How chip neutrality sabotaged Nvidia’s deal to buy the arm: QuickTake

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One of the most influential companies in the tech industry unknown to most consumers: Arm Ltd. The UK-based company designs key parts of the chips that power nearly every smartphone on the planet. Its strategic importance is so great that when owner SoftBank Group Corp. decided to sell the company to US chipmaker Nvidia Corp., it sparked an outcry from Arm customers that killed the $40 billion deal. SoftBank’s Plan B is to sell Arm stock in what could be the chip industry’s biggest initial public offering ever.

Arm does not own factories or produce its own chips. The company designs basic semiconductor components and licenses the designs to other companies in exchange for a royalty based on the number of products produced. The arrangement brings in around $700 million in revenue every quarter, making Arm one of the UK’s biggest tech companies. That’s still only a fraction of the sales generated by tech giants like Nvidia and Intel Corp., and Arm has a relatively small staff of 6,000. Yet few companies reach as far into the tech ecosystem: Arm estimates that 70% of the world’s population uses its products daily, and more than 200 billion chips have been made with its technology.

2. Where can I find Arm’s products?

They are used in everything from the smallest sensor to the most powerful data center. Amazon.com Inc., Samsung Electronics Co. and Apple Inc. are among Arm’s largest customers. Arm’s instruction set – the basic code used by software to communicate with semiconductors – consists of billions of devices, and the effort required to switch to another company’s code would be enormous. Devices that run on batteries need chips that can get by on relatively little power; Arm Designs prioritized this from the start. When smartphones arrived and demanded more processing power, the technology evolved into more computational chips. About 1.4 billion of these handhelds are sold each year, more than 90% of which use Arm. More recently, big tech names such as Apple and Amazon have sought to supply their own chips. Many of these new components are also based on Arm, which is beginning to threaten Intel’s lucrative hold on high-end computer processors. Intel has the so-called X86 instruction set, the basis for a type of processor that is most widely used in computers. Advanced Micro Devices Inc. is the other major user of this technology.

3. Why did Nvidia want to buy it?

Thus, it could build on its success in graphics processors and penetrate faster into data centers, artificial intelligence and new areas such as automotive chips. But critics said a takeover would threaten a cornerstone of Arm’s success: its neutrality. Arm was used in the $550 billion semiconductor industry with the understanding that no one would get privileged access to its technology. SoftBank announced the sale to Nvidia in September 2020. The deal began to unravel after the U.S. Federal Trade Commission filed a lawsuit to block it in December, and Nvidia pulled out in February.

SoftBank is expected to list a minority stake in Arm in New York by the end of March 2023. It also agreed to consider a partial listing on the London Stock Exchange after British Prime Minister Boris Johnson allegedly pressured the chief executive of SoftBank, Masayoshi Son, in person. In July, with the UK government in turmoil following Johnson’s resignation, SoftBank temporarily suspended talks of a London listing, according to people familiar with the matter.

5. What is Arm really worth?

Shortly after SoftBank’s IPO plan was announced, SoftBank was targeting a valuation of at least $60 billion for Arm, nearly double the amount paid for the company in 2016. However, valuations technologies have fallen since then, forcing companies to cancel listings or cut stock prices to get sales down the line. SoftBank decided in April to sell a smaller portion of Arm than expected and retain a majority stake in hopes of securing a higher valuation for the remainder later. Supply chain issues and concerns that the industry is making too many chips in a slowing global economy have made it difficult to reliably value semiconductor companies. In February, Arm would have been worth about $24 billion if investors valued it at the average market cap-to-earnings ratio of the Philadelphia Stock Exchange’s semiconductor index. But that benchmark has lost about a quarter of its value since then.

6. Does an IPO solve the neutrality problem?

The large and diverse investor base typically secured via an IPO could help ensure that Arm doesn’t fall under the sway of a single industry player. This may not be enough to reassure some of its most important customers. Qualcomm Inc. CEO Cristiano Amon said his company wanted to take a stake in the company alongside rivals and create a consortium that would maintain Arm’s neutrality.

More stories like this are available at bloomberg.com

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