It’s the biggest acquisition in the history of the semiconductor industry and a significant victory for SoftBank and its founder and CEO Masayoushi Son, which bought Arm for $32 billion in 2016.
Under the terms of the deal, Nvidia (ticker: NVDA) will pay SoftBank (9984.Japan) $12 billion in cash, including $2 billion payable at signing, and 44.3 million Nvidia shares worth an estimated $21.5 billion. SoftBank could also receive up to $5 billion in cash or common stock under an earn-out agreement, subject to satisfaction of specific financial performance targets by Arm. Nvidia will also issue $1.5 billion in stock to Arm employees.
Shares of SoftBank are up 8.3% in early Monday trading in Tokyo.
“AI is the most powerful technology force of our time and has launched a new wave of computing,” Nvidia CEO Jensen Huang said in a statement Sunday. “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. Our combination will create a company fabulously positioned for the age of AI.”
Nvidia will finance the cash portion of the deal from its balance sheet. Nvidia said SoftBank’s stake in the company after the deal closes will be under 10%. The deal doesn’t include Arm’s Internet of Things Services Group, according to the announcement.
In an interview with Barron’s, ARM IP Products Group President Rene Haas confirmed that the deal does not include Treasure Data, a software platform for managing data generated by IoT applications. In July, there were reports that SoftBank had hired Goldman Sachs to find a buyer for the unit with a targeted price of $1 billion.
Nvidia said the deal will be immediately accretive to its non-GAAP gross margin and non-GAAP earnings per share. Nvidia CFO Colette Kress said in an interview with Barron’s that SoftBank will not get a seat on Nvidia’s board.
“The Nvdia-Arm deal is not only the largest semiconductor deal by dollar volume at $40 billion, but I believe the one with the most significant impact,” says Patrick Moorhead, of the chip research firm Moor Insights & Strategy. “I think the deal fits like a glove in that Arm plays in areas that Nvidia does not or isn’t that successful, while Nvidia plays in many places Arm doesn’t or isn’t that successful.”
Assuming the eventual exercise of performance-based elements of the deal, the transaction would eclipse the $37 billion acquisition of Broadcom by Avago (which then took Broadcom’s name) in 2016. SoftBank acquired Arm for $32 billion in 2016. The current Arm equity is held 75% by SoftBank Group, and 25% by the SoftBank Vision Fund, the company’s $100 billion venture capital portfolio.
Nvidia said Arm will remain headquartered in Cambridge in the U.K.
Nvidia said it would keep Arm’s open-licensing model “while maintaining the global customer neutrality that has been foundational to its success, with 180 billion chips shipped to-date by its licensees.” Arm will keep its name, and its intellectual property will remain registered in the U.K.
SoftBank’s Son said in a statement that “Nvidia is the perfect partner for Arm.”
Asked about reports that some U.K. officials were opposed to the deal, Arm’s Haas said that believes some of the negative commentary came from people unaware that Nvidia intends to maintain both its business model and strategy. He notes that Nvidia plans to build a large supercomputer on the Arm Cambridge campus.
As for the lengthy closing process – which is expected to take about 18 months – Nvidia’s Kress said that primarily reflects time to receive required regulatory approvals. She notes that Nvidia recently went through a similar set of approvals in the U.S., Europe and China for its acquisition of Mellanox Technologies. “We’ve gotten a good understanding of how that works,” she says, “and we’re ready to get on the road again.”
Meanwhile, both Bloomberg and the Financial Times reported over the weekend that SoftBank could use proceeds from recent transactions along with other cash to take the company private—SoftBank’s recent market cap of about $105 billion is less than half of the company’s underlying net asset value.
Arm designs chips, licenses the designs to companies like Broadcom, Apple, Marvell and Nvidia, and collects royalties when companies sell Arm-based chips. ARM’s biggest market has long been mobile devices—Arm-based processors power more than 95% of the world’s smartphones and tablets.
When Softbank’s Arm acquisition was announced four years ago, Masayoshi Son said he expected Arm to become a key driver of the emerging Internet of Things, which happened to be a major focus for its $100 billion Vision Fund, a venture capital portfolio launched the same year SoftBank bought ARM.
There has been speculation since July that SoftBank was considering options for a sale or spinoff of Arm, and Masa confirmed on the company’s most recent earnings call with the media that it was holding talks with an unspecified prospective bidder, which was widely believed to be Nvidia.
Still the deal is a stunner, which follows a series of transactions over the last six months intended to bolster both SoftBank’s stock price and Masa’s reputation, which was tarnished last year by the company’s troubled investment in the short-term real-estate rental firm WeWork. The Nvidia/Arm combination is likely to face opposition from Arm licensees that see Nvidia as a rival—and it is also getting some political push back in the U.K., although the company would simply be trading a Japan-based owner for one based in California.
In March, under pressure from the active investment firm Elliott Management, SoftBank announced a plan to raise $41 billion in cash through asset sales, with the proceeds targeted at paying down debt and buying back stock. The company has nearly completed that program, via the sale of most of its stake in T-Mobile (which it received via the acquisition of its majority stake in Sprint), and portions of its holdings in both Alibaba (BABA) and SoftBank Corp., a majority owned Japanese wireless carrier. In addition to that program, the company recently announced plans to sell about a third of its remaining position in SoftBank Corp. for $13.5 billion, in an offering that will reduce its stake to about 40% from 62%.
In announcing June-quarter earnings, SoftBank said it has already spent about 1 trillion yen—around $9.4 billion—to buy back stock using proceeds from the recent asset sales, and it reduced its net debt position by about $14 billion in the latest quarter. SoftBank said at the time of the earnings announcement that it plans to buy back at least another 1.5 trillion yen of stock.
In announcing earnings, SoftBank also said it was changing the way it reports financial results to reflect the fact that the company is in fact an investment company, and not an operating company. SoftBank has demonstrated that shift recently with some active maneuvering in the public equity and derivatives markets.
The company announced the creation of an investment management subsidiary capitalized at $555 million, with the cash to come two-thirds from the company, and one third from Masa. In announcing the unit, SoftBank specifically said it would invest in highly liquid public listed stocks, via both direct investments and derivative transactions.
As Barron’s reported last month, the company booked a profit of $611.5 million in the June quarter after investing $10 billion of the cash from its recent asset sales in large-cap tech companies. That investment is unrelated to the new tech stock fund. As of the end of the June quarter, the position had been trimmed to $3.4 billion.
In a subsequent SEC filing, the company disclosed $3.8 billion in technology stockholdings as of June 30, positions that appear to reflect both the holdings of the new fund and the post-asset sale tech investments.
SoftBank positioned included a $1 billion stake in Amazon.com (AMZN) as well as $475 million worth of Alphabet (GOOGL) and nearly $250 million of Adobe (ADBE) shares. Other big bets included Netflix (NFLX), Microsoft (MSFT), and Nvidia (NVDA), all between $180 million and $190 million, with nine other stockholdings around $100 million.
According to multiple media reports, the company has invested billions of dollars in U.S. equity call options in recent weeks in a move that seems to have contributed to the recent rally in technology shares—and may be adding to the volatility in recent trading sessions.
Write to Eric J. Savitz at [email protected]