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Financials Mergers & Acquisitions

Softbank buys ARM for $32bn in shock IoT move

Japanese operator wants to control its own technology destiny as it ups its game in cloud/IoT, but ARM loses the neutrality which made it great

Just when the UK thought there couldn’t be any more shocks in store, one came from left-field in the hi-tech world – the £24.3bn ($32.17bn) acquisition of its most venerable technology firm, ARM, by Japanese mobile operator Softbank.

ARM, whose processor IP dominates the handset market, has been the subject of acquisition rumors almost since it was founded in 1990 as a joint venture between Apple, Acorn and VLSI Technology. But the expected predators have always come from the semiconductor or device spaces where ARM has ruled supreme with its designs for processors, microcontrollers and, more recently, graphics chips.

Instead, it is to become part of an operator. This is a huge gamble by Softbank and its maverick chairman Masayoshi Son. He has always ruled over a diverse group of operations and has been evolving Softbank well beyond the conventional mobile operator model – even by the standards of east Asian MNOs, which are far more active in controlling technologies and driving standards than their western counterparts, Softbank has been a major player in international mobile platforms, pushing the Japanese industry beyond its cosy island.

And of course, it has media holdings and its Yahoo stake, and has been one of the most aggressive operators in developing network-neutral services, increasingly for the smart home and the Internet of Things (IoT), where it aims to be an international player, and where the ARM purchase appears to fit.

But the question marks for ARM’s future are huge. The firm is at a transition point. The smartphone market’s growth is slowing and ARM, and key licensees like Qualcomm, need to expand into new target sectors. The IoT is the most promising because of ARM’s strength in low power architectures and its existing presence in microcontrollers and real time processors, in markets like auto. It is also taking the higher-risk shift into network, cloud and server infrastructure, where it will collide with Intel, which is seeking a similar expansion from its traditional data centers into low power hyperscale platforms. The ambition and funds of Softbank could make this a smoother path.

The new uncertainties over ARM’s continuing dominance, which have periodically hit its share price, and the slump in UK share values after the Brexit referendum, make this a good time for Softbank to pounce, getting one of the pivotal technologies of the mobile industry for a relatively low price.

But can ARM continue to develop its unique and successful model under the ownership of a single player? It is clear Softbank is not paying over $31bn for a technology merely for its own purposes. It wants to become the controller of key de facto standards for the next generation of low power processors, putting itself at the heart of a major ecosystem. This could accelerate the development of standardized IoT networks on which it can become a flagship service provider and a driver of the industry, Google-style.

But that is a massive leap in its own right. Despite Yahoo and other alliances, Softbank has not made a significant impact, outside of the technical standards field, in markets where it does not have a network – and even in the US, its stewardship has not brought the dramatic turnaround for Sprint which many predicted from the Japanese firm’s superior management and experience. And ARM’s success has rested on its independence. Every time that the rumor went round Wall Street yet again, that Intel was going to buy ARM, it was shot down in flames, because it made no sense for ARM to be in the hands of a single company.

Of course, Softbank is not as extreme as that, because it does not compete with ARM’s licensees, but it has its own technology agenda, which will not fit well with the strategies of many ARM partners, nor their direct or indirect operator customers. It will have a breathing space while it decides exactly how to proceed with an ARM-driven strategy, because in many sectors, ARM’s customers, however disquieted, have nowhere else to go. But when it comes to future directions, it will need to reassure the ARM community rapidly or risk defections when chipmakers plan their next generation offerings.
The IoT and infrastructure spaces are more fragmented than the handset heartland and there are other IP choices – IBM’s rejuvenated Power program and even Oracle Sparc at the high end, plus Nvidia and Imagination for graphics; MIPS and a host of start-ups in the IoT; Intel everywhere; and the moves by Google and others potentially to design inhouse architectures.

The Softbank deal seems to be all about IoT, which may cause uncertainty in the fledgling ARM-based infrastructure space, though it would make sense for Softbank to control its hyperscale destiny, Facebook-like, if it is to grow as an international cloud player. A cloud + IoT strategy is hardly original, but Softbank has better weapons than most MNOs to pursue it effectively, and so escape the dying mobile data business model. However, it will come up against the cloud and web giants, and it is highly questionable whether it needs to take on the additional expense and distraction of a processor platform, rather than getting its services play right and harnessing existing networks and device designs.

The takeover of ARM, if it passes the usual shareholder and regulatory clearances, will be the largest ever acquisition of a European hi-tech business. Softbank will pay £17 in cash for each share, a 43% premium on its closing price last week.

Chancellor of the Exchequer Philip Hammond said the deal would guarantee the jobs of ARM’s 4,000 employees and would be the largest ever Asian investment into the UK, turning “this great British company into a global phenomenon”. The deal is timely for the new UK government, is it is presented as a signal that foreign investors are not running shy of the country after Brexit – though it can also be seen as an early sign that the vultures are circling around UK firms because of the depressed share prices. There were certainly no comments about protecting the UK’s most important technology asset, as there would have been from ministers in France, Germany, or an earlier phase of UK history.

After taking into account ARM’s £1bn in cash, the deal gives an enterprise value for the business of around £23.3bn. This is 24.4 times ARM’s 2015 revenues of £968.3m and 56.8 times its adjusted profit after tax of £428.9m. The diverse Softbank empire is worth $68bn and has holdings including a majority stake in Sprint and Yahoo Japan. Masayoshi Son is an eccentric but accomplished dealmaker and has built up a store of cash with which to pursue new directions as traditional internet and mobile revenues stagnate. He has made a $20m investment in Alibaba, which has more than trebled in value, and in the past 10 years he has taken part in over 140 deals, totalling $82bn, nearly all of them since 2012. Other acquisitions include US retailer Brighstar, the Japanese baseball stadium Fukuoka Dome, India’s Snapdeal, and a 51% stake in Finland’s Supercell.

It remains to be seen whether, with its ARM purchase, Softbank will be tilting at Google, creating a major new force in the next generation of cloud/IoT/mobile services and devices; or instead, tilting at windmills, Don Quixote-style. Either way, ARM as we know it, and its carefully balanced style of relationships with its often fractious community, will be consigned to history along with ‘the smartphone era’.

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