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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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Joe Stanganelli 7/26/2016 | 2:42:23 PM
Re: Investment for the IoT future? @ianbrown: Okay, but based on that analysis, it looks like the shareholders aren't going to get anything better.  Best thing for a shareholder may be to vote yes on the deal, see it through, and then promptly cash out.

(And then the best thing for an investor to do, once a number of shareholders do that -- and they likely will -- is to purchase the stock once it's plummeted...knowing that, in the long run, the stock will rise again.)
lanbrown 7/25/2016 | 6:55:48 PM
Re: Investment for the IoT future? While I agree, normally you have a company buying another to either add to what they already have in their market or there are synergies with the combination.  There is no overlap at all with Softbank and ARM.  They (Softbank) are not even in the chip design business.  They are not even a licensee of ARM from what I can find.

The only way that acquisition will pay for itself is if they increase the license fee and the royalty rate.  Even if ARM increased their profits 10-fold (still excluding taxes) it would take about 6 years before the breakeven point.  Sure they can buy it now and sell it a few years later for a profit...that is if the business remains like it is today.

I highly doubt that Softbank will be the only bidder for ARM.  Shareholders have yet to approve it and another bid could come in.  I wouldn't be surprised if a group didn't make an offer.    This group comprising of some of the larger current licensee holders of ARM.  Any one of these companies would face huge hurdles in buying ARM on their own; a lot less if there are many in the group.  Then none of them truly control ARM and ARM would be treated as an independent company.  That doesn't mean that there wouldn't be any regulatory hurdles to overcome though.

The best thing for ARM and the industry, ARM remains a public independent company.
EuroCableGuy 7/25/2016 | 12:22:39 PM
Re: Investment for the IoT future? "How about Broadcom"

Broadcom's new products (STB, cable modem, etc..) are based on ARM; they started transitioning from MIPS a couple of years ago...
Joe Stanganelli 7/25/2016 | 11:18:03 AM
Re: Investment for the IoT future? Well, a company is more than a year of its profits extrapolated out (assets, etc.) -- but sure; whatever the plans are for ARM, a lot of it, I suspect, has to do with a "if I can't have you nobody will" mentality.
lanbrown 7/24/2016 | 8:27:57 PM
Re: Investment for the IoT future? Don't forget (even though I'm sure Intel would like that) the Itanic......now back to x86!
lanbrown 7/24/2016 | 8:24:43 PM
Re: Investment for the IoT future? Remember AIM?  Motorola (the M in AIM) had issues supplying the chips Apple (the A in AIM) wanted when they wanted them, so they went to IBM (the I in AIM.)  When IBM faced challenges as well, Apple moved to Intel; a totally different architecture.

So while there is a lot of "if's" the most important thing to keep in mind is that Linux (and thus Android) is not tied to a particular architecture.  For IoT's, if they are using Linux or say *BSD, they are still not tied to particular architecture.  If you are looking at really low powered chips, MIPS has advantages.

For Softbank to buy ARM at the price they did, they will want to recoup their investment.  For 2015 ARM had a pretax profit of £414.8 million.  Let's just keep taxes out of it and convert that to USD; $546 million.  Softbank is buying ARM for $32 billion.  So without ever paying any taxes it will take Softbank 58 years to recoup their investment.  Sure ARM is seeing growth which would take that number down, but they also have to pay taxes.  It would be decades before Softbank sees a return.  They have plans for ARM and I'm sure the current customers won't like what those are.
brooks7 7/24/2016 | 12:10:38 PM
Re: Investment for the IoT future? Joe,

Here is some of the history:

- 8085 killed and they learned from this as they just walked into customers one day (I was one of them) and said that we could no longer order 8085's from them and good luck.

- i860, i960, i432

- Level 1 Communications

- Dabbling in Fiber Optics

- Celeron

- Various attempts into the mobile market

Intel does this huge oscillation all the time.  I want to be only in the x86 business.  I want to be in the rest of the market.  One cycle takes about 3 years.  Been going on for over 30 years.

seven

 
Joe Stanganelli 7/24/2016 | 10:47:32 AM
Re: Investment for the IoT future? FWIW, I owned an Atom device...and it's kind of a piece of junk.

Not sure I blame Intel there.
Joe Stanganelli 7/24/2016 | 10:44:37 AM
Re: Investment for the IoT future? @brooks7: So...Intel is Yahoo?  ;)
Joe Stanganelli 7/24/2016 | 10:43:52 AM
Re: Investment for the IoT future? @ian: Compelling analysis, but that's a heckuvalot of ifs and wills.

So either way, you're definitely right in your final analysis: "Time will tell."  ;)
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