NVIDIA’s $54B takeover of ARM in jeopardy

By Ghali Moutawakil, University College London

Overview of the deal

Acquirer: Nvidia Corporation
Target: Arm Holdings
Total transaction size: $54bn
Closed date: Deadline in March 2022
Acquirer financial advisor: Morgan Stanley
Target financial advisor: Goldman Sachs

Nvidia announced on 13 September 2020 that the company had reached an agreement with SoftBank Group Corp to purchase ARM Limited, in a transaction estimated at $54 billion. This deal, which still requires formal approval, stands to be the largest semiconductor acquisiton in history. It would top Avago’s 2015 deal to buy Broadcom for $37 billion and SoftBank’s $32 billion purchase of ARM in 2016.

In May 2020, SoftBank Group Corp reported a $18 billion loss at its giant Vision Fund and booked a $7.5 billion loss on other tech investments, which it attributed primarily to the economic shock caused by the COVID-19 pandemic. Hence, the Japanese conglomerate decided to sell the company to help cover its debts and, as part of the transaction, it is expected to take a less than 10% stake in Nvidia.

However, this deal that would arguably consolidate Nvidia’s leadership in the semiconductor industry, faces opposition among EU and UK regulators. While Nvidia claims to have won the support of Arm customers Broadcoam, MediaTek and Marvell Technology there are concerns that it might miss the March 2022 deadline for closing the deal.

We are buying ARM because we want to advance computing further. The future of computing is going to move further from the cloud to the edge. That is what ARM is fantastic at. Where we are fantastic is AI. So, imagine the possibilities in putting AI at the edge.”

-Jensen Huang, founder and CEO of NVIDIA

Acquiring Company Details: Nvidia

Credits: NVIDIA.

Headquarters: Santa Clara, California, US
CEO: Jensen Huang
Number of employees: 13,227
Market Cap: $558.78 billion (as of 31/08/2021)
EV: $560.34 billion
Trailing P/E: $80.31 billion
TTM Revenue: $21.9 billion
EBITDA: $8.49 billion
EV/Revenue: x25.59
EV/EBITDA: x66.02

Target Company Details: ARM

Credits: ARM.

Headquarters: Cambridge, United Kingdom
CEO: Simon Segars
Number of employees: 6,250 (as of 2018)
Market Cap: N/A
EV: N/A
Trailing P/E: N/A
Revenue: N/A
EBITDA: N/A
EV/Revenue: N/A
EV/EBITDA: N/A

Background

Nvidia Corporation is a American multinational technology company founded in 1993 and incorporated in Delaware. Its main products are high-end graphics processing units (GPU) destined to the PC gaming market and system on a chip units (SoCs) for the mobile computing and automotive market. In addition, Nvidia is focused on Machine Learning and its use in Artificial Intelligence as the spearhead of its long-term growth strategy. Its competitors include AMD, Intel and Qualcomm.

Arm Ltd. is a British semiconductor and software design company founded in 1990 as a joint venture between Acorn Computers, Apple and VLSI Technology. In 2016, it was acquired by SoftBank Group Corp. The company’s main products are microprocessor designs (CPU) and graphics processing unit (GPU) designs. The majority of revenues stem from royalties arising from licensing sales. With over 160 billion chips made based on designs from ARM, the company dominates the market of processors in mobile phones.

RATIONALE

Firstly, the acquisition or ARM is part of NVIDIA’s ambition to create the leading computing company for the age of AI. By taking advantage of ARM’s broad customer base, NVIDIA can bring its products technologies to a wide range of end markets, including mobile and the IofT.

“Learning from data, AI supercomputers can write software no human can. Amazingly, AI software can perceive its environment, infer the best plan, and act intelligently. This new form of software will expand computing to every corner of the globe. Someday, trillions of computers running AI will create a new internet thousands of times bigger than today’s internet-of-people.”

-Jensen Huang, CEO of NVIDIA

Most importantly, the acquisition is aimed at exploiting key synergies between the two companies. NVIDIA’s AI expertise and R&D budget with Arm’s developer ecosystem, open-licensing, customer-neutral business model and IP portfolio. In PCs and datacenters, NVIDIA plans to expand the ARM platform, turbocharging the development of the ARM ecosystem as a thriving alternative to x86. It will crucially enhance R&D across ARM’s markets in order to make world-class CPUs available to all ARM licensees.

“Through the combination with NVIDIA, we’re going to have a lot more resources to bear in creating an even richer portfolio of IP, and there’s no way that we can do that on our own.”

-Simon Segars, CEO of ARM

Finally, this deal would give NVIDIA a concrete competitive advantage over their main competitors by taking over key intellectual property and selecting who can benefit from it.

RISKS

In a report realeased in July, Britain’s Competition and Markets Authority noted that NVIDIA “foreclosing” ARM’s intellectual property could harm competition for CPUs, GPUs and system-on-chip products. Similarly, on August 27th, The Financial Times reported that the EU “will examine whether or not the $54bn takeover deal will result in reduced competition between the world’s leading chip designers.” The regulators will launch a 90-day investigation and Nvidia agreed to work “with the European Commission to address any concerns they may have”.

Moreover, further geopolitical tensions can arise if NVIDIA decides to move ARM’s operations outside the United Kingdom. On the one hand, there are fears of a lost economic sovereignty by the UK, with its only remaining technology company coming under American control and subject to US. Office of Foreign Assets Control regulations. On the other hand, ARM supplies, through Qualcomm, Chinese phone manufacturers such as Huawei, Xiaomi and Oppo. Consequently, if Arm becomes part of a US-based company, it could further restrict Chinese access to critical technologies.

Therefore, we can expect, for the deal to go through, that NVIDIA could be constrained by government regulators to implement neutral business practices with ARM’s clients including competitors such as Intel and AMD.

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