NVIDIA and SoftBank Group have announced “a definitive agreement under which NVIDIA will acquire Arm Limited from SBG and the SoftBank Vision Fund (together, “SoftBank”) in a transaction valued at $40 billion.”
Nvidia, headquartered in Santa Clara, California, is the leading designer of graphics processing units (GPUs) used in video gaming and other visualization applications. It also designs ICs for mobile computing, automotive, data center and AI applications.
Arm, headquartered in Cambridge, UK, provides the RISC (reduced instruction set computer) architecture used in most mobile phone processors, both Android and Apple, as well as designs for system-on-chip (SoC) ICs used in numerous other applications. More ICs have been produced based on designs from Arm than from any other company.
Nvidia’s strategic goal is to combine the two companies’ technologies and dominate the market for artificial intelligence-related computing.
Nvidia CEO Jensen Huang believes that “AI is the most powerful technology force of our time” and “In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people.”
The consideration includes $21.5 billion in NVIDIA common stock, $12 billion in cash, $1.5 billion in equity issued to Arm employees, and up to $5 billion in cash or stock determined by “an earn-out construct, subject to satisfaction of specific financial performance targets by Arm.”
NVIDIA’s press release, issued on Sunday, September 13, notes that “NVIDIA will continue Arm’s open-licensing model and customer neutrality and expand Arm’s IP licensing portfolio with NVIDIA technology.” This should answer most of the conflict of interest concerns that have been raised.
NVIDIA also plans to expand Arm’s R&D activities in Cambridge, UK, through the establishment of an AI research center equipped with supercomputer based on Arm technology. This should calm British politicians who were upset when the Japanese bought Arm and who are upset again now.
The transaction has been approved by the boards of directors of NVIDIA, SoftBank Group and Arm. Assuming no objections from regulators in the UK, the US, the EU and China, it should be completed in about 18 months.
Softbank bought Arm for $31 billion in 2016, implying a capital gain of 8% to 24% depending on the earn-out.
The gain over four years is modest, but it is a gain and will make a meaningful contribution to the strengthening of Softbank’s balance sheet. On Monday, SoftBank Group’s share price jumped almost 9%.
Also depending on the earn-out, Softbank will acquire between 6.7% and 8.1% of NVIDIA, making it one of the company’s top three shareholders. (Vanguard currently owns 7.5% and Fidelity 7.3%.)
In January 2019, the Vision Fund sold its entire $3.6 billion stake in NVIDIA. Since then, Nvidia’s share price has tripled. That was not the kind of “vision” that investors were looking for.
However, the press release quotes Softbank CEO Masayoshi Son as saying that “NVIDIA is the perfect partner for Arm… We look forward to supporting the continued success of the combined business.”
An acrimonious dispute between Arm headquarters and Arm China over the alleged “irregularities and conflicts of interest” of Arm China CEO Allen Wu has apparently been resolved. Chinese investors purchased 51% of Arm China in 2018.
But it remains unclear how American ownership will affect Arm’s relations with Chinese customers. Already it has been forced to limit its dealings with Huawei.
And it remains to be seen whether or not Chinese regulatory approval of the deal will be contingent upon changes in American policy toward China.
Scott Foster is an analyst with Lightstream Research, Tokyo.