SoftBank May Not Want Nvidia to Bite Off Its Arm

(Bloomberg Opinion) — Nvidia Corp. has the money and motive to buy British chip designer Arm Ltd. But as much as Arm’s parent SoftBank Group Corp. may be open to a transaction, this particular combination may not be its first choice.

Santa Clara, California-based Nvidia, a leading maker of graphics processing units, has in recent weeks approached SoftBank about a deal for Arm, Bloomberg News reported on Wednesday. A takeover would be the biggest ever of a semiconductor company, even after a five-year, $270 billion spree of industry consolidation.

Strategically, a deal would make sense for Nvidia Chief Executive Officer Jensen Huang, making the company a one-stop shop for his customers. Every graphics processor chip Nvidia currently sells requires another general processor chip, the technology in which Arm specializes. And Huang has often spoken bullishly about prospects for the so-called internet of things, where small networked sensors and devices become pervasive. Arm-based chips are power-efficient and small, matching his vision.

What’s more, Nvidia can afford it. New Street Research analysts estimate that Arm might be valued at $44 billion in a year’s time, when an IPO is mooted. Even after completing the $6.3 billion acquisition of Israel’s Mellanox Technologies Ltd. in April, Nvidia has a net cash position and plenty of capacity to raise new debt. But Huang may not even need to touch his cash pile: Nvidia’s stock is a valuable currency after a 77% surge this year that values the firm at $256 billion.

SoftBank has been exploring a sale or stock listing of Arm, which it acquired for $32 billion in 2016. But the nature of Arm’s business makes any outright acquisition by a chipmaker a difficult proposition, as Bloomberg Intelligence analyst Anand Srinivasan has pointed out. The Cambridge, England-based firm licenses its designs for central processing units to many of the world’s chipmakers to adapt. These include Advanced Micro Devices Inc., Qualcomm Inc., Samsung Electronics Co., Broadcom Inc., and plenty more besides. Arm-based CPUs are the brains for most of the world’s smartphones.

That also means that an acquisition by a chipmaker poses a significant regulatory challenge, because of the power it gives the new owner over its own competitors. That’s no different for Nvidia. Even though its core business is in graphics processing units, rather than CPUs, it competes with many of the firms that use Arm designs.

SoftBank is under pressure from the activist investor Elliott Management Corp. to reduce the gap between the value of its holdings, which include a $172 billion stake in the Chinese e-commerce giant Alibaba Group Holding Ltd., and its own enterprise value. It may therefore want to avoid a deal that would attract drawn-out regulatory scrutiny, with no guarantee of success.

An easier proposition for regulators might be a combination with Cadence Design Systems Inc. It, too, specializes in the intellectual property behind semiconductors, but Cadence doesn’t compete with Arm or its customers. Perhaps coincidentally, its CEO Lip-Bu Tan joined the SoftBank board just last month. An all-stock merger with Cadence would likely see SoftBank retain a majority stake in a new publicly traded entity. 

Nvidia might want a deal, but SoftBank may have better alternatives.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe’s technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron’s, following an earlier career as an equity analyst.

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