SoftBank & Arm – All the stops.

SoftBank leaves no stone unturned in the hunt for $64bn. 

• The latest transaction between SoftBank and Vision Fund I is an attempt to put a market value down for a valuation of $64bn but no one has explained why Arm is more valuable now than it was in June when SoftBank itself valued it at $45bn.
• SoftBank has purchased the 25% of Arm that it does not own from Vision Fund I for $16bn which nominally values Arm at $64bn and it is now clear to me that this is the number that SoftBank will run with for the IPO.
• This transaction has a number of effects:
  • First and foremost, valuation where this transaction attempts to set a market value for Arm which can then be used to support an IPO coming at $64bn.
  • The problem here is that this strategy contains a substantial conflict of interest.
  • The valuation of $64bn is being set by SoftBank which has the most to gain from a high valuation of Arm at IPO.
  • Furthermore, the $16bn paid will be more than recovered by SoftBank if this allows the valuation to be $64bn rather than a more reasonable $32bn.
  • Consequently, despite the recusal of Mr Son from the negotiations, I struggle to believe that this is a transaction that is purely based on objective valuation.
  • This is particularly the case as earlier this month, SoftBank booked a $45bn fair value for Arm when it reported its FQ1 2024 results.
  • Arm’s is suffering from the downturn in smartphone shipments which is by far its biggest end market and as such, its growth has turned negative on a YoY basis (see here).
  • Typically, the valuation of a highly rated company does not increase by 42% when its revenues start declining even if the decline is temporary.
  • It will be interesting to hear how SoftBank justifies this valuation increase when the question is inevitably asked.
  • I suspect the answer will include AI (see below)
  • Second, long-suffering investors: who will now receive a good payday on the 25% of Arm that is held in Vision Fund I.
  • After the very public and messy meltdowns of WeWork and FTX, SoftBank badly needs to deliver some good news to the fund’s biggest backers the most prominent two of whom are PIF from Saudia Arabia and Mubadala from UAE.
  • This transaction will serve to reduce these investors’ risks from an unsuccessful IPO and relieve some of the pressure on Vision Fund I created by its less successful investments.
  • Third, neat and tidy: This transaction will simplify the ownership structure of Arm at IPO which will make its governance easier to understand.
  • A simple governance structure where control and ownership are both clear and well-aligned is always a bonus for any company coming to market.
• SoftBank also appears to have recruited 28 banks to execute the IPO which includes all of the usual names.
• This will ensure that only the small independents who can never make enough noise to cause any problems, will be asking hard questions about the valuation being asked by SoftBank.
• Neither the listing documents nor the marketing material from SoftBank for this IPO have been made available and so it is impossible to say with any certainty where the real fair value is at the moment.
• The current state of the smartphone market does not bode well for Arm returning to growth this side of 2024 which is going put pressure on a 23x FY 2022 revenues valuation.
• This is why the AI story is so important to getting this IPO away at the desired valuation and explains why SoftBank has been looking for anchor investors from the technology industry.
• The valuation issue will not become really clear until the public market itself has said what it is willing to bear.
• This is why Arm needs to be seen to be like Nvidia and as an AI company which I think is crucial to the success of this transaction.
• If the AI story sticks, then this will probably get away comfortably given the ludicrously high valuations that the market will afford to those seen to be leaders in the generative AI race.
• If not, then SoftBank has a very difficult task on its hands and may end up having to settle for much less.