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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.


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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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[email protected] 7/18/2016 | 6:56:39 AM
Investment for the IoT future? If I understand this right, SoftBank believes ARM is going to build a significant business as the IoT goes global and it doesn't plan to intefere, just support.... let's see how that goes. 
Joe Stanganelli 7/18/2016 | 10:40:48 AM
Re: Investment for the IoT future? Well, Facebook did something similar with Instagram as pundits were dubious.  So far, so good there, though.
mendyk 7/18/2016 | 10:46:47 AM
Re: Investment for the IoT future? Isn't Softbank already carrying a load of debt?
brooks7 7/18/2016 | 10:53:10 AM
Re: Investment for the IoT future? 43% premium for a company based in a country that will return to the Dark Ages in a few weeks.  Wonder what they will do once Brexit continues and the country decends into anarchy?

seven

 
mendyk 7/18/2016 | 11:02:17 AM
Re: Investment for the IoT future? Initial market reaction to the deal is decidedly negative. My guess it's mainly due to the debt monster that's been created.
iainmorris 7/18/2016 | 11:14:37 AM
Re: Investment for the IoT future? ARM has expressed quite a bit of concern about the impact of Brexit given the number of EU citizens it employs in Cambridge. However, it's also noted (as SoftBank will have done) that virtually all of its earnings are generated outside the EU. As a UK technology company that is also a global phenomenon, it is a pretty rare thing. Nevertheless, who is to say that its new owners won't shift R&D outside the UK if circumstances make it difficult to employ EU citizens in Cambridge? I'm not sure how binding these promises are to double the size of the UK workforce.
inkstainedwretch 7/18/2016 | 11:28:34 AM
Investing in data centers and in Britain As Iain noted in his story, the ARM ecosystem is moving to secure a chunk of the data center server business (taking it away from Intel, which has a probably unsustainable near-monopoly in that area). Do not underestimate what a boon this could be to ARM (and any acquirer) if successful.

Re: Brexit / knowledge worker employment. Cheerleaders for globalism say there's nothing to be done about manufacturing jobs moving to countries where labor is cheapest; you just have to invest in knowledge workers, they say. But this maneuver should remind globalists that knowledge workers can reside literally anywhere. Iain notes this as well, but it's another point that should not be lost in the shuffle.

-- Brian Santo
Mitch Wagner 7/18/2016 | 12:25:43 PM
Re: Investment for the IoT future? Yes, but Facebook and Instagram are a different industry from SoftBank and ARM. SoftBank will likely come to see ARM as strategic; hard to see how it will be able to resist meddling. 
Mitch Wagner 7/18/2016 | 12:26:47 PM
Re: Investing in data centers and in Britain Indeed, China and India produce a lot of smart engineers. R&D could be relocated. 
brooks7 7/18/2016 | 12:40:54 PM
Re: Investing in data centers and in Britain Yep ARM has taken on Intel in the Data Center for 10 years or so.  Traction 0.  Value Proposition none.

The reason it works for Intel is that the hardware is cheap and available from lots of places.  People have been buying these things for years without any need for ARM.  So, ARM needs to produce servers that cost 30 - 40% less than Intel ones.  Call me when that happens.

seven

 
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