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SoftBank Buys ARM, a Mobile Chip Designer, for $32 Billion SoftBank to Buy ARM, a Mobile Chip Designer, for $32 Billion
(about 1 hour later)
SoftBank agreed on Monday to acquire ARM Holdings, the British semiconductor designer, for $32 billion, in a deal that would give the Japanese company a big business designing chips for mobile phones and a growing array of smart, interconnected gadgets. When Masayoshi Son, the billionaire Japanese technology investor, solidified his control over his SoftBank internet conglomerate last month, he told shareholders he still wanted to “work on a few more crazy ideas.”
The deal represents the first large-scale, cross-border transaction in Britain since it voted to exit the European Union last month. ARM had been seen as a haven from the volatility surrounding that split — known as Brexit — because its chip technology is used in mobile phones all over the world, with limited revenue derived from Britain. One of those ideas materialized on Monday, when SoftBank unveiled an audacious $32 billion deal to acquire ARM Holdings, the British semiconductor designer. The deal — one of the biggest of the year — would give the Japanese company control of a firm whose chip designs can be found in most of the world’s mobile gadgets, from iPhones and drones to a growing array of smart devices and appliances for the home.
The deal marks the first major cross-border transaction in Britain since it voted to exit the European Union last month. Worries over the impact to the British economy have weakened the value of the country’s currency and made it cheaper for foreign companies like SoftBank to hunt for deals there. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen.
For SoftBank, the deal marks another reinvention, this time with a major bet on a future filled with interconnected gizmos. While major technology companies see a future in smart thermostats and toasters, the technology has not yet become widely available. Meanwhile, global sales of smartphones have slowed, showing the mobile future has limits.
“ARM and SoftBank have an overlap on how we see the future,” said Simon A. Segars, ARM’s chief executive, in an interview. But he left the door open for another offer. “Now that the offer is in the public domain, if anyone wants to make a counteroffer, they are more than welcome to do so,” he said. “There’s always a possibility of someone counterbidding.”
British leaders, under pressure to address global worries about the country’s future outside the European Union, portrayed the deal as an endorsement. “Softbank’s decision confirms that Britain remains one of the most attractive destinations globally for investors to create jobs and wealth,” said Philip Hammond, the new chancellor of the Exchequer, in a statement.
The deal is the third-largest proposed corporate merger this year, behind Bayer’s offer for Monsanto and a Chinese state-owned company’s proposal for Syngenta, according to the deal-tracking firm Dealogic. If completed, it would also be the second-largest chip deal on record, behind Broadcom’s $37 billion deal for Avago Technologies.
SoftBank already has ties to ARM through Sprint, the American wireless carrier that it controls. The two sides eventually agreed to a price — more than 70 times ARM’s net earnings in 2015.
ARM Holdings may not be a household name, but it is likely that one of the company’s chip designs powers your smartphone, tablet or other mobile device. It designs chips and parts of chips that use less power so that they can be used in smaller gadgets. ARM had a market capitalization of about $22 billion as of Friday’s close, and the proposed acquisition represents a 43 percent premium on the company’s closing share price last week.ARM Holdings may not be a household name, but it is likely that one of the company’s chip designs powers your smartphone, tablet or other mobile device. It designs chips and parts of chips that use less power so that they can be used in smaller gadgets. ARM had a market capitalization of about $22 billion as of Friday’s close, and the proposed acquisition represents a 43 percent premium on the company’s closing share price last week.
Turmoil from last month’s Brexit vote likely made the deal more lucrative for SoftBank. The British pound has weakened since the vote, which makes purchasing British companies like ARM cheaper for companies that deal primarily in other currencies. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen.
ARM took an early lead on chips for mobile devices, while the growing popularity of smartphones and tablets has been more challenging to traditional chip makers like Intel.ARM took an early lead on chips for mobile devices, while the growing popularity of smartphones and tablets has been more challenging to traditional chip makers like Intel.
The deal is the largest ever for SoftBank, the Japanese technology conglomerate that also controls the mobile carrier Sprint in the United States. Based in Tokyo, SoftBank invests in technology, media and telecommunications companies, and ARM could provide an additional boost to the company’s mobile strategy. Started in 1990 as a spinoff from Acorn Computers, a now-defunct British computer maker, ARM has gone from a small start-up of less than 20 people to a global leader whose technology is used in more than 90 percent of smartphones produced by Apple and Samsung, among others.
SoftBank has been selling assets and raising cash, which is typical for a company gearing up for a big acquisition. Last month, the company agreed to sell its majority stake in Supercell, the developer of “Clash of Clans” and other mobile games, to Tencent Holdings for about $8.6 billion. It also pared back about $10 billion worth of shares in Alibaba, the Chinese internet giant.
SoftBank has made some big internal moves at the top as well. The company said last month that Nikesh Arora, who joined SoftBank two years ago from Google, would be leaving. He had been seen as the heir apparent to Masayoshi Son, the company’s founder and chief executive, and someone who could catapult SoftBank and its global ambitions through deal making. But once he stepped down, Mr. Son signaled that he was not ready to give up control.
Started in 1990 as a spinoff from Acorn Computers, a now-defunct British computer maker, ARM has gone from a small start-up of less than 20 people to a global leader whose technology is used in more than 90 percent of smartphones produced by Apple and Samsung, among others. Based in Cambridge, England, ARM generates more than $1 billion in annual revenue by licensing its designs to large chip makers.
Unlike Intel, its chip-making rival, ARM forgoes the high margins — and equally high production costs — of directly manufacturing microchips. Instead, its team of roughly 3,000 engineers designs chips, which are then licensed to larger technology companies like Qualcomm that pay ARM fees and royalties for manufacturing the chips.Unlike Intel, its chip-making rival, ARM forgoes the high margins — and equally high production costs — of directly manufacturing microchips. Instead, its team of roughly 3,000 engineers designs chips, which are then licensed to larger technology companies like Qualcomm that pay ARM fees and royalties for manufacturing the chips.
ARM’s business model has made it the tortoise to Intel’s hare. The company’s revenues totaled a mere $1.5 billion last year, compared with $55.4 billion for Intel over the same period. But as ARM’s chips have become increasingly powerful, the company’s stable of customers have begun to create devices that directly compete with those powered by Intel. That can be seen in particular in the world of computer servers, which have become the lifeblood of the internet as people’s online activities move into the cloud. The company’s revenues totaled a mere $1.5 billion last year, compared with $55.4 billion for Intel over the same period. But as ARM’s chips have become increasingly powerful, the company’s stable of customers have begun to create devices that directly compete with those powered by Intel. That can be seen in particular in the world of computer servers, which have become the lifeblood of the internet as people’s online activities move into the cloud.
Though the deal is for a British company, ARM faces little exposure to the British economy, which is under a growing cloud of skepticism since the Brexit vote. ARM traces more than half of its revenue to Asia, while about 38 percent comes from North America. Only 1 percent of its revenue is from Britain, according to its latest annual report. As smartphone sales have slowed, ARM has invested millions of dollars in chip designs aimed at new customers, including automakers and household product companies, that are looking to add internet connectivity to their existing products.
Not all, though, has gone well for ARM. Sales of smartphones — still the main driver of ARM’s earnings — have started to slow, raising questions about whether the company will be able to offset this decline with new business areas. The proposed deal comes amid signs from SoftBank that it was preparing for a major move.
In recent years, ARM has tried to get ahead of this potential problem, investing millions of dollars in chip designs aimed at new customers, including automakers and household product companies, that are looking to add internet connectivity to their existing products. Last month, Mr. Son reasserted control over SoftBank’s overseas investment portfolio, easing out a former Google executive whom he had been grooming as his successor. In a statement announcing the departure of the executive, Nikesh Arora, Mr. Son said he had decided to stay on as SoftBank’s chief for at least five or 10 more years.
Chip makers have found themselves in the middle of rampant consolidation over the last few years as the industry has reached a state of maturity, leading smaller players to combine to better compete. This deal would be among the largest mergers in the industry since Avago Technologies agreed to acquire Broadcom for almost $40 billion in May of last year. Several months earlier, NXP Semiconductors spent about $12 billion to buy Freescale Semiconductor. SoftBank has recently been selling assets and raising cash. Last month it sealed an agreement to sell its majority stake in Supercell, the developer of “Clash of Clans” and other mobile games, to China’s Tencent Holdings for about $8.6 billion. It also recently sold about $10 billion of shares in Alibaba, the Chinese internet giant.
Until now, SoftBank has invested mostly in the services side of the technology business — internet companies like Yahoo Japan and Alibaba, and mobile phone carriers like Sprint and Vodafone, whose Japanese arm Mr. Son bought in 2006 and turned into one of Japan’s dominant carriers.
But abrupt changes in direction are part of SoftBank’s DNA. Mr. Son founded the company in the 1980s as a distributor of computer software. When he broke into the mobile phone market with the Vodafone purchase in 2006, many predicted disaster — SoftBank lacked experience in the industry, and the $15 billion deal loaded it with debt. But the business, renamed SoftBank Mobile, soon became a cash cow.