Tech M&A
Softbank (Japan) and ARM (Britain)

SoftBank to Buy Britain’s ARM for $32 Billion in Record Deal ... Softbank Secures ARM Holdings in Record $32B Deal

Burgess COMMENTARY

Peter Burgess

SoftBank to Buy Britain’s ARM for $32 Billion in Record Deal ... Softbank Secures ARM Holdings in Record $32B Deal

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SoftBank Group Corp. agreed to buy ARM Holdings Plc for 24.3 billion pounds ($32 billion), securing a slice of virtually every mobile computing gadget on the planet and future connected devices in the home.

The Japanese company is offering 1,700 pence in cash per share or a 43 percent premium to Friday’s close, according to a statement Monday. The deal would be the biggest-ever for SoftBank, which under Chief Executive Officer Masayoshi Son became one of Japan’s most acquisitive companies with stakes in wireless carrier Sprint Corp. and Alibaba Group Holding Ltd.

'I have admired this company for over ten years,' Son told reporters at a press conference in London on Monday. 'This is an endorsement into the view of the future of the U.K.'

Son said that he had held intermittent conversations about a strategic partnership or joint venture with ARM over the course of several years, but only made a serious approach to ARM’s chairman Stuart Chambers two weeks ago. All due diligence for the deal has been done in the past two weeks, Son said.

'This all happened very, very quickly,' ARM Chief Executive Officer Simon Segars said in a telephone interview. 'They made an offer that was very, very compelling for our shareholders and a proposal for how to invest in the company for the future.'

Click here for an explainer about ARM and the products it makes

SoftBank will gain control of a cash-generating mobile industry leader that gets royalties every time clients such as Apple Inc., Samsung Electronics Co. or Qualcomm Inc. adopt its designs, which are considered power-saving and efficient.

The deal is the biggest ever Japanese acquisition in Europe, surpassing Japan Tobacco Inc.’s approximately $15 billion acquisition of Gallaher Group Ltd. completed in 2007. It is also the biggest ever Asian takeover of a U.K. company according to data compiled by Bloomberg.

SoftBank will fund the acquisition partly through cash and loans, according to a statement Monday. ARM’s shareholders will get a dividend of 3.78 pence per share.

ARM shares rose as much as 47 percent to a more than 18-year record on Monday and were trading 43 percent higher at 1,695 pence as of 12 p.m. in London. The company has a market valuation of 23.9 billion pounds.

Brexit Cost

Brexit and the pound’s subsequent decline against the yen and the dollar was not a factor in SoftBank’s decision, Son said. 'I did not make the investment because of Brexit,' Son said. “It is not opportunistic about the currency.”

In fact, Son said because ARM’s sales are mostly to customers in the U.S. and Asia, and are largely dollar-denominated, its stock has risen about 15 percent since the EU referendum vote. That means the deal actually became more expensive for SoftBank because of Brexit, not cheaper, he said.

Related reading: Post-Brexit U.K. Welcomes ARM Purchase in Test of Strategy

ARM’s headquarters will remain in Cambridge as well as its senior management team, and SoftBank pledged to at least double employee headcount in the U.K. over the next five years. ARM currently employs about 4,000 people.

Segars said there will be no changes in the way ARM operates, and SoftBank will allow the company to continue to exist as a standalone unit. 'We’ve been completely independent since our IPO and that is something that our partners value,' Segars said, referring to ARM’s semiconductor manufacturing customers. He added that SoftBank “will keep investing in our roadmap of existing technologies' and that 'we are not getting acquired by someone who wants to strip costs out of the business.'

Goldman, Lazard

Beyond its sheer scale, the ARM acquisition is unusual for a company that’s preferred to take control through hefty stakes in smaller companies, or those with high-growth potential. The chip designer alone will account for more than a third of SoftBank’s current total international holdings of 8.3 trillion yen ($79 billion) as of July 15.

Goldman Sachs Group Inc. and Lazard & Co. were the lead financial advisers to ARM on the deal, the company said. Raine Group LLC, Robey Warshaw LLP and Mizuho Securities Co. are acting as financial advisers to SoftBank, it said.

ARM has come to dominate the design of smartphone chips and is pushing into servers to challenge Intel Corp., evolving from a small lab in a converted barn to a company whose designs are found in 95 percent of smartphones. With the mobile phone market slowing, ARM is adding new customers in the automotive industry and targeting growth in processors for network equipment makers and servers. The company is also exploring chip designs to boost the graphics capabilities of phones.

“ARM has what we view as an unassailable library of IP processor designs based on chip performance, size and power performance,” Neil Campling, an analyst with Northern Trust Capital Markets, wrote in an e-mail. “ARM is growing at 10x the rate of the semiconductor industry it serves and is increasingly the glue that binds the disruptive forces of the entire digital world, not just $700 smartphones.”

Increased Debt

Any deal for ARM comes less than a month after Nikesh Arora, Son’s heir apparent at SoftBank, quit the company. The former Google executive was brought on board to spearhead a search for the next Alibaba, the Chinese e-commerce company SoftBank backed that went on to pull off the world’s largest initial public offering in 2014.

SoftBank will now need to add to its massive debt load to see the acquisition through. The Tokyo-based company carried almost $106 billion of total debt on its balance sheet at the end of March, but less than $23 billion in cash and marketable securities.

However, the price tag may be justified because ARM’s dominance in mobile computing translates into consistent cash-flow, and its hardware-light business model yields margins north of 95 percent in every quarter since late 2014, Amir Anvarzadeh, Singapore-based head of Japanese equity sales at BGC Partners Inc., said in an e-mail.

China Challenge?

“As much as we hated the decision of buying Sprint, we believe if Son wanted to bet on the sterling recovering he picked a great name in the tech sector,” Anvarzadeh said. “The market will be seeing this acquisition in a positive light despite stretching its balance sheet further.”

ARM’s model is based on the idea of spreading risk and profits. It does the underlying work and makes more money when its customers sell more things. That means brands like Apple and Samsung can focus on higher-level innovations instead of grunt work, while custom chipmakers like Taiwan Semiconductor Manufacturing Co. deal with actual fabrication.

Some smartphone players may dislike the loss of independence at ARM, which is held by mainly institutional investors at the moment, said Gartner analyst Roger Sheng. Japanese ownership may even hamper ARM’s efforts to expand in China, where tensions with its neighbor run deep and the government is pushing local technology companies to come up with alternatives to foreign-owned technology.

“Their clients and partners are happy to see that ARM is independent because it works out better for the ecosystem,” Sheng said. And “the Chinese government has some political issues with the Japanese government so if ARM is acquired by SoftBank I believe China will invest more to develop their own architecture and maybe some Chinese companies will use other architectures.”