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How Chip Neutrality Scuppered Nvidia Deal to Buy Arm: QuickTake

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One of the most influential businesses in the tech industry is unknown to most consumers: Arm Ltd. The UK-based company designs key parts of the chips that power almost 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’s customers that killed the $40 billion deal. SoftBank’s Plan B is to sell Arm shares in what could be the chip industry’s biggest-ever initial public offering. 

Arm doesn’t own factories or produce its own chips. The company designs core semiconductor components and licenses the blueprints to other firms in exchange for a fee based on how many are produced. The arrangement brings in about $700 million in revenue every quarter, making Arm one of the UK’s largest tech businesses. That’s still a fraction of the sales that tech giants like Nvidia and Intel Corp. generate, and Arm has a relatively small workforce of 6,000. Yet few companies reach so far across the tech ecosystem: Arm estimates that 70% of the world’s population uses its products on a daily basis, and more than 200 billion chips have been made with its technology. 

2. Where would I find Arm’s products? 

They’re used in everything from the tiniest sensor to the most powerful data center. Inc., Samsung Electronics Co. and Apple Inc. are among Arm’s most important customers. Arm’s instruction set — the basic code used by software to communicate with semiconductors — is in billions of devices, and the effort required to switch to another company’s code would be enormous. Devices that work on batteries need chips that can get by with relatively little power; Arm’s designs prioritized that from the outset. When smartphones came along and demanded more processing horsepower, the technology evolved into more computer-like chips. There are about 1.4 billion of these pocket computers sold every year, with more than 90% using Arm. More recently, major tech names such as Apple and Amazon have been seeking to supply their own chips. Many of those new components rely on Arm too, and that’s beginning to threaten Intel’s lucrative hold on high-end computing processors. Intel owns the so-called X86 instruction set, the basis for a type of processor that’s the most widely used in computers. Advanced Micro Devices Inc. is the other major user of that technology.

3. Why did Nvidia want to buy it?

So it could build on its success in graphics processors and push 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 has been used across the $550 billion semiconductor industry on the understanding that no one would get privileged access to its technology. SoftBank announced the sale to Nvidia in September 2020. The transaction began to unravel after the US Federal Trade Commission sued to block it in December, and Nvidia walked away in February. 

SoftBank is expected to sell a minority stake in Arm by the end of March 2023. It initially leaned toward a US IPO until agreeing to also consider a partial listing on the London Stock Exchange after British Prime Minister Boris Johnson and Chancellor Rishi Sunak reportedly lobbied SoftBank Chief Executive Officer Masayoshi Son in person. A homecoming for Arm could boost London’s standing as a financial center post-Brexit, though a shrinking UK economy, roaring inflation and poor performances from 2021 IPO stocks have weighed on investor appetite. 

5. What’s Arm really worth? 

Shortly after SoftBank announced the IPO plan, it was targeting a valuation of at least $60 billion for Arm — almost double the amount it paid for the business in 2016. However, tech valuations have plunged since then, forcing companies to cancel listings or cut stock prices to get sales over the line. SoftBank decided in April to sell a smaller portion of Arm than previously planned and retain a controlling stake in the hope of obtaining a higher valuation for the remainder later. Supply-chain problems and concerns that the industry is making too many chips in a slowing global economy have made it hard to put reliable valuations on semiconductor companies. As of February, Arm would have been worth about $24 billion if investors valued it at the average market capitalization-to-revenue ratio of the Philadelphia Stock Exchange Semiconductor Index. But that benchmark has lost more than a quarter of its value since then. 

6. Does an IPO solve the neutrality problem? 

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

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