Regulators prevailed, hobbling Nvidia’s proposed acquisition of Arm Ltd.

Citing “significant regulatory challenges,” Nvidia announced this week it is abandoning the Arm acquisition unveiled to much fanfare in September 2020. In response, Arm named Rene Haas as its new CEO, replacing Simon Segars as the chip IP vendor prepares for an initial public offering.

Haas will oversee Arm’s IPO. Segars will “support the leadership transition in an advisory role for Arm”.

The initial $40 billion deal was fraught from the beginning, with critics and, eventually, European and U.S. regulators raising objections about the transaction’s adverse impact on Arm’s licensees. Nvidia argued unsuccessfully to assuage those concerns.

SoftBank Group acquired Cambridge-based Arm in 2016 for $32 billion, but moved to cash-out fours years later. After talking to several suitors, Nvidia emerged as a buyer, its data center prowess seemingly a perfect match. Based on Nvidia’s share price, the value of the proposed deal eventually rose to $66 billion.

Opposition to the mega-deal on anticompetitive grounds soon prompted probes by the European Union, U.K regulators and, eventually, the U.S. Federal Trade Commission, which sued in December 2021 to block the deal. The FTC action appears to have been the final nail in the coffin.

In November 2021, the U.K.’s Competition and Markets Authority (CMA) cited “significant competition concerns,” thereby “restricting access to Arm’s CPU IP and impairing interoperability between related products, so as to benefit Nvidia’s downstream activities and increase its profits.”

In a last-ditch attempt to rescue the deal, Arm released a 29-page rebuttal in January, indicating it would face significant hurdles to growth as a standalone company if the acquisition fell through. Without Nvidia’s backing, Arm made the case that it would be seriously disadvantaged in its efforts to compete against Intel Corp. and other x86 vendors in the booming data center market. It also cited competition from emerging RISC-V developers.

SoftBank Group said Tuesday (Feb. 8) it is coordinating with Arm in preparation for the IPO that is expected within its fiscal year ending on March 31, 2023. Arm’s technology and intellectual property “will continue to be at the center of mobile computing and the development of artificial intelligence,” SoftBank said.

“Arm is becoming a center of innovation not only in the mobile computing revolution, but also in cloud computing, automotive, the internet of things and the metaverse, and has entered its second growth phase,” said SoftBank CEO Masayoshi Son. “We will take this opportunity and start preparing to take Arm public, and to make even further progress.”

Added Jensen Huang, founder and CEO of Nvidia: “Arm has a bright future, and we’ll continue to support them as a proud licensee for decades to come. Though we won’t be one company, we will partner closely with Arm.” Huang said SoftBank’s investments have positioned the “Arm CPU beyond client computing to supercomputing, cloud, AI and robotics. I expect Arm to be the most important CPU architecture of the next decade.”

Still, Arm previously warned that a stock offering might stifle its ability to innovate, saying capital markets demand a focus on short-term revenue growth and profitability. “SoftBank considered and rejected an IPO in 2019 and again in early 2020 because the markets would not give SoftBank the necessary return on its investment. While Arm’s licensees such as Apple, Qualcomm and Amazon have enjoyed skyrocketing revenue growth and profits, as well as soaring market valuations, Arm has lately endured comparably flat revenues, rising costs and lower profits that would likely present challenges for a 30-year-old public company,” it told U.K. regulators.

Stuck in neutral

That view is supported by some analysts. A Future Horizons report commissioned by Nvidia and filed with regulators last year, argued that Arm would ultimately be unable to fund major investments needed to compete against rivals if its acquisition by Nvidia was blocked and it was forced to go public. “With stagnant revenues and no profits, time is not in Arm’s favor and funding the required increased levels of R&D spending will clearly be a business and financial leap of faith. Arm does not have the financial firepower to self-fund this from revenues,” the report concluded.

The study also noted that Arm has made little headway in its Internet of Things efforts despite hiring thousands of employees.

“Nothing has changed in the past six months,” Future Horizons CEO Malcolm Penn told EE Times. Applying a British football metaphor, Penn called the deal’s collapse “a classic own goal by the regulatory authorities–the wrong answer to possible plausible market concerns persuaded by industry vested interests.”

way, new CEO Haas will oversee preparations for Arm’s IPO. Haas previously served as president of Arm’s IP products group. Under Haas, the Arm unit increased investment in a large software developer ecosystem as well as products aimed at growth markets such as infrastructure and automotive. Those investments attracted new ecosystem entrants, including Alibaba, Ampere, Amazon Web Services, Bosch, Denso, Intel’s Mobileye unit and Telechips. Arm said this week it is on track to achieve record royalty revenue, licensing revenue and profits during its current fiscal year.

Haas previously held positions in engineering management and sales with Nvidia, Scintera Networks and Tensilica. He also serves as a non-executive director at Mythic and Computacenter.

Still unresolved is whether Arm will offer its stock on New York or London exchanges. Financial Times cited sources close to SoftBank as saying it prefers to list Arm in on a New York exchange despite Arm’s U.K. origins. U.S. markets also tend to provide higher valuations for technology stocks.

In a statement, Haas insisted “Arm’s market opportunity has never been greater. We are now uniquely positioned to address the diverse demands of AI, cloud, IoT, automotive and the metaverse. And with the uncertainty of the past several months behind us, we are emboldened by a renewed energy to move into a growth strategy….”

Under terms of their agreement, SoftBank will retain the $1.25 billion prepaid by Nvidia when the acquisition was proposed. That sum will be recorded as profit during the fourth quarter. Nvidia will retain its 20-year Arm license.

By: DocMemory
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