Nvidia is not "taking over", and SoftBank plans to promote ARM listing financing within a year

One of the most shocking news for the capital market after hours in the US stock market on Monday was That SoftBank's hope to sell british chip design company ARM to the US chip giant Nvidia came to an abrupt end, citing strong opposition from regulators in the United States, the United Kingdom and the European Union.

SoftBank Group CEO Son Zhengyi then said on a third-quarter earnings call on Tuesday afternoon local time that it plans to conduct an initial public offering of ARM companies before the end of the next fiscal year ending in March 2023, and the most ideal IPO listing location is the NASDAQ in the United States.

Son Zhengyi: ARM's listing will be the most important IPO in the history of the chip industry, and operating profit has doubled in the past two years

Some media said that Son Zhengyi "transformed" the SoftBank earnings call into an investor roadshow before ARM's listing, and strongly showed that it was okay not to sell to Nvidia, arm's chip design in smart phones, electric vehicles, cloud computing and data centers have high demand:

"ARM is entering a golden age when IT will revolutionize frontier areas such as cloud computing and meta-universes as the most important IPO ever made by the chip industry."

Son said he paid $32 billion for the acquisition of British chip designer ARM in 2016, and the original idea was to go public with the company's IPO, but chose to sell it privately because of the new crown epidemic.

In September 2020, SoftBank announced the sale of ARM to Nvidia for a deal worth about $40 billion. As SoftBank expects to receive cash and Nvidia shares, the deal valued at $80 billion in late last year as the latter's stock price rises, making it the largest M&A deal in the history of the chip industry. Some analysts say the current deal is worth $66 billion.

He was surprised to see the FTC trying to sue to block the deal last December, and surprised at the backlash from big tech companies such as Qualcomm and Microsoft that rely on ARM chip designs, but interpreted it in terms of the benefits of ARM's future IPOs:

"We see a backlash, precisely because ARM is one of the most important and essential companies that most companies in the IT industry or Silicon Valley rely on, directly or indirectly."

Son said arm is likely to list on the NASDAQ, which is dominated by technology stocks, because many of ARM's customers are in Silicon Valley. Choosing ARM to list instead of "keeping" is to hope that external investors in the SoftBank Vision Fund will be able to cash out through the IPO, and the Vision Fund holds a quarter of ARM's shares. Arm stock options can also be issued to ARM employees as incentives after listing.

SoftBank also revealed that after a tough period in previous years, ARM is on track to achieve revenue of $2.5 billion in the current fiscal year ending March, up 26 percent from $1.98 billion in the previous year; its operating profit has doubled over the past two years and is expected to reach $900 million this fiscal year. In the first nine months of the fiscal year ending December, ARM's net sales soared 40% year-over-year to $2 billion.

Meanwhile, Nvidia's $1.25 billion deposit to SoftBank when the sale contract was signed in 2020 will not be refunded, and this "break-up fee" will be recorded as SoftBank's profit in the fourth quarter of the fiscal year. Nvidia expects to include a charge of $1.36 billion in the first quarter of fiscal 2023.

Wall Street: ARM goes public or can't get the high valuation sold to Nvidia, and SoftBank has had a harder time raising money for the Vision Fund

On the day of the news of arm's sale to Nvidia, ARM's management quickly restructured, with Rene Haas, who had seven years of NVIDIA work experience and joined ARM in 2013 as head of the intellectual property department, becoming CEO, and former CEO Simon Segars out. Haas said no decision has been made on where ARM will be listed and whether SoftBank will continue to hold a majority stake after listing.

Analysts are generally concerned that in a current environment where global tech stocks are frustrated by the Fed's hawkish turn, ARM's choice of an initial public offering may not be able to obtain the high valuation sold to Nvidia. People close to SoftBank said the relatively higher valuation given to technology stocks by the U.S. market may be one of the reasons SoftBank doesn't want to consider listing ARM in the UK.

Fumio Matsumoto, chief strategist at Okasan Securities, said that whether the volatile semiconductor business can remain hot this year has added uncertainty to ARM's IPO, which makes the timing of a large-scale IPO less than ideal. And because of the potential synergies, internal strategic buyers in the chip industry could have paid ARM a higher price than the IPO.

At the same time, the failure to sell ARM privately has also put pressure on SoftBank to raise funds for the Vision Fund, whose existing portfolio valuations are suffering setbacks, with office space-sharing company WeWork, Southeast Asian ride-hailing service provider Grab and German used car e-commerce platform Auto1 all falling last quarter. Kirk Boodry, a technology analyst at Redex Holdings, worries that ARM's switch to an IPO could affect SoftBank's share buybacks, "because the sale of ARM appears to be a major source of new funding." ”

In addition, Nvidia's inability to own ARM is also a major loss to its development strategy. Nvidia CEO Jen-Hsun Huang originally hoped to use ARM's chip processor design to consolidate the company's competitive advantage in the data center chip market and further compete with Intel and AMD. In the data center, NVIDIA's graphics processors have become an important tool for artificial intelligence and machine learning.

Nvidia, which has jumped to the top chip company in the United States by market capitalization, said it would retain a 20-year license to ARM technology despite the failed acquisition. CFRA Research analyst Angelo Zino said the inability to buy ARM was a missed opportunity for NVIDIA, but a failed deal removed the suspense of the stock and investors can now "focus on the company's attractive fundamentals."

When the FTC sued Nvidia for arm acquisitions in December, it said competition in emerging markets such as self-driving car chips and new network chips could be damaged, according to public information. Britain extended its review of the deal last year and expanded it to national security, with some British politicians viewing ARM as a national strategic asset and wanting it to go public in London. Major technology companies opposed to NVIDIA's acquisition of ARM argue that NVIDIA will gain an unfair advantage by having priority over ARM technology.

Reuters also said the deal's failure once again highlighted the difficulties companies have in convincing antitrust regulators and governments to approve big tech mergers and acquisitions, particularly in the semiconductor industry. Due to regulatory obstacles, Qualcomm abandoned the $44 billion acquisition of NXP Semiconductors in 2018, and former US President Trump also blocked microchip maker Broadcom's proposal to acquire Qualcomm.

Nvidia fell 2 percent ahead of market hours on Tuesday, Feb. 8, and at one point 3 percent before midday, before turning higher and rising more than 1 percent before midday. The stock has grown by more than 70 percent over the past 12 years, far outperforming the S&P 500 market's 15 percent gain. SoftBank closed down 0.9 percent to 5,302 yen on Tuesday.