Comms chips

SoftBank Muscles In on ARM in $32B Deal

Japanese conglomerate SoftBank, which counts major telecoms services operations in Japan and the US as part of its portfolio, is splashing out more than £24 billion ($32 billion) on a takeover of the UK's ARM Holdings, believing the chip designer has a pivotal role to play in the fast-developing market for Internet of Things services. (See SoftBank to Buy ARM for £24.3B.)

The move will have implications for players across the entire communications market: ARM Ltd. licenses the technology that is used in smartphones and other handheld gadgets, and its designs are being introduced into other appliances amid forecasts that billions of devices will need Internet connectivity in the coming years.

The company could also stand to benefit from the rollout of software and virtualization technologies by network operators. Companies investing in NFV, including Orange Business Services , have already been experimenting with ARM technology, in preference to Intel Corp. (Nasdaq: INTC)'s x86 platform, as a means of reducing hardware costs. (See Orange Plots Mass Network-as-a-Service Rollout.)

UK politicians have seized on news of the deal as evidence of the country's continued attractiveness to foreign investors despite "Brexit" upheaval. Last month, the British public voted to quit the European Union (EU), sparking concern about the outlook for the UK economy.

However, ARM is arguably the UK's only communications-sector manufacturer of genuinely global significance: as a supplier to a number of the world's biggest technology players, it is heavily shielded from the headwinds buffeting other UK organizations.

Moreover, the result of the UK's referendum triggered a sharp reduction in the value of the pound sterling against currencies including the Japanese yen, allowing SoftBank Corp. to acquire ARM for a much lower fee than it would previously have had to pay.

Amid speculation that ARM was a possible takeover target for US semiconductor giant Intel -- which has failed to wrestle any control from ARM in the mobile communications market -- SoftBank may have felt under pressure to act fast.

Its offer price of £24.3 billion ($32.2 billion), or 3.3 trillion Japanese yen, works out at £17 ($22.6) per ARM share and represents a premium of 43% to the company's closing share price on July 15. Shares in ARM were trading up 43% in London on Monday morning following the announcement.

The fee also looks astronomical next to ARM's recent earnings. In 2015, the company made less than £1 billion ($1.3 billion) in revenues and just under £430 million ($571 million) in profit after tax.

Want to know more about the Internet of Things? Check out our dedicated IoT content channel here on Light Reading.

That makes this look like a huge gamble by SoftBank CEO and founder Masayoshi Son, whose investment strategy has been called into question following a $22 billion takeover of US mobile operator Sprint Corp. (NYSE: S) in 2013.

Sprint's ongoing travails have more recently prompted the divestment of other SoftBank assets, including stakes in Chinese e-commerce giant Alibaba Group and Finnish games maker Supercell, the company behind the popular Clash of Clans game. (See SoftBank to Sell $7.9B of Alibaba Shares, Arora Removes Aura From SoftBank and SoftBank Sells Supercell to Tencent for $7.3B.)

But in buying ARM, SoftBank would be capturing a business that enjoys a dominant position as a designer of processors for handheld devices.

In its statement on the transaction, SoftBank said it would fund the deal through a new debt facility of JPY1 trillion ($9.5 billion) as well as cash reserves. The operator's net interest-bearing debts had risen to 3.8 times annual EBITDA earlier this year, although the sale of Alibaba shares was expected to reduce the ratio to about 3.3.

Son has made a huge commitment to the ARM business, promising to double the number of UK employees at the company over the next five years. ARM had 3,975 members of staff on its books at the end of last year.

"ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the Internet of Things," said Son in a statement. "SoftBank intends to invest in ARM, support its management team, accelerate its strategy and allow it to fully realize its potential beyond what is possible as a publicly listed company."

Son has also promised to keep the headquarters of the business in the UK city of Cambridge and to ensure that ARM continues to operate as an independent business.

That would mark something of a contrast with the approach taken in the US, where Son brought in a new CEO -- in the form of Marcelo Claure -- in an effort to rekindle growth at Sprint.

Nevertheless, SoftBank seems unlikely to fiddle with ARM while the chip vendor continues to thrive. Last year, the company's revenues rose by 22%, to £968.3 million ($1.3 billion), while profit before tax was up 24%, to £511.5 million ($679 million).

SoftBank expects to finalize the takeover before the end of September but has yet to secure the requisite regulatory and shareholder approvals.

The Japanese company seems unlikely to encounter any political objections in the current climate, although Theresa May, the UK's new prime minister, has previously expressed concern about foreign takeovers of UK businesses.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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Joe Stanganelli 8/1/2016 | 7:13:05 AM
Re: Investment for the IoT future? I'm sure -- or, at least, I would like to think -- that the VZ M&A folks took the email issues into account when crunching the numbers.  Ditto for AT&T.
lanbrown 7/30/2016 | 10:00:16 AM
Re: Investment for the IoT future? They want to compete with Google and Facebook in the ads space.  As for dropping the rest; Yahoo is a legal obligation to AT&T for email service as well as a portal.  So Verizon is now committed to supporting it by buying Yahoo.  I'm sure AT&T is looking at an alternative right now though.
Joe Stanganelli 7/30/2016 | 7:20:48 AM
Re: Investment for the IoT future? I don't think VZ seeks to turn Yahoo around.  I think they just want some of its assets, technologies, and market presence.

If Yahoo is still around as any meaningful subsidiary -- as opposed to being fully absorbed by VZ -- in 18 months, I'll be mildly surprised.
lanbrown 7/29/2016 | 1:27:35 PM
Re: Investment for the IoT future? Buy Yahoo has been on the market since then and their value has only decreased.  Microsoft was also looking at buying everything though whereas Verizon only bought a part of Yahoo.


I cannot see Verizon able to turn Yahoo around let alone compete with Google and Facebook.
Joe Stanganelli 7/29/2016 | 1:23:10 PM
Re: Investment for the IoT future? @kq4ym: FWIW, that will still take about two years.
Joe Stanganelli 7/29/2016 | 1:22:36 PM
Re: Investment for the IoT future? @ian: And Yahoo could have Google for $5mil. once upon a time.

Of course, if they had actually done that deal, it's a lock that Google/Yahoo wouldn't be anywhere near as successful as Google is today.
kq4ym 7/28/2016 | 1:23:45 PM
Re: Investment for the IoT future? As the "UK's only communications-sector manufacturer of genuinely global significance," it surely will be interesting to see if the bids go up significantly after the proposed departure of Britain from the EC.
lanbrown 7/27/2016 | 7:36:14 PM
Re: Investment for the IoT future? While I think it is overvalued, for someone with deep pockets and is concerned about a design that they make lots of money from, it might be worth it.  That is why I think a consortium would be an easier sale to regulators.  The large ARM licensees obviously are concerned what Softbank may or may not do regardless of what they have said publicly or privately.

I find it funny that Verizon thinks that Yahoo will allow them to compete with Google and Facebook.  Microsoft has lost that war and Yahoo way before them.  Verizon could use bloatwared mobile phones to push traffic to themselves.  That tactic might cause regulators to take a look at them though....they should ask Microsoft.  Their customer may not be all that happy either.  Yahoo uses Bing and Bing has done pretty much nothing against Google.

The really interesting part though.  51% of the queries are handled by Microsoft and the remaining 49% is by whomever Yahoo wants to use which is....Google.  Yahoo has full control over mobile searches.  As for ads and listings, 51% goes to Microsoft and 49% to Google.  So, Verizon is going to compete with Google by paying Google.  Or will Verizon dig the Yahoo search code out of the archives, blow the dust off of it and start using it?  They could give 100% of the business to Microsoft, but it is not like that is working for Microsoft.

Just think, Microsoft was willing to pay $50 billion for Yahoo 8 years ago.
Joe Stanganelli 7/27/2016 | 5:34:38 PM
Re: Investment for the IoT future? @ian: Sure.  My comment was presuming SoftBank remains the highest/best bidder.

But if you and many others are thinking the deal is overvaluing ARM given their revenues and other factors, chances are you're not alone.

But then, VZ just agreed to buy Yahoo for $4.8bil., so what do I know?
lanbrown 7/26/2016 | 7:18:09 PM
Re: Investment for the IoT future? A bidding war could start for ARM.
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