Japanese conglomerate Softbank has plunked down $32.4 billion for ARM in a deal that takes advantage of a weakened pound while giving it control over the world's leading developer of smartphone chip designs.
ARM-based chips power 95 percent of the world's smartphones, but as demand in that market begins to slow, it has been working diligently to expand into the burgeoning array of products that require low-power yet efficient chips as part of IoT (Internet of Things) implementations.
Both companies hailed the deal as a fitting match with solid benefits for shareholders, but what did you expect them to say? Some observers had head-scratching reactions to Softbank's move, given it has no existing chip business. Rather, it's best known for its Japan-based telco, along with a majority investment in Sprint, clean energy products, robotics and an array of other products and services.
ARM hadn't been looking to sell the company when Softbank approached it, ARM CEO Simon Segars said in a recorded interview released Monday. But Softbank offered an "intriguing and interesting proposition," he added. "ARM and Softbank share a vision in how technology is going to change people's lives. With the level of investment they can make in this business, we can achieve more than we could on our own."
Under the deal's terms, ARM will run as an independent unit, with Segars and his team remaining in place and the headquarters staying in the UK.
The company will double its headcount over the next five years as well. That pledge strikes to the heart of ARM's strength, and for Softbank, underscores the risk it takes in making such a huge investment. ARM makes money by licensing its chip designs to other companies, such as Apple, and takes a license fee and royalties on any chips developed with them. That means ARM's value is not merely in its intellectual property, but also its people, particularly the development teams working on the next generation of microprocessor designs.
Those chip designs are "not iterative on what we have today," Segars said. "They're going to require invention they're going to require development, they're going to require bringing together different partners in a very diverse ecosystem. That's a non-trival exercise that will take time and investment. Softbank shares our view of how long it will take."
What isn't yet clear is how Softbank will fund that sort of investment, assuming the sale goes through. It is purchasing ARM in an all-cash deal funded by both cash on hand and a bridge loan from Japanese bank Mizuho. ARM has some $8.5 billion in cash and short-term investments on hand, which could be used for expansion purposes.
Meanwhile, Softbank became saddled with about $100 billion in debt to a series of acquisitions. It has taken recent steps to ease its debt load by selling off assets, including part of its stake in Alibaba.
Ultimately, the ARM deal looks like a good move for Softbank, according to Constellation Research VP and principal analyst Andy Mulholland. "The answer is all in 'the final mile of IoT—the actual connection of individual devices at global scale of numbers," he says. "This is where the value originates. Getting data from an end connection then owning as near to origination as possible places a company in a powerful position. ARM has historically dominated the mobility chip market and is well placed to do the same to end devices. Imagine the rules and control that can be built into a end device chip."
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