Close-up | ARM's capital past: How did the UK "lose" the chip pearl?

Southern Finance and Economics reporter Jiang Yue Shanghai reported that the ownership of a British chip company has aroused global attention.

On February 8, Nvidia and SoftBank issued a statement to terminate their transactions with ARM.

The news spread, a few joys, a few embarrassments. Perhaps the most miscellaneous tastes belong to the British government and the London Stock Exchange?

The company, which was born in Cambridge, England and whose main equity once belonged to the United Kingdom, is called ARM, and occupies an important position in the global chip architecture design industry. However, the company's British ancestry has gradually been washed away since 2016, and this history is quite dramatic in today's increasingly reinforced concept of global chip sovereignty.

ARM, known as the "crown jewel" of the chip industry, changed all its shares to Japan's SoftBank in 2016 with the consent of many well-known funds in the United Kingdom and the British High Court. Since then, the US market has struggled to take over, reflecting the increasing competition in chips. However, on February 8 this week, SoftBank said it would lead ARM to the United States to list, but did not mention the London Stock Exchange, and this plan to fly away from the United Kingdom will make ARM more and more distant from the United Kingdom.

How did Britain lose control of the Chip Pearl? Where will ARM's control ultimately go?

Uk "Brexit" and ARM "Brexit"

Many things are always ignored when they happen, but in retrospect, it is "the light boat has passed through the ten thousand heavy mountains". Looking back at 2016, the United Kingdom and ARM both ushered in their respective turning points in their fate, and the British "Brexit" and ARM "Brexit" occurred in the first two months, which were incredibly fast.

On June 23, 2016, the results of the referendum on Brexit were released, and 51.9% of citizens chose to support Brexit, causing a global sensation. People began to question whether the UK was moving towards "de-globalisation", and the value of British assets, led by the pound, fell further into the abyss.

This was followed in July 2016 when a cross-border sale of Uk assets "normally" unfolded. On July 18, 2016, ARM, a chip architecture design company that is dual-listed on the London Stock Exchange and nasdaq exchanges and has the blood of Cambridge, accepted a full share offer from Japan's SoftBank Group.

The whole of Britain at the time was overjoyed by the deal. Isn't the outside world talking about the decline in the attractiveness of UK assets? SoftBank's arrival seems to be helping the British to crush that narrative. Philip Hammond, the new British treasurer, immediately made a positive statement on the deal, calling it "a clear testament to the undiminished charm of British assets for overseas investors".

However, the British government at the time did not anticipate the later story. Two years later, the global chip war began, and the British government realized that it had "lost" the chip pearl, but it was too late. It turned out that, like the Uk's "Brexit", AARM has since taken the step of "brexit".

SoftBank "Probe Capsule"

SoftBank's tender offer is as easy as probing for things. Starting with the issuance of the offer on July 18, 2016, it took SoftBank only 50 days to complete the deal.

Looking back at the process, the network of this transaction is connected to the British regulatory authorities and the stock exchange, and the participating teams are star-studded, and there is no shortage of top asset management companies and international investment banks, but in the rapid change of interest conversion, some people must not have thought clearly about the gains and losses of off-the-books interests.

In the year leading up to the Referendum's Brexit, the pound fell nearly 30% against the yen, which also meant a relative contraction in value for assets across the UK. After the Brexit vote on June 23, 2016, this value shrinkage could not stop the car.

Arm, which is listed on the London Stock Exchange, has also lost its upward momentum. On the one hand, the attractiveness of UK assets has declined, on the other hand, the smartphone market seems to have reached an upward bottleneck, and the performance of this downstream market has dragged ARM down from making a performance breakthrough. In the 12 months leading up to June 2016, ARM's share price had a low of £8.25 per share and a maximum of just £11.4 per share.

In this "time of crisis", SoftBank suddenly stepped out to play the role of "white knight". SoftBank originally owned only 1.45% of ARM and made a tender offer to acquire the remaining 98.55% stake. Arm is even happier that SoftBank is willing to pay £17 per share, which is a significant 53.35% premium to ARM's closing price on the last trading day before the offer. As if that wasn't enough, SoftBank arrogantly attached a condition: all-cash transactions.

People see SoftBank's bid as a "sky-high price", and some people describe SoftBank's move as a "big gamble". Why? SoftBank's bid means it believes Arm's total value can reach £23.58 billion, which is about 23.82 times ARM's total revenue the year before and 52.36 times EBITDA. In other words, if ARM continues to grow so tepidly, It will take At least 50 years for SoftBank to recoup its investment costs.

ARM's then-chairman of the board, Stuart Chambers, described SoftBank's takeover offer as "irresistible," adding that SoftBank was "locking in cash to value that will be cashed in in the future." However, if Chambers were really so confident in ARM's future, would he happily agree to the deal?

50 days of "fast horse and whip" to complete

Not only Chambers, but the joy of the deal spread in the British government, ARM shareholders and other aspects. The participation of the star team has also added an inexplicable credibility to this transaction, and many investment banks and well-known funds have thrown themselves into it.

ARM and SoftBank each sent investment banking teams to coach the deal, arm hired Goldman Sachs, Lazard, UBS, while SoftBank hired Mizuho, Raine, robey Warshaw, who can be called "old friends". Among them, Raine is a Wall Street boutique investment bank, co-founders Joe Ravitch and Jeff Sine have been in goldman Sachs, Morgan Stanley and other major investment banks for many years specializing in media, telecommunications, Internet investment banking work, after resigning and starting a business is a frequent customer of SoftBank's board of directors, advising SoftBank technology investment.

Before the sale to SoftBank, ARM was dual-listed on the NASDAQ and London Stock Exchange, and according to the geographical division, 44.6% of the equity belonged to investors in the US market, 35.45% of the equity belonged to investors in the UK market, and investors in Japan, France, Canada and other places divided the remaining 20%.

Scottish-based Baillie Gifford, Arm's largest shareholder, holds nearly 10% of the shares. The company, in particular, has a unique vision for technology investments, and once stood firmly for Tesla in its most difficult times, and accordingly received great returns. In addition to Baillie Gifford, Well-known institutions such as BlackRock, Capital Group, Norges Bank, Vanguard and other well-known institutions ranked first in Arm's holdings. Such a team of shareholders also nodded at SoftBank's offer.

The above-mentioned star counseling team and well-known institutional investors jointly promoted SoftBank's acquisition of ARM, which also caused public opinion to be generally optimistic about the transaction. British Finance Minister Hammond pointed out that SoftBank's acquisition of ARM will be the largest investment in the UK in Asia ever, which will ensure that ARM's staff in the UK will double in the next five years and enable the British company to play an important role in the international arena. He took the opportunity to reiterate that the UK is open to overseas investors and that the charm of UK investment assets remains the same.

Compared with other cross-border transactions, SoftBank's acquisition of Arm can be described as "fast and fast". After receiving the share buyout offer on 18 July 2016, ARM's shareholders voted on 30 August, followed by a positive approval from the UK High Court on 1 September. On September 6, 2016, SoftBank officially completed its acquisition of ARM in a total of 50 days.

Leaving the sun and entering the United States?

ARM was originally an authentic British company, after the acquisition of SoftBank, not only the shareholders changed to Asian faces, but also delisted from the London Stock Exchange and NASDAQ, which means that the British can no longer easily understand the operation of this company from the open market. In 2020, SoftBank pushed ARM to convert again, accepting a full purchase offer from the American chip company Nvidia, which is arm's second "blood exchange" in a short period of time.

On September 14, 2020, the news of the acquisition came out that Nvidia was willing to acquire a 100% stake in ARM from SoftBank for nearly $40 billion, paid by Nvidia common stock plus cash. Mergers and acquisitions have occurred from time to time in chip history, but the $40 billion price will make the deal go down in history.

Nvidia is currently the world's leading GPU designer and a star stock in the capital market. According to the market value in February this year, NVIDIA's market capitalization fluctuated around $650 billion, similar to the size of meta, the parent company of the social network Facebook, which shows its huge size.

Compared with its peers, Nvidia's chip leader position is prominent, because the current market value of Intel and Qualcomm is about $200 billion, and the size of AMD is about $150 billion. NVIDIA will continue to be favored by the capital market in 2021 and is still developing rapidly.

Nvidia made its fortune in GPU design, but in recent years it has moved towards the wider range of computing chips, making great achievements in data centers, artificial intelligence, meta-universes, autonomous driving and other fields. Why did NVIDIA buy ARM? What does ARM do?

ARM is engaged in chip architecture design, and the difference with companies such as Intel is that ARM does not manufacture or sell processor chips on the basis of its own design, but instead licenses the design to other chip design companies to complete the end-of-line work.

Due to the obvious architectural distinction with mainstream manufacturers such as Intel, the ARM architecture has gained unique competitiveness. For example, in the smartphone market, ARM is very competitive, and the mobile phone chip based on the ARM architecture has significantly lower power consumption than other architecture chips, which is enough to win most of the market.

Nvidia, which is expanding its computing chips, attaches great importance to the value of ARM in further enhancing computing power. In early 2021, Nvidia launched a new data center CPU processor chip, named "Grace", using the ARM architecture. According to NVIDIA, Grace is designed to meet the computing needs of today's world's most advanced applications, with computing performance and throughput rates unmatched by any architecture before.

However, due to the huge size of NVIDIA, ARM has played a key role in some areas, and the market "anti-monopoly" calls have been everywhere. Competitors, including Google, Microsoft, and Qualcomm, have publicly opposed Nvidia's acquisition of ARM, claiming that the deal will jeopardize ARM's independence and could hurt competition.

One of ARM's major customers, communication chip design giant Qualcomm is one of the opponents, and its president Cristiano Amon said he would like to see ARM listed, and Qualcomm will take a stake. Cristiano Amon said: "If ARM has a separate future, I think you will find that many companies in the ecosystem are very interested in investing in ARM. ”

In addition, the United Kingdom, the European Union, the United States, and China, the four major markets of NVIDIA and ARM, have also stepped in to regulate the transaction. Among them, Nadine Dorries, the British Secretary of Digital and Culture, led the LinkedIn Competition and Markets Agency to conduct several rounds of in-depth investigations, focusing on the two issues of antitrust competition and national security, which were originally scheduled to end in May this year. The U.S. Federal Trade Commission filed a lawsuit in December 2021 to block the deal on antitrust grounds.

Faced with complex pressure, on February 8, NVIDIA and SoftBank jointly issued a statement deciding to terminate the ARM transaction.

The LSE was inferior to nasdaq

Although it is impossible for an American company to take over ARM, Son continues to pursue the "American Dream". On February 8, he announced that he would take ARM back on the market to nasdaq.

As soon as the news came out, the United Kingdom was in an uproar, and the British government and the London Exchange were in an embarrassing situation. Why does Son Zhengyi not want ARM to be listed in local London, but instead wants to chase dreams across the ocean?

In the face of public skepticism, a spokesman for British Prime Minister Boris Johnson responded on February 9 that he had noticed the news that SoftBank wanted to take ARM to the United States for listing. However, the British government could not comment more, but could only dryly insist that London is still "a great place" for high-tech companies.

The Prime Minister's Office also insisted that London, which hit a new high for IPOs and private equity investment in 2021, remains committed to supporting the company's growth and listing in London.

However, Darren Jones, a member of the House of Commons, wrote on his personal social media on Feb. 9: "If ARM cannot be competitively secured for listing in London, how can the Prime Minister insist that London is the best place for tech companies to raise large amounts of money?" ”

According to the information, the proportion of the IPO market of the London Exchange in the past 15 years has fallen sharply, and the market structure cannot keep up with the "new economy" trend is also an obvious weakness. Because of this, tech stars like ARM are more inclined to choose NASDAQ in the United States.

Browse the stock section of the London Stock Exchange today, and the sense of "old economy" comes to mind. In the daily turnover rankings, the top ten companies are usually Lloyds Bank, telecommunications company Vodafone, BT, BP, International Aviation Group, mining group Glencore, car manufacturer Rolls-Royce, Barclays Bank and so on.

If you compare the representative stocks of the London Stock Exchange and the NASDAQ exchange, you can also see that the "subject content" of the London Stock Exchange is far less than that of the NASDAQ. Among the top ten companies in the market capitalization of the FTSE 100 index of the London Stock Exchange, there are three pharmaceutical companies such as AstraZeneca, GlaxoSmithKline and Unilever, three commodity companies such as Shell, BP, Rio Tinto and Glencore, as well as HSBC and foreign wine companies Diageo and British American Tobacco. Many of these companies are over 100 years old, and James Anderson, a fund manager and partner at Baillie Gifford' Star Fund, has previously described the UK stock market as "still in the 19th century".

Among the constituent stocks of the NASDAQ 100 Index, the top ten shares are all technology companies, the two with the largest market capitalization are Apple and Microsoft, and the slightly smaller ones are chip giant Broadcom, SaaS giant Adobe, etc. The bottom 90 of the list are mostly occupied by technology companies.

In 2021, LSE has achieved its best results since 2007 in terms of IPO issuance, and is trying its best to improve the "content" of the IPO. During the year, the LSE pushed 122 companies to go public, with a total financing of more than £16.8 billion, of which 39% went to the technology or consumer internet sectors. However, as a comparison, the NASDAQ market issued a total of 753 IPOs in 2021, reflecting that startups and technology companies still prefer to choose NASDAQ.

Jay Ritter, a chair professor in finance at the University of Florida, explains this "charisma," saying, "There's a perception that American investors are more tech-savvy and more willing to pay more for these 'future-proof' companies." "For now, it appears that this perception will continue to intensify."

London remains one of the world's leading trading centres in debt, derivatives and foreign exchange, but in the stock market it is currently facing historic challenges.

At a time when the local chip asset ARM has once again chosen a listing destination, the London Stock Exchange and the British government are obviously in an embarrassing situation.

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