SoftBank’s $32bn Acquisition Of ARM Holdings

  • SoftBank announces £17 cash per share takeover of ARM Holdings, 40% premium.
  • Technology companies looking for ways to gain exposure to the Internet of Things.
  • ARM Holdings potential takeover target since Brexit, due to GBP falling 28%.
  • SoftBank also interested in exposure to ARM’s global diversified mobile market and steady cash flow, to help pay down debts.
  • Deal will be partly paid for with $10bn raised from Alibaba shares and $7.3bn from Supercell sale.

Since the referendum there have been whispers of an ARM Holdings takeover. Analysts at Bloomberg News have been closely following Qualcomm’s movements expecting an approach sometime this year, and the markets have been pricing in a potential takeover after the stock rose some 20% following the vote to leave. This is due to a weaker pound allowing for a cheaper foreign takeover.

Bloomberg have been eyeing Qualcomm as a potential suitor because of their interest in capitalising from the Internet of Things. This is the sector of the technology market that provides processors and microchips to power, for example, household appliances and smart cars. Officially it is the ‘sector of network connectivity’; a future where fridges automatically order food as you consume and cars that drive themselves.

Two to three weeks ago SoftBank approached ARM holdings and the UK Government with an offer of £17 a share, placing a forty per cent premium on the share price. Similar to Qualcomm, SoftBank is eager to gain a foothold in the Internet of Things and with a promise to double the size of the ARM Holding UK workforce (4,000 to 8,000) over the next five years its intentions are clear. Maysayoshi Son himself, the CEO of SoftBank, influences his company values and is an enthusiast about the Internet of Things, envisioning a future of empathising, talking cars.

SoftBank is paying for this takeover in cash, partially raised through $10bn of Alibaba shares and $7.3bn from the sale of Supercell, the maker of Clash of Clans. Son is well known for his investments, having initially placed $20mn into Alibaba, an investment that has now risen in excess of $20bn. However this does not mean he’s an investor of the century. A recent acquisition of Sprint has been performing poorly.

In the case of ARM Holdings SoftBank appears keen to not only place a bet on the Internet of Things, but to also have a steady cash generator. ARM Holdings does not manufacture any of its chips or processors and therefore benefits from a lack of fixed costs associated with large factories. With 95% of Android and iPhone smartphones containing ARM intellectual property, ARM provides SoftBank exposure to the mobile space and to steady funds that will help bring down $54bn of debt. ARM Holdings also has a diversified set of consumers, with 50% of consumers originating from Asia, 40% UK and 10% USA. This gives SoftBank exposure to a diversified audience of consumers in both the mobile space and the Internet of Things.

Is it a good deal?

Typically mergers and acquisitions do not benefit either party. Synergies are exaggerated and share prices, on average, fall in the years following a merger. Some analysts have argued that this is a Brexit takeover, with SoftBank taking advantage of the weaker pound and a UK Governemnt more likely to push the deal through, as they are desparate to show the UK is still a place to invest.

However I suggest that the weak GBP, whilst providing the opportunity, is not the main reason. The deal does not include SoftBank absorbing ARM Holdings, therefore the company will remain independent and British-based, in Cambridge. Doubling the UK workforce is not only a ploy to secure approval from the UK regulators, but to also show that SoftBank is serious about their bet on the future of network connectivity.

ARM Holdings will very likely be a major supplier of the Internet of Things, therefore whether this is a good deal or not is just a matter of when the revolution will occur, and if it will be as big as we all expect.

 

-Ed

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