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Arm IPO gets more complicate

Wednesday, September 13, 2023

SoftBank’s initial public offering (IPO) for Arm on the Nasdaq stock exchange faces major challenges because the British chip designer is overvalued and growth prospects are dim, analysts and a person close to the company told EE Times.

Japanese tech conglomerate SoftBank aimed for the IPO after an attempt to sell Arm for $40 billion to Nvidia last year failed because U.S. and European regulators cited antitrust concerns. SoftBank aims to sell a 10% stake in Arm in the IPO, for as much as $70 billion, according to Reuters. That would make it one of the world’s largest IPOs this year while allowing SoftBank to keep a controlling stake in Arm.

“Softbank desperately needs money to restore its fortunes,” a person close to Arm told EE Times, speaking on the condition of anonymity. After SoftBank’s “disastrous investments” in WeWork, Katerra, Uber and other companies, Arm is one of the few success stories that could be sold to realize a gain, the person said. “After the failed Nvidia sale, the IPO was the best hope he [Masayoshi Son, SoftBank’s founder, chairman and CEO] had left. He is hoping for a ludicrously high valuation.”

SoftBank’s Masayoshi Son

While Apple, Amazon and Samsung may take a stake in the Arm IPO, “these guys already have pretty good deals from Arm, so it is not obvious what the advantage is to them of investing in Arm at these lofty potential valuations,” the person said. “Softbank is hoping to tie some of them in—to provide a baseline for the IPO price. Arm will survive in some shape or form for longer than we will live. But will it grow and be worth $60 billion? That is an enormous visionary leap of faith.”

Arm’s big customers may want to keep their rivals from gaining a competitive advantage through ownership of Arm chip designs that Apple, Samsung and smaller competitors in China use to make nearly all of the world’s smartphones. Still more companies use Arm designs in sensors and supercomputers.

‘Complicated Arm China saga’ cited

The two-year downturn in global smartphone sales hurts the short-term growth outlook for Arm. Arm faces more concerns in China, where Arm China a few years back broke away from the parent company at the same time when Arm’s rivals in China were adopting RISC-V and other alternative design architectures, according to Paul Triolo, who advises global tech companies at Albright Stonebridge Group.

“The complicated Arm China saga has been a key reason for the delay in the IPO,” he said. “It has proven much more complicated to resolve the issues around Arm China and renegade official Allen Wu than either Softbank or Arm originally thought.”

Arm counts on China for about one-quarter of its sales, according to Arm’s IPO filing.

“Arm China is an unqualified disaster for Arm and SoftBank,” the person close to Arm said this week. “In 2018, SoftBank decided to sell 51% of the company to some Chinese investors for a very modest sum. Initially, Arm had seats on the board, and it was a joint venture. But there was a lot of tension over control and governance. Somehow, along the way, Arm seems to have lost control.”

Despite Arm’s reliance on Arm China as a source of revenue and as a conduit to the Chinese market, Arm China operates independently, Arm said in its IPO prospectus, issued this week.

If Arm fails to maintain its commercial relationship with Arm China, Arm’s access to China’s market could be materially diminished, and business, as well as prospects for growth, could be adversely affected, Arm said in the prospectus.

There is a worry that, once Arm is a publicly traded stock, “they will put profits first, increasing prices and reducing investment in R&D,” Dylan Patel, chief analyst at SemiAnalysis, told EE Times. “Arm China is a mess. Arm effectively gave it up and agreed they will never get control back.”

RISC-V threat

RISC-V is an existential threat to Arm’s long-term adoption, the person close to Arm said: “Under SoftBank, Arm has dramatically put up its royalties and license fees to the point where many companies [existing, as well as potential new customers] are starting to design away from Arm, usually adopting RISC-V. Arm is still dominant, for now, in cellular mobile. But if this flight to RISC-V at the lower end continues to accelerate, then Arm’s dominance even in mobile is under threat.”

Unlike most other instruction-set architecture designs, RISC-V is provided under royalty-free, open-source licenses.

“RISC-V will continue to gain market share in embedded and IoT applications, as well as control cores for larger SoCs,” Patel said. “RISC-V will have a tougher time moving into the application space for client-facing applications, where Arm dominates.”

Albright Stonebridge Group’s Paul Triolo.

Given the decline in U.S.-China relations and future trajectories, existing export controls and their potential expansion, and the impact of U.S. restrictions in China to wean companies off of Western IP and systems across the technology stack, Arm’s prospects in China seem problematic, Triolo said. “It is possible, for example, that internal government directives include mandates to phase out the use of foreign-controlled IP by Chinese technology firms over a specified period,” he said. “This would put even more pressure on Chinese firms to consider alternatives, including RISC-V.”

A positive-but-conditional view

Patrick Moorhead, the chief analyst at Moor Insights & Strategy, said the outlook for an Arm IPO remains positive—at a potentially lower valuation.

“While I don’t think it’s the optimal time for any company to try and go public, I think investors will embrace Arm at the right price,” he told EE Times.

RISC-V is likely to erode Arm’s share at the low end while the company’s other markets continue to grow, Moorhead said.

“Both ecosystems can grow in the mid and high end as the market grows for designs,” he said. “On a percentage basis, RISC-V will take some share.”

The long term remains positive for Arm, he asserted: “I see a growing PC and data center ecosystem for the company—and a growing software ecosystem. I think the company has a bright future.”

By: DocMemory
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