ARM Holdings has recommended to shareholders that they accept a £24.3 billion acquisition bid from Japanese conglomerate SoftBank, which could attract enough further investment to help it square off against Intel in the internet of things (IoT) and data centre markets.
“SoftBank is taking ARM private, effectively, which I think is very interesting,” 451 Research founder John Abbott tells Computerworld UK. “ARM’s prospects have always been really big but when you look at the actual company it’s still quite small – under a billion dollar revenue last year, around only 3,000 staff – so it’s really underinvested for the position it has in the market.”
ARM Holdings is one of the most prevalent chip companies in the world. It licenses out its core designs to other businesses, and it’s estimated that the business has sold 90 billion chips in its 25 years.
“That’s huge, but a lot of those are very low value,” Abbott explains. “Its licensing model, where it just licenses the core and expects licensees really to do more investment and to add value, means it doesn’t actually get huge amounts of revenue from some of these sales despite its dominant position.”
ARM was founded in 1990 and is currently based in the ‘Cambridge cluster’, where a number of silicon and other technology businesses are located. The company has a heritage in providing the chips for set top boxes and other appliances, but it really proliferated during the smartphone boom thanks in part to the low-power designs of its technology.
The proposed acquisition would double ARM’s employees in the UK over the next five years, SoftBank says, and the deal has been welcomed by Britain’s new chancellor, Philip Hammond.
According to Abbott, the deal could help ARM position itself against Intel in some of the latter’s core areas. The internet of things is the “obvious one”, he says, but it needs the sizeable investment from a company like SoftBank to properly sweep the market.
“The other areas in particular are high-end data centre technologies like servers, storage and networking,” Abbott says. “So it needs investment to get into those markets, and to fight against the incumbents, which is primarily Intel.”
The 'next wave' of IoT
Frost & Sullivan’s research analyst for digital transformation, Vijay Michalik, believes the deal is indicative of SoftBank’s interest in taking on the IoT market.
According to Michalik, the ARM acquisition will help Softbank leverage its position in the “next wave” of IoT devices – whether that’s in home appliances or connected cars.
“Processing power is getting moved closer to the edge through advanced applications in automotive, healthcare and augmented reality with low latency requirements, which increases ARM Holdings’ potential,” Michalik says. “In recent years, Softbank has also built capabilities in artificial intelligence, which will help create new and powerful synergies following today’s acquisition.”
Softbank has a reputation for building its profile through takeovers and acquisitions, having recently acquired US telco Sprint in a $20bn deal.
Speaking with Computerworld UK, Michalik says that the acquisition will involve pushing more resources into ARM to keep it working on R&D.
“One of the important parts here is that ARM’s business model just isn’t the same as Intel’s – and what their goal is, is to shift as many licences as possible at a low cost, and to get those contracts with companies like Apple and Samsung going forward,” Michalik says. “I think that what this could potentially do – what Softbank has been talking about recently – is giving ARM more resources to get out there and keep working on the R&D side, so they can position those revenue streams for the internet of things as well as their successful mobile business.”
“The spot where ARM has really beaten Intel is in the low power-requirement chips in the mobile era, and I think that expertise translates well into the internet of things.
“It fits in with a number of other investments Softbank have been making – in more forward-thinking long-term growth prospects, like robotics and artificial intelligence, and I think that all of these things will have a lot of positive synergy in the future. They’re going to get benefits from connecting, or integrating those different parts of the ecosystem.”
In terms of the wider repercussions across the chip market, a lot of other companies could be looking at which British investments to make – especially as the lower value of the sterling makes acquisitions or investments more attractive internationally.
“I think Intel, who were rumoured to be interested in buying ARM, may be wondering what they should do next as well,” Michalik says. “And whether there are any other acquisitions on their radar that they should be making instead.”
New prime minister Theresa May has just issued a statement saying the deal indicates that Britain is open for business.
Is it really an inward investment?
However, Anthony Miller, managing partner at analysts TechMarketView, takes a different view from the government.
“There is not a brilliant track record in acquisitions, albeit outside of tech, where the overseas buyer has made commitments to maintain an operation in the UK, and it all goes to hell in a hand basket because circumstances change,” Miller says. “From an investor’s point of view, it’s great news for them.”
“But I really do take a different view from the government in terms of this being an inward investment – it’s an acquisition. Inward investment, to my mind, is when an overseas company sets up an operation over here or perhaps helps fund a British company – buying a British company, in my mind, is not an investment, it’s a pure takeover.”
“Particularly the significance of ARM and the area it’s in – as you know it licenses chip designs, it doesn’t actually do the manufacture – and its focus on mobile technology is exactly the right place at the right time, which is undoubtedly why Softbank saw it as so attractive. So as you can probably garner, we have very much mixed feelings on the deal.”