Reports from the Heart of the Machine
Editors: Zenan, Boat
If Nvidia abandons the acquisition, SoftBank has the right to retain the $2 billion in advance it originally received.
Microsoft's $75 billion acquisition of Activision Blizzard sparked cheers, while Nvidia's $40 billion acquisition of chip design firm Arm may be hopeless.
According to Bloomberg reported yesterday, Nvidia is quietly preparing to abandon the acquisition of Arm from SoftBank Group, a deal that has made little progress in terms of regulatory approvals.
A person who spoke on condition of anonymity said Nvidia had told partners it did not expect the deal to be completed. Meanwhile, another source familiar with the matter said SoftBank is stepping up preparations for Arm's listing to change plans after Nvidia cancels the acquisition.
On September 13, 2020, Nvidia shocked the industry by announcing plans to acquire Arm for $40 billion, paying SoftBank a total of $21.5 billion in NVIDIA common stock and $12 billion in cash, including $2 billion at the time of signing, under the terms of the deal approved by the boards of directors of Nvidia, SoftBank and ARM at the time.
Huang has said the acquisition of Arm helps NVIDIA become "a company in a great position in the AI era."
If arm acquisition is successful, Nvidia, which dominates GPUs, will occupy an upstream position in chip design. But such mega deals require approval from major economies (China, the U.S., the Eu and the U.K.), and government concerns about monopolies have sparked a backlash from regulators and dissatisfaction from Arm's customers. The U.S. Federal Trade Commission sued Nvidia last December to block the deal, saying it would become too powerful if it gained control of Arm's chip design.
According to a person familiar with the matter, the acquisition also faces resistance in China, where chinese regulators are inclined to block it if it is approved elsewhere. But they don't expect the acquisition to get to this point.
Nvidia expected the regulatory approval process to take a year and a half, but today the company still faces obstacles. The leadership of Nvidia and Arm is still defending regulators and has not yet made a final decision. Bob Sherbin, a spokeswoman for Nvidia, said: "We will continue to maintain the views detailed in the latest regulatory documents – that this transaction provides an opportunity to accelerate Arm's development and promote competitive innovation."
On the other hand, a SoftBank spokesperson also said: "We still hope that this transaction can be approved."
If Nvidia can successfully complete this transaction, it will be a huge success for Nvidia, which has built its graphics card business into a chip manufacturing empire. Nvidia already has the largest market capitalization of the U.S. semiconductor industry, at more than $550 billion, more than twice as much as Intel.
But such acquisitions have not been easy. In 2018, Qualcomm terminated its $44 billion acquisition of NXP Semiconductors NV after nearly two years of regulatory hurdles. At that time, the Trump administration also banned Singapore's electronic chip manufacturer Broadcom from acquiring Qualcomm on the grounds of "national security", although Broadcom had already announced that it would relocate its headquarters to the United States.
Arm's sale will come under greater scrutiny as its chip designs are used in everything from mobile phones to cars to factory equipment, and neutrality has been the foundation of its business model. Many of the world's top tech companies rely on Arm's technology, and they fear that they could lose unrestricted access to Arm after the acquisition.
As a result, numerous tech giants, including Qualcomm, Microsoft, Intel and Amazon, have opposed the acquisition. According to people familiar with the matter, the tech giants have provided regulators around the world with what they believe is sufficient to justify terminating the deal.
The deal has also created divisions within Nvidia, with some at the company frustrated that the acquisition was about to fail, while others argued that management could use the FTC trial to justify the deal's merits.
Still, Sanford C. Bernstein analyst Stacy Rasgon said that if it doesn't end up acquiring Arm, NVIDIA may still be fine. He said in a research note: "While acquiring Arm would have been a good thing, we don't think Nvidia had to buy it either."
The deal could have helped NVIDIA move into the data center chip space, but Nvidia must have been able to create more value without an acquisition.
Inside SoftBank, some hope to complete the acquisition, especially if rising Nvidia shares make the deal more valuable. Since announcing its plans to trade with Arm, Nvidia's share price has nearly doubled. On the other hand, there are some people within SoftBank who prefer to do an IPO for Arm as soon as possible, and the chip industry is still attractive to investors.
The preliminary agreement between Nvidia and SoftBank expires on September 13 of this year and could be renewed if an agreement is reached. Nvidia said at the outset that it would take "about 18 months" to complete the deal. The timeline will suggest the completion of the acquisition around March this year, but it seems impossible to complete it at this time.
Nvidia has more than one obstacle at hand: The Federal Trade Commission (FTC) lawsuit alone could take months, and investigations by the European Commission and Britain's antitrust regulators must also be taken into account.
The long review time is also a test for capital operation. Regardless of whether the transaction is successful or not, SoftBank and Arm have the right to retain the $2 billion that Nvidia paid at the time of signing, including a $1.25 billion "lock-in fee."
At a time when international trade tensions are rising, NVIDIA must also be approved by the Chinese authorities. The United States has been trying to prevent China's semiconductor industry from gaining access to the latest technology. Many of the country's emerging chipmakers are Arm's customers, giving domestic government agencies additional incentives not to want Arm technology, which was originally british, to be transferred to the United States.
In opposing the deal, companies such as Qualcomm, Intel and Google said Nvidia could not maintain Arm's independence because it was itself an Arm customer. Nvidia, the largest maker of graphics chips, competes with Intel in server processors and is expanding into new areas that will allow it to compete directly with many other Arm licensed chip companies.
Nvidia also provides chips for businesses such as Amazon's AWS and Microsoft's Azure, providing the basis for processing AI hashing power in data centers. The companies are also developing their own chips, making NVIDIA and its partners potential competitors.
The news that Nvidia is close to abandoning arm has affected investors' mentality, and as of Tuesday's U.S. stock close, Nvidia shares fell 4.48% to $223.24. SoftBank's American Depositary Shares fell 4.9 percent.
Reference: https://www.bloomberg.com/news/articles/2022-01-25/nvidia-is-said-to-quietly-prepare-to-abandon-takeover-of-arm
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