By Erika Goodwin-Monteagudo, Liam Smith, Hannah Farrell and Liam Ryan (Trinity College, Dublin) and Vinay Naik (University of Warwick)
Overview of the deal
Acquirer: Nvidia Corporation
Target: Arm Holdings
Estimated Value: $32bn
Total Transaction Size: $32bn+
Closed date: Estimated Q4 2020
Target advisor: Goldman Sachs
Nvidia Corporation is reportedly close to purchasing English-based software design company Arm Holdings from the Japanese conglomerate Softbank, which could be the largest ever deal in semiconductor history. Nvidia, whose IPO with a stock price of $12 a share at the turn of the 21st century, now stands as arguably the biggest giant in the graphics and chip units industry to date. The acquisition would keep Nvidia the leader in a more consolidated semiconductor industry. Arm would enable Nvidia to expand its product range away from its high-end focused chips, as it is estimated that Arm’s chips are in 95% of smartphones globally. The deal is projected to be worth more than $32 billion, depending on the premium Nvidia is willing to pay for the firm, made up in both cash and stocks, if the transaction is to go ahead at all. SoftBank, who have only owned Arm for four years after purchasing the company for $32 billion in 2016, has been in talks with a multitude of potential buyers, Apple being the most notable. However, Nvidia has remained the front-runner in lue of Softbank’s eagerness to sell Arm.
Unfortunately, it is not expected that Nvidia will come to complete this deal with ease, as many experts and analysts have been quick to illustrate the many hurdles and roadblocks the “king of GPUs” will face. Firstly, Arm has a large number of customers due to providing significant technology to the smartphone industry. These customers include two of Nvidia’s rivals, AMD and Intel, where Nvidia’s acquisition of Arm could have many malintentions for the pair. This has led many experts to posit that in order for the deal to move forward towards completion, Nvidia will have to comply with many fairness clauses set out by government and industry regulators. Nevertheless, Nvidia could find itself out of favor with Softbank if the former does not make a concrete offer in the near future, as the latter hopes to sell Arm in order to help cover some lingering debt issues.
As all three parties have declined to comment on the matter, only time will tell the fate of this deal. Investors should stay cautious of Nvidia for the time being, as the likelihood of this deal falling through must be respected, and Nvidia has been trading somewhat above its value, sitting at over two and a half times its 52-week low, opening at $424.40 at the start of August 2020.
“It’s one of the fundamental assumptions of the ARM business model that it can sell to everybody” - Dr. Hauser, co-founder of Arm
Company Details: Nvidia
Nvidia Corporation is a multinational American technology company. Nvidia focuses on personal computer graphics, graphics processing units (GPU) and also on artificial intelligence. It designs GPUs for the gaming and other industries. As well as this, Nvidia produces its own Tegra mobile processors for smartphones and tablets, and is also involved in vehicle navigation and entertainment systems.
Founded in 1993, headquartered in Santa Clara, California, United States.
CEO: Jensen Huang
Number of employees: 13,227
Market Cap: $275.5 bn (as of 08/08/2020)
EV: $268 bn
LTM Revenue: $11.8 bn
LTM EBITDA: $4 bn
LTM EV/Revenue: x22.9
LTM EV/EBITDA: x67
Company Details: Arm
Arm Ltd. is a semiconductor and software design company wholly owned by Japanese conglomerate SoftBank Group. Its primary business is in the design of ARM processors (CPUs), but is also involved in the design of other chips and software development tools. Arm’s architecture accounts for about 90% of all embedded 32-bit CPUs, and is seen in most mobile phones sold globally, including the iPhone.
Founded in 1990, headquartered in Cambridge, United Kingdom
CEO: Simon Segars
Number of employees: 6,250 (as of 2018)
As Arm Ltd was taken private in 2016 after its $32bn acquisition by SoftBank Group, all figures below have been taken from its last available annual report/stock data:
Market Cap: $31.2bn (2016)
EV: $21.6bn (2015)
Revenue: $1.4bn (2015)
EBITDA: $644.8mn (2015)
EV/Revenue: 15.1x (2015)
EV/EBITDA: 33.5x (2015)
Short-term consequences
Softbank’s purchase of Arm for $32 billion in 2016 is the highest price paid for a European technology company to date and a deal with Nvidia is likely to exceed this. However, it is probable that any deal struck between Softbank’s Arm and Nvidia will be met with scrutiny from governments and industry regulators. Given that Nvidia is a direct customer of Arm, this raises concerns for how this may impact Nvidia’s competitors and the impact antitrust laws may have on the deal.
The sale leaves Nvidia’s competitors, including Intel and Apple, that rely heavily on Arm’s chip-designs in a place of uncertainty for future access to Arm. The previous sale of Arm to Softbank did not include these concerns, while this sale gives Nvidia a degree of control over its competitors. The likelihood is that the sale will result in investigations by industry regulators and require deals be made with Arm’s current customers in an effort to retain them.
Arm’s co-founder Hermann Hauser has raised concerns over the deal. According to Hauser, the deal undermines the assumption that Arm can sell to anyone, a fundamental in Arm’s business model. The neutrality that Arm maintained in its sale to Softbank will be jeopardised in a sale to Nvidia.
Long-term Upsides
Firstly, an acquisition of Arm by Nvidia will give them a huge competitive advantage over their industry rivals. Currently Arm licenses out their designs to different technology companies, such as Nvidia, who use Arm’s designs in their own products such as GPUs. Post-acquisition, Nvidia could have the power to pick and choose who can use Arm’s key proprietary technology and as such have the power over what their own competitors can produce. This likely to come under a lot of regulatory scrutiny for anti-competitive processes if it does happen, nonetheless, even if Nvidia are forced to continue to supply their competitors through Arm, their ability to apply harsher licensing conditions on competitors, as well as lowering their own costs would give them a unique advantage over competitors, which would help them to consolidate their current industries.
Another possibility is that Nvidia could use their acquisition of Arm to venture into new industries and diversify their operations. Arm processors power many different devices from supercomputers to connected homes as well as the vast majority of mobile phones in the world. If Nvidia does manage to acquire Arm, they will be able to diversify away from their core product niche and begin competing to a greater extent with companies like Apple and Intel in other industries. A good example of the benefits Nvidia could reap from the Arm acquisition is in autonomous driving. Over the last several years Nvidia has licensed Arm technology, like many of the other companies in this space, for its own self driving advancements. The acquisition of Arm would give Nvidia a much closer look at Arm’s valuable intellectual property and technical expertise, than that which would be afforded to Nvidia’s competitors. This would increase Nvidia’s capabilities in taking on companies like Apple in the autonomous driving industry.
There is also huge scope for Nvidia to venture into the mainstream computing market following a merger with Arm. Currently, Nvidia leads the way in GPUs, leading to faster and clearer pictures for gaming computers. Arm’s processing units are among the fastest in the world and are applicable to devices like phones and computers. A closer marriage of the two has the potential to lead to computers and other devices that could rival the current market leaders and provides massive scope for growth in these markets for Nvidia.
Risks and Uncertainties
As Arm has been able to do business with a plethora of large technology companies, the acquisition by Nvidia could create a significant bias in Arm’s future dealings. Arm would risk losing a great deal of customers if the deal was to go through without the intercession of lawmakers and regulators of the technology industries, who could have their say on the matter. This could include holding Nvidia to certain standards of good-faith ownership of Arm that would require fair business practices with Arm’s large customers and Nvidia’s rivals, AMD and Intel. Many believe that this reasoning could be a core contribution to the devolution and failure of this deal altogether perhaps.
Another risk for Arm is that Nvidia could attempt to move the former’s operations out of the UK and into the US, as Nvidia has a history of preferring in-house production of all products. This could promote further tension between Nvidia, Arm and its licensees if Nvidia looks to strong-arm their way towards an even larger claim in the software and hardware industries.
Arm also failed to thrive under Japanese conglomerate, Softbank. It’s annual revenues rose by $700m since the 2016 acquisition. Nvidia’s have roughly tripled in the same time period. It could be a concern that Arm too could struggle to expand under Nvidia, after not being able to do so under Softbank with its Vision Fund, the world's largest technology-focused venture capital fund, with over $100 billion in capital.
If Nvidia is to acquire Arm, it will come at the cost of complying with the safeguards of other rival companies. This could quickly prove to be unworthwhile for Nvidia as they wish to dominate the global mobile market.
“Although it could put Nvidia in a powerful position of control, some $35 billion would be a steep price to pay” - Geoff Blaber