Nvidia Considers Acquiring ARM Amid Monopoly Concerns

(Jordi Brown & Claudia Horsham)

In recent weeks Nvidia, an American multinational technology company which designs graphic processing units (GPUs) and system on chip (SoC) units for the mobile, computing and automotive markets, has expressed interest in acquiring SoftBank’s chip designer, Arm Ltd. The GPU on a computer processes images and video – Nvidia’s GPUs can be found both in the consumer market, either as standalone products for enthusiasts or already part of a pre-built PC, as well as in the professional market, such as for those in the film and TV industry or those creating computer-aided designs. Arm is owned by SoftBank, a Japanese holding company, through a $100 billion technology venture capital fund called Vision Fund. Rather than making chips like Nvidia, Arm concentrates on designing and licensing instruction sets including the groundwork of how chips communicate with software. Arm-licensed processors power more than 95% of the world’s smartphones and tablets with multinationals such as Apple, using Arm’s instruction sets in designing their own chips. SoftBank purchased Arm, the UK’s largest listed technology company, from shareholders for $32 billion in 2016 with 75% of Arm owned by SoftBank Group and 25% by the SoftBank Vision Fund. If Nvidia were to go ahead with the acquisition of Arm and be given the green light by competition authorities, the deal would be the biggest acquisition in the chip industry and of a semiconductor company to date.

Motivations

Nvidia’s motivations for the acquisition comes after it has begun working more closely with Arm last year to enable GPU-accelerated Arm-based servers. The deal would work in Nvidia’s favour as the chip powerhouse is a GPU player and would benefit from a leading designer of CPUs like Arm. Thus, by acquiring Arm they would gain the ability to field high-end CPUs as well as Arm sensors in the automotive space. Similarly, this would allow Arm a larger revenue play in the Internet of Things (IoT) and mobile field. The acquisition seems sensible for Nvidia as it would allow the California-based technology company to become a ‘one stop shop’ (Bloomberg, 2020) for customers as every graphics processor chip Nvidia sells requires another general processor chip, which Arm specializes in.

Nvidia market capitalisation stands at $253.58 billion, surpassing that of competitors such as the chip giant, Intel. It also has a strong net cash position and this will provide Nvidia with sufficient capacity to raise new debt. Moreover, Nvidia may not need to use its cash to acquire Arm, as Nvidia’s stock is a valuable currency after rising 77% this year – its share price has risen from $175 in July 2019 to $418 at present. The acquisition of Arm will not be Nvidia’s first, as the technology multinational completed a $6.3 billion acquisition of the Israeli-based technology company, Mellanox Technologies Ltd. in April proving the company’s ability to acquire other firms.  

Figure 1. Source: https://finance.yahoo.com/quote/NVDA/history?period1=1564484639&period2=1596107039&interval=1d&filter=history&frequency=1d

The acquisition would seem sensible for SoftBank, which is seeking funding for a $41 billion share buyback and debt reduction plan. The Japanese multinational conglomerate is increasingly under pressure to reduce the gap between the value of its holdings and its enterprise value but, at the same time, would want to avoid a deal that would attract regulatory scrutiny, with no guarantee of success. SoftBank is in need of more cash to support firms in its $100 billion investment vehicle thatinvests in emerging technologies, some of which have been struggling since the start of the coronavirus pandemic. 

Regulatory Approval

Any acquisition of Arm – a UK-based company with a heavy presence in Silicon Valley – by Nvidia would be heavily scrutinised by competition authorities on both sides of the Atlantic. Rather than make chips themselves, ARM licenses its chip designs for other companies to manufacture. Their designs effectively hold a monopoly in some markets – the company claims that “more than 95 percent of the world’s smartphones [are] built on our IP” (Arm Limited, 2020), and similar percentage levels can be seen in the market share of processors used in smart TVs (Arm Limited, 2020).

The problem is that for Nvidia – a chip maker, rather than chip designer – owning the design of both your own and your competitors’ chips will not be looked upon fondly by either the Federal Trade Commission (FTC) or the Competition and Markets Authority (CMA). Arm’s business model works because of the relationship it has with the likes of its licensees including Apple, Qualcomm and indeed Nvidia itself. A competitor such as Nvidia would be able to have access to Arm’s chip designs before its rivals and integrate that into its own products. Moreover, we would see stagnation of the chip industry, because it would now be in the interests of Arm to not innovate in the designs it licences to firms and ensure the continued success of its parent company. SoftBank’s 2016 acquisition of Arm Holdings succeeded because regulators saw it as a “neutral buyer” (Chitkara, 2020) – Nvidia is certainly not that.

At the moment, any acquisition of Arm Holdings by Nvidia is just rumoured. Other options for parent SoftBank would include selling to a company not directly in the chip market, such as Boeing or General Electric (HILDENBRAND, 2020), or even listing Arm on the stock market as a public company.­­­­­­­­ The latter would likely produce a valuation in the region of $44 billion, up from the $31.4 billion SoftBank bought Arm for in 2016 (Chitkara, 2020).

Prediction

SoftBank’s sluggish performance after poorly-decided investments in WeWork, Uber and OneWeb (Sun, 2020) will see it want to raise capital. Our prediction is that regulatory concerns will quell the chances of an acquisition of Arm by Nvidia, and that SoftBank will not want to test the resolve of the FTC or CMA and either look to a more neutral buyer or the market itself to boost profits.


Figure 2. Source: https://group.softbank/system/files/pdf/ir/financials/annual_reports/annual-report_fy2020_01_en.pdf

Definitions

Enterprise Value – a measure of the company’s total value.

Market Capitalization – the total market value of a company’s outstanding shares of stock, calculated by multiplying the total number of a company’s outstanding shares by the current price of one share.

Net Cash – the result of a company’s total cash minus its total liabilities reported on its financial statements. It is commonly used in evaluating a company’s cash flows.

Operating profit- a profit from business operations (gross profit minus operating expenses) before the deduction of interest and taxes.

Share buyback – the repurchasing of shares of stock by a company that issued them. A buyback occurs when the issuing company pays shareholders the market value per share and reabsorbs that portion of ownership that was previously distributed among public and private investors.

References

Arm Limited, 2020. MOBILE COMPUTING SMARTPHONES. [Online]
Available at: https://www.arm.com/solutions/mobile-computing/smartphones
[Accessed 30 July 2020].

Arm Limited, 2020. SOLUTIONS SMART HOMES. [Online]
Available at: https://www.arm.com/solutions/smart-homes
[Accessed 30 July 2020].

Chitkara, H., 2020. How Nvidia’s potential acquisition of SoftBank-owned Arm could shake out. [Online]
Available at: https://www.businessinsider.com/nvidias-arm-acquisition-met-with-regulatory-scrutiny-2020-7
[Accessed 30 July 2020].

HILDENBRAND, J., 2020. How SoftBank’s sale of Arm Holdings could go very right, or terribly wrong. [Online]
Available at: https://www.androidcentral.com/arm-softbank-sale
[Accessed 30 July 2020].

Lenihan, R., 2020. Nvidia Interested in Buying SoftBank’s Arm Chip Designer. [Online] Available at: https://www.thestreet.com/investing/stocks/nvidia-interested-in-acquiring-softbank-chip-designer-arm [Accessed 30 July 2020].

Nasdaq, 2020 NVIDIA Corporation Common Stock (NVDA) Stock Quotes. [Online] Available at https://www.nasdaq.com/market-activity/stocks/nvda [Accessed 28 July 2020].

Reuters, 2020 Nvidia expresses interest in SoftBank’s chip company Arm Holdings: Bloomberg News. [Online] Available at: https://uk.reuters.com/article/us-arm-holdings-m-a-nvidia/nvidia-expresses-interest-in-softbanks-chip-company-arm-holdings-bloomberg-news-idUKKCN24N2P1 [Accessed 30 July 2020].

Savitz, E., 2020 Nvidia is Reported to be Interested in Buying SoftBank’s Arm Unit. [Online] Available at: https://www.barrons.com/articles/nvidia-softbank-arm-holdings-microprocessor-licensee-smartphones-51595450803 [Accessed 30 July 2020].

Sun, L., 2020. Could NVIDIA Buy ARM to Expand Beyond GPUs?. [Online]
Available at: https://www.fool.com/investing/2020/07/27/could-nvidia-buy-arm-to-expand-beyond-gpu.aspx
[Accessed 30 July 2020].

Webb, A. and Kim, T., 2020 SoftBank may not want Nvidia to bite off its arm. [Online] Available at: https://www.bloomberg.com/opinion/articles/2020-07-22/nvidia-arm-deal-may-not-be-softbank-s-first-choice [Accessed 30 July 2020].

Featured Image: Reuters


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