What’s next for Arm’s volatile takeover?

Nvidia’s acquisition of British chip design company Arm from SoftBank has caused serious outcry on both sides of the Atlantic.

The deal, first announced in September 2020, has been mired in regulatory reviews around the world and could miss its original timeframe to close in March 2022. This week, Nvidia’s financial results were overshadowed by the deal after the UK government ordered an in-depth investigation into competing facilities and national security, which could take months.

Why do managers seem to dislike the deal so much?

Arm holds an unusual position in the global technology industry. It doesn’t make its own chips, but its designs formed the basic blueprint for the 25 billion chips made by other companies last year. Some competitors have complained that after the takeover, Nvidia will be able to restrict their access to Arm designs to substitutes for its own products.

The agreement was also reached at a time when competition regulators globally have become much more concerned about the emergence of a new generation of powerful technology monopolies.

Announcing a deep EU investigation into the deal at the end of October, Margrethe Vestager, the bloc’s competition commissioner, warned that it “could lead to restricted or impaired access to Arm’s” IP”, distorting various chip markets. Arm’s fortunes depend on near-total dominance in the smartphone processor space, but the risk of Nvidia using the deal to corner newer markets like data center servers and cellular cause concern to managers.

This week, the UK is also out a deeper investigation of the deal, and Nvidia said regulators in Europe had raised “many concerns”. It also revealed that the US Federal Trade Commission has its own worries. China, meanwhile, is waiting, with a formal review yet to begin.

Margrethe Vestager
EU Competition Commissioner Margrethe Vestager has announced an in-depth investigation into the Arm takeover © Oliver Hoslet/EPA-EFE/Shutterstock

Why is the UK in particular against it?

While other regulators focus solely on competition issues, the UK has added national security to its list of concerns. It’s not clear exactly what’s behind this, but Arm’s headquarters and most of its research activities are in the UK, potentially becoming an important part of any future industrial strategy. future to build a stronger national technology foundation.

Post-Brexit politics has also worked. SoftBank bought Arm less than a month after the Brexit vote in 2016, taking advantage of the pound’s 11% decline against the US dollar. The deal was described at the time as a vote of confidence on Britain’s future industrial competitiveness, and SoftBank made a five-year commitment – now expired – to maintain its presence. Arm in the UK and increased local recruitment.

The potential sale to a US company comes at a time when other key UK companies have fallen into foreign hands and adds to worries about the company’s influence waning – despite although Nvidia has made its own promise to support Arm’s UK operations and continue to invest in the Country.

Do Nvidia and SoftBank have any answers to these worries?

Nvidia tried to take over the rest of the tech industry with the promise of pouring money and some of its own tech into Arm. That could give Arm a stronger foothold in new markets like AI and make technology developed inside Nvidia more widely available to the rest of the industry.

The American company has also given assurances that it will not block any other companies from licensing Arm’s designs. The offer has fallen on deaf ears, with both the EU and UK ruling inappropriately before embarking on their latest investigations. UK Competition and Markets Authority said “Behavior” remedies like these, designed to limit the company’s future conduct, are difficult to enforce by police and enforcement, and they doubt any guarantees Nvidia gives giving about their future behavior would be appropriate.

This scrutiny shows how much Nvidia’s chief executive, Jensen Huang, underestimated the possibility of resisting the deal. He argued from the outset that Nvidia’s own economic interest in maintaining Arm’s existing licensing business would provide enough assurance that it would not attempt to discourage competitors from using the designs. of Arms. He also tried to be magnanimous about leaving a lot of room for competitors, asserting that “the market is so diverse, there’s no way one company can handle them all.” That inevitably makes competitors worry that Nvidia will try to grab the best parts of the market for its own.

Is there a way the deal can still be done?

Yes, although the odds are stretching. Nvidia could try to make stronger guarantees to reduce the risk of impeding competition, although it may be difficult to overcome the CMA’s aversion to behavioral remedies. The alternative – structural measures that would involve cutting out portions of Arm’s IP and protecting it from Nvidia control – would be difficult to come up with without detracting from the value of the technology purchase. company from the very beginning.

It is possible that threats from regulators will no longer actually attempt to block the deal. In particular, for the UK’s Competition and Markets Authority, the stakes are high. A major victory right after Brexit would cast the country’s power as the new power on the global antitrust stage, although a huge loss would be heavy.

SoftBank logo on a store in Tokyo, Japan
SoftBank has a strong incentive to push the deal through to the very end and is poised to reap huge profits © Kazuhiro Nogi / AFP via Getty Images

Nvidia and SoftBank could call it a date at what point?

Nvidia first said it could take 18 months, until next March, to finalize the deal and has since warned that things could take even longer. As long as both companies believe they face a case that could shake the regulators – something both have claimed in recent days – they can drag things out for many years. another month.

SoftBank, meanwhile, has a strong incentive to push the deal through to the very end. It could generate a huge profit thanks to Nvidia’s share price skyrocketing since the deal was announced. The cash and stock offer, worth $38.5 billion to SoftBank at the outset, is now worth $82 billion.

One reason to quit sooner is if Arm’s business starts to falter, especially if it begins to lose key employees. Last year, Nvidia set aside $1.5 billion to use as stock bonuses for Arm employees once the deal was completed, but growing opposition to the deal has left the gold that is becoming more and more distant. Arm spent some of its own money trying to keep its employees from quitting, a key factor behind the $200 million loss the company suffered in the last financial year.

What happens to Arm if the deal is cancelled?

SoftBank revealed its interest in selling Arm when it approached Nvidia about a possible deal. That makes an alternative exit seem viable if the current deal fails.

The deal sheds light on Arm’s unique position in the chip industry. Arm could also be on the verge of success in its business, after a period of heavy investment under SoftBank to expand its reach into new markets beyond smartphones. After growing at a compound rate of just about 5% a year since 2016, revenue has grown 61% in the first six months of this year.

Other chipmakers will likely trigger the same regulatory backlash as Nvidia did if they try to buy Arm. That makes the listed stock market the most likely alternative, with the UK being a favorite location for those who see Arm as the key national technology champion. But a return to a London listing before the SoftBank deal may not have been the preferred outcome for its current owners: Wall Street, after all, values ​​much higher shares of assets. technology company.

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