Story Of The Week

Softbank Acquisition of ARM- The next spin on Internet of Things

With a penchant for crazy ideas and deals like ‘emotion cars’, Softbank has struck yet again, this time acquiring the king of semiconductors of Britain, ARM Holdings.

Overview

On 18th July 2016, Soft bank caught the global chip industry by surprise with a $32 billion deal to acquire ARM Holdings PLC, the U.K.-based designer of the microprocessors that power more than 95% of the world’s smartphones which includes the likes of Apple, Samsung and Huawei. The 25-year-old British company has the crucial advantage of not having to make its own chips—it just designs the processor architecture and licenses it to these companies. The deal in turn has resulted in Softbank getting a share of revenue in almost everything from smartphones to connected gadgets at home.

Record Breaking Deal

The deal has been record breaking in many ways. It is the largest deal ever made by Softbank Group eclipsing the $22 billion made for Sprint in 2013. In the world of microchip Mergers and Acquisitions, the Arm Holdings deal ranks second only to Avago Technologies’ $37bn acquisition of US chipmaker Broadcom, according to Dealogic data.

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It has been a year of technology for Mergers and acquisitions with deals totalling $342.7bn so far, up 17.8 per cent year-on-year. That’s the greatest volume since the dot com bubble of 2000.

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It’s also the largest UK target tech deal on record, and the second largest Japanese outbound deal ever.

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Immediate Aftermath and the edge over Intel

Many analysts say that Softbank’s acquisition timing is perfect both politically and financially. The offer came a few days after the UK’s announcement of its decision to exit the EU, otherwise known as “Brexit.” and the pound has fallen 11% since the Brexit vote took place on July 24, 2015, making the ARM acquisition $4 billion cheaper for Softbank. However, Masayoshi Son denies this benefit, stating that ARM’s shares rose on the Brexit news. Also due to Brexit the deal was welcomed in the UK as the deal shows overseas buyers’ confidence in the UK.

If we look at ARM, the slowdown in smartphone sales may slow its revenue growth in the short term. But in the long term, ARM would be at the centre of IoT (Internet of Things), with its architecture being used by the likes of Apple (AAPL) and Samsung (SSNLF). It would also give tough competition to Intel’s (INTC) IoT efforts.

ARM already commands a 25% market share in the IoT market and expects to increase that to 50% by 2020. On the other hand, Intel looks to increase its market share to 45% by 2020, and so with Softbank’s acquisition of ARM, Intel will have to tighten its seat belt and speed up its efforts to secure a big enough bite of IoT.

A look into the Future

CEO Masayoshi Son main interest is making ARM technology the central CPU for billions of Internet of Things devices in the future. Softbank already owns a telecom network in Japan and Sprint in the US, and understands that these networks and others will become a major conduit for interacting with and delivering data to IoT (Internet of Things) devices. It expects ARM to be at the center of the IoT revolution, which would bring a “paradigm shift in human history.” ARM is the long term goal for Softbank, envisioning that nearly every IoT device in the world could be powered by ARM designs. This requires heavy investing and the strategy marks a shift in Softbank’s strategy, from telecom services to IoT.

The impact can be serious in the Tech industry as ARM’s current per-CPU prices are pretty low and in most cases very aggressive. Any upward pricing changes from ARM in future would have various ramifications for users of ARM chips as their own profitability could be challenged over time. This would result in more expensive mobile gadgets to maintain profitability for almost all mobile gadgets and with Intel

The deal with ARM allows Softbank to have a chance to at several growing tech areas such as cloud, virtual reality for mobile devices and the Internet of Things. Also ARM’s dominance in mobile computing translates into consistent cash-flow. Also, If ARM’s communications chips become a standard for the internet of things, the resulting profits could dwarf what the company gets from smartphone chips now.

For ARM, The deal will help them further accelerate the use of ARM-based technology wherever computing happens. The purchase suggests that we will see another surge in ARM’s productivity, and that could mean even better and broader products. The research and design is an expensive and fundamental part of ARM, and the expansion of that might well be a boon in the future.

References:

  1. http://marketrealist.com/2016/07/look-keys-financials-involved-softbank-arm-deal/
  2. http://in.pcmag.com/cpus-components/105640/opinion/why-the-softbank-arm-deal-makes-sense
  3. https://next.ft.com/content/235b1af4-4c7f-11e6-8172-e39ecd3b86fc
  4. http://economictimes.indiatimes.com/news/international/business/softbank-to-buy-britains-arm-for-32-billion/articleshow/53260667.cms
  5. http://www.wsj.com/articles/softbank-agrees-to-buy-arm-holdings-for-more-than-32-billion-1468808434
  6. http://www.cnbc.com/2016/07/17/softbank-poised-to-take-uks-arm-for-234-billion.html
  7. http://www.bloomberg.com/news/articles/2016-07-18/softbank-said-to-near-32-4-billion-acquisition-of-arm-holdings

 

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