Brit chip biz ARM legs it to Softbank for $32bn British semiconductor designer ARM is about to be acquired by Japan's SoftBank. The New York Times reports the deal is imminent. The FT has put a value on the deal: US$32.4bn. That's a premium of about $10bn over ARM's market capitalisation. SoftBank is a sprawling company that operates a telco in its Japanese home but is …
Indeed.
Unless ARM need investment I don't see what Softbank is bringing to the table. The risk is that when one of the many other Softbank business units is haemorrhaging cash and dragging down the bottom line, ARM could be sacrificed.
ARM losing its independence sounds like a very bad trade. I wouldn't be surprised if Apple end up as owners of ARM (again) longer term, and that will be very bad news for everyone. Seriously, seriously bad.
If worse came to worse, Apple might be interested in negotiating to acquire a perpetual architectural license. That would allow them to essentially 'fork' their own version of the ARM architecture to meet their needs, if they felt like there was a risk ARM wouldn't continue on the way it is now. They are not going to buy something that's apparently worth $32 billion just to get that. That's at least $31 billion more than such a perpetual license could possibly be worth.
It's already fairly normal in big deals to have terms to cover situations like that. IPR matters to both sides in a licensing deal, and it's not unusual for IPR to be held in escrow in case the IPR owner vanishes off the face of the earth, etc.
The fact that ARM's board are recommending this deal to their shareholders suggests that whatever the licensing terms are, IPR transfer to licensees on takeover isn't in there. That would have made ARM very unattractive for a takeover, and it would have emerged during the due-diligence that's no doubt been going on in the recent past.
Oh, and I think Apple (and Qualcomm, Microsoft, Marvell and Texas Instruments) all have a "Foundry" license, which does allow them to make changes to the ARM architecture. It's the reason why Apple can put a separate security processor deep into the heart of their chips.
Of all of these, Microsoft are the ones that I think have wasted that investment. With the ability to tinker with the architecture at a very deep level one can define a complete ecosystem (boot, peripherals, buses, etc). Now whilst Microsoft have done that for mobiles they haven't done it for servers which is where the real money is likely to come from for them, and if they don't hurry up then Qualcomm and a bunch of others will leave them standing.
p.s. @DougS, not sure why anyone's downvoting you on that, it all certainly matters a great deal to Apple.
I thought the licence those big players have ("foundry") lets them re-implement the hardware as they like, but absolutely not fork the instruction set and software interface generally (ISA, eg. cache behaviour) to make sure code portability can never be sacrificed. Intel IIRC learnt this when they acquired DEC and its Xscale designs, and tried to fiddle with the ISA, and found they couldn't because the ISA is copyrighted in some way separate from the IP licence.
WTF because this is a complete surprise. I could believe it's as simple as SB having a huge mound of cash and looking for the best possible investment, as ARM is starting to work in servers too, and the IoT bubble.
The fact that ARM's board are recommending this deal to their shareholders suggests that
it suggests that their legal obligation to do the best by their shareholders over-rides just about any other concern. This is such a large premium over the current market value that I don't think the board had any option but to recommend it, whatever their ideals may be.
Today was reporting this morning that they are promising to double the UK workforce in the next three years or something. I find that impossible to believe, and if it did happen I can foresee all sorts of organisational issues and cashflow issues that could ruin this almost lone-surviving jewel of British technology. I can see how ARM could do with a bit of a cash injection to accelerate their plans, but I can't see any reporting on how this might happen.
Bad news all around. Possibly even worse than the Cadbury's thing.
M.
P.S. slightly biased, I speak as someone who still uses an Acorn RiscPC (StrongARM) on a daily basis
"it suggests that their legal obligation to do the best by their shareholders over-rides just about any other concern."
It does not, and there is in fact no such legal obligation. The duties of the board of directors are ultimately to ensure the long-term success of the company, and while shareholder considerations are part of that, the shareholders' interests certainly do not override the prime responsibilities.
http://www.lawdonut.co.uk/law/ownership-and-management/the-board-of-directors/your-responsibilities-as-a-director-faqs#YRAAD2
Funny that most companies don't seem to work that way any more, short-term shareholder profit clearly takes priority over long-term success -- otherwise more companies would be spending more on R&D to develop new products for a few years hence, instead of cutting R&D budgets to "save money"...
You are confusing the two. The foundry license gives the licensee ARM's designs, like say that for the A72, and supporting tools etc. to help them implement it on a given foundry process. The architectural license lets the licensee design their own core from scratch to implement the ARM architecture. Apple and Qualcomm used their architectural licenses to create the A9 and Kyro, respectively. A foundry license would be used to create an SoC that includes "4x A72 cores" or other ARM designed cores.
However, even with an architectural license your design has to be compatible with ARM's specs. You can't change something in the architecture, and I don't believe you can even add your own stuff to it. If you added a new instruction, for example, the opcode you code could be used by ARM for a different new instruction, making your core no longer compatible with and able to run standard ARM code.
From what I understand, Apple had some input into the creation of the ARMv8 spec, so they wouldn't have any need to add their own non-standard stuff to it, since they would have got anything they wanted added to it already. It is more likely those trying to build ARM servers would be the ones interested in adding something, but they'd want to work with ARM so that the new stuff would be a part of a future architectural spec (i.e. ARMv8.1, 8.2, etc.)
Dunno what the plan is. The guy who runs Softbank is no fool - bought a $20 million stake in Alibaba, which is know worth $65 billion. Lucky?!
Softbank runs a mobile network and, because of how the Japanese mobile market works, is therefore a major vendor of phones. Those phones will be marginally cheaper for Softbank as they can refund themselves the license fee for the ARM core that'll be inside. But not £24 billion cheaper.
The IOT thing sounds more like it. The Japanese love their gadgets, and if IOT is ever going to really take off anywhere it will be their.
Then there's the ARM server market - if that explodes (like it's threatening to do) then ARM could become really big indeed.
will really make people sit up and take notice.
The Premium is the price you pay that is in excess of the quoted share price.
IMHO, this is just a silly amount. The board when seeing it must have had a collective heart attack.
Why would Softbank risk this large amount of money in an area of business that they have no experience?
I get the distinct impression that someone else is behind this.
Why would Softbank risk this large amount of money in an area of business that they have no experience?
They're not. This is a debt-funded acquisition, so all they're risking is somebody else's money. Due to financial repression debt is ridiculously cheap and ARM is 10% cheaper than it was a month ago.
If they're just looking at it due to the drop in GBP, they've got bad timing.
I bought at £8.55 earlier this year. It's not been above £10.75 until this morning and Independence served ARM well as most of their revenue is in dollars.
As pleased as I am to have struck lucky, I don't see ARM as being a bargain. Nor do I really think the takeover benefits any one other than shareholders or ARM and whoever gets a bonus.
I bought at 42p, and sold after 7 years, the last 5 of which it was hovering around a pound, of course it immediately took off like a rocket to the £10 mark. With the takeover I'd have stood to make over 60K in profit if I'd held on another 7 years.
I bought at £8.55 earlier this year. It's not been above £10.75 until this morning and Independence served ARM well as most of their revenue is in dollars
Friday's closing price was £11.89, and that wasn't any sudden jump.
I bought ARM for under £1 (indeed, just under 80p at best). It stayed around £1 for a year or two, and only really took off when it leaked to the financial markets that it was in the Iphone. Someone is looking for a repeat performance with IoT, after a few years in the £10 ballpark.
Why would Softbank risk this large amount of money in an area of business that they have no experience?
The Japanese economy is ex-growth. With an ageing population, and vast (and still growing) public sector debt, the wider economy has to shrink. The best thing a Japanese company can do at the moment is to spend money on businesses not exposed to Japan's domestic economy. ARM's model of being an IP house means it isn't a bet on any particular country winning the race in the Internet of Tat - ARM benefit so long as their technology is used by whoever makes the Tat, not whether that it is made in China, Taiwan, Korea or anywhere else.
With UK assets looking cheaper as FX markets react to the Brexit vote like a bunch of sheep, Softbank have taken the opportunity to buy ARM at a useful discount.
If Softbank treat ARM as an autonomous investment (much as Berkshire Hathaway treat their business units) then there's no reason to worry about their lack of sector experience.
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So if IoT and the ARM server market do take off, ARM could do very well out of that. It might simply be a case of Softbank seeing vast future profits ahead for ARM and fancy a piece of the action.
With ARM under Japanese control, it does give Japan an interesting strategic position. ARM could equally have been purchased by a Chinese manufacturer, and that wouldn't necessarily have been good news for Japanese chip designers and phone manufacturers. There's a lot of regional politics out in that part of the world... Access to ARM core designs arguably is very important to Japan, and there's nothing like owning the company to guarantee that. We'll get to see how important if the Chinese government starts complaining about the deal, or if Chinese manufacturers start fiddling the license fee payments.
Oh, and Fujitsu's next supercomputer might be a tiny bit cheaper if Softbank cut them a deal on the license fee...
Other companies also have to pay royalties for the use of ARM chips, IP, etc, so it is more than Softbank not having to pay for the license.
It is also good timing since Intel is not developing the Atom for mobiles any longer. So the other mobile manufacturers either find an alternative SoC or Softbank might get sued for monopoly.
In a world where money is free because they've been printing it for years then a whole load of stupid investments start to look sensible.
"The plan" is to take ARM's nice revenue stream and use it to pay virtually zero interest on the loan and pocket the rest.
Amusingly... this acquisition of the world's most successful chip company is about half financed by the sale of a "freemium" phone game... https://en.wikipedia.org/wiki/Clash_of_Clans
Now that's "added value" :-)
I'm not sure that Softbank are really a direct competitor to Intel, so I don't see exactly what the difference is at the moment.
Sure, if Intel had any designs of their own on acquiring ARM, those plans have just become a lot harder. By the time Intel's bods wake up in America, the deal will likely be done here in the UK, so they'll miss out.
Not that anyone would have let Intel buy ARM. Nor Apple, Samsung, etc. That would have been too obviously anti-competitive, and not even the blindest of Competition Commissions would have let that one go past.
"By the time Intel's bods wake up in America, the deal will likely be done here in the UK, so they'll miss out."
Not really - the shareholders have to decide in the end and could easily be open to a bigger offer. It's the board's job to get the best value for the owners.
On the other hand it would be great pity if this company was damaged in any way. I see Softbank are suggesting doubling the (UK) workforce.
"Not really - the shareholders have to decide in the end and could easily be open to a bigger offer. It's the board's job to get the best value for the owners."
I know I know. But Intel would have to react extremely quickly indeed, and make an immediate and unbelievably good offer. Big enough to encourage shareholders to run the gauntlet of a Competition Commission inquiry instead of walking away right now with an extra unexpected $10billion in their pockets.
Especially with a new PM just in post who has expressed a distaste for ownership of firms going abroad. There's no obvious anti-competitive concern with Softbank's acquisition, but there sure as hell would be if Intel tried to buy ARM. Softbank's offer looks like a dead-cert $10billion profit for shareholders. An Intel offer would be a risky-as-hell profit, and no one is likely to turn down Softbank's already very generous offer and risk losing out altogether.
Intel would have to offer something substantially above $32billion in cash, and that'd be a huge and risky proposition for Intel right now.
Who knows. Japanese companies can be very conservative in their approach to innovation, etc. ARM haven't exactly been idle on the innovation front, but they've also been very careful to stick to what they know - CPU design and licensing, and could also be considered a conservative company.
It might turn out to be a reasonably good fit, especially as it's clearly not a merger between two CPU design outfits (Softbank have nothing else like ARM in their portfolio). It might be that Softbank will simply leave ARM to get on with it.
What would be a problem is if Softbank have borrowed heavily to buy ARM, and then saddle ARM with that debt. That would be a bad thing.
The big question is, does SoftBank actually has a plan, a considered strategy in which ARM is the cornerstone that would be worth paying an extra 10bn. Or do they just have a load of cash they want to use to diversify, and someone on the board read some blurb about IoT? In that case, they might not even be aware of the fact that ARM designs chips, but doesn't make them. (Stranger things have happened.) Anyway, anything other than option one does not bode well for ARM.
Well I just read a story about this buyout calling ARM a "supplier to Apple", so obviously some of the press are under the illusion that they make & sell chips, but I'm pretty sure you don't get to the point where you can throw $32 billion around without having a pretty good idea of what the company you are buying actually does.
It is obviously an IoT play, based on the assumption that in 10 years there will be tens of billions of ARM CPUs made every year to go in toasters and light bulbs, each one licensed from ARM.
Well I just read a story about this buyout calling ARM a "supplier to Apple",
And on Today this morning that was practically all they said in the news bulletins (the business bloke was slightly better). There was no mention of the absolutely vast range of stuff that has at its heart one or more ARM cores, just "iPhone and iPad".
Shoddy reporting.
M.
Well that's because Meeja are boneheads who want to bling around Apple gear (and not for good reasons such as UNIX-y programming) and think that is all that anyone ever buys, and have *no idea* what goes on in the real world - which is why they similarly also think all motorcyclists drive Harley-Davidsons, or want to when they "grow up" or "get successful" - God knows what they think people are riding the TT or places like Laguna Seca on.
ARM is still my biggest single shareholding. My inclination as shareholder is to vote against any loss of independence. It'll take more than a just a five-figure boost to my pot to change my vote: it'll need a convincing story about being a Good Thing for the industry (can't see that), or at worst a real fabulous "retire rich" premium (which I doubt even Apple could offer).
So, what will the big institutional shareholders do? Who's pulling their strings?
With an offer of 50% premium on the closing share price? I think the Institutionals will agree with the deal. It's a lot of money right now, vs a slow-ish but steady income for the long run.
Plus depending on how Softbank do it, they might simply acquire enough shares to completely control the company (90%?), and any hold-outs will then find themselves being issued a compulsory purchase order, possibly at far less advantageous rates.
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