As SoftBank preps IPO, Boris tries to Arm the FTSE

Boris Johnson is on a charm offensive to try to win the chip designer's IPO for London, but SoftBank is worried about a chip stock slump and its China subsidiary.

Pádraig Belton, Contributor, Light Reading

May 6, 2022

8 Min Read
As SoftBank preps IPO, Boris tries to Arm the FTSE

It's London calling. But it is unclear if SoftBank Group will answer.

The Japanese conglomerate called off its sale of chip designer Arm to Nvidia in February. Now Softbank CEO Masayoshi Son needs to decide whether to list Arm, which it bought in 2016, in New York or London.

UK Primer Minister Boris Johnson is under pressure – which makes it expedient to fight off the US markets to retain the UK-based firm, that makes Apple's M1 chip.

Accordingly, the UK's digital minister, Chris Philp, and Minister of Investment Lord Gerry Grimstone are leading a last-ditch effort to convince Arm's owners to list the company on the London Stock Exchange (LSE), and not on New York's tech-heavy Nasdaq.

For 18 years up until 2016, Arm was the London exchange's largest tech firm. With its valuation expected to float between $30 billion and $40 billion (Son hopes for a more ambitious $60 billion), the company would easily reclaim this mantle if it returned.

Figure 2: Boris Johnson's obsession with Churchill has him frame himself as the plucky underdog - rather than finding ways to deflect opinion from recent scandals. (Source: Allstar Picture Library Ltd/Alamy Stock Photo) Boris Johnson's obsession with Churchill has him frame himself as the plucky underdog – rather than finding ways to deflect opinion from recent scandals.
(Source: Allstar Picture Library Ltd/Alamy Stock Photo)

Better to be the biggest fish in a London pond than a minnow in Manhattan, argued Philp and Grimstone. The online grocery delivery firm Ocado, the LSE's biggest tech firm, has a market capitalization of just $8.61 billion.

Much of London's future ability to attract tech flotations will depend on whether it succeeds or fails. In 2021, London IPOs for several UK companies were disappointing. Deliveroo's share price tanked almost immediately after listing, while Wise (formerly Transferwise) has a valuation in London considerably less than its US rivals.

Inducements that Philp and Grimstone plan to bring to the table when they meet with SoftBank executives in the next few weeks will include a promise to fast-track Arm straight into the Financial Times Stock Exchange (FTSE) 100 Index – plus commitments they hope to gather from UK asset managers to support the stock when it lists.

SoftBank said a final decision on where to list Arm has not yet been made.

When a bulldog has no bite

It is possible to be too much of a plucky underdog. And the broader problem for Johnson and company is that London simply hasn't got the liquidity or analyst cover for tech stocks to attract a major IPO of this size, analysts tell Light Reading.

This comes despite efforts in 2021 by the chancellor, Rishi Sunak, to aggressively court tech firms to IPOs in London by introducing dual class share structures to give founders more control, and by dropping the shares required to be offered to the public to only 10% – both controversial measures.

This was meant to match offerings on the US markets, where practice is often to sell only 10% to 20% of a business at IPO.

SoftBank, for its part, generally does not monetize large sums in IPOs, but instead has used "funky derivatives products" to free up capital efficiently and minimize taxes, said one banker.

For all this effort, "London may want to be a global hub for tech investing, but it is not there yet," David Bicknell, an analyst at GlobalData, wrote in an email to Light Reading.

"At a time when the global tech market is not at its strongest, Arm needs to be able to target the destination where most investors and key semiconductor supporters such as Qualcomm are based," he adds.

"That is New York, not London." Qualcomm's headquarters are in San Diego.

Accordingly, the chances of Arm choosing London for its primary listing are "slim," said Bicknell.

"The problem with London is it's really too small for a company of the size of Arm to do it alone," said Hermann Hauser, who helped develop Arm's first processor, speaking on Radio 4's Today program Thursday.

Nasdaq's biggest firms – Apple, Microsoft, Amazon and Alphabet – all have market values over $1 trillion. The most valuable tech firms on the LSE have values under $10 billion, and Ocado's value has tumbled by 60% since September 2021.

The odds that London will lose Arm to New York "highlight that there is more work that can be done" to boost the city as an attractive place for tech listings over the longer term, argued Stephen Kelly, chair of Tech Nation, in an email to Light Reading.

A two-pronged problem

SoftBank would like to issue Arm's IPO in March 2023. Before then, along with choosing where to do so, the company must deal with two other problems: a slump in chip stock prices and its restive China subsidiary.

The chip stock slump is the result of investors' fears that current shortages in semiconductors will turn into a glut in the market. The Philadelphia Stock Exchange Semiconductor Index, which had tripled in value since 2017, has lost 22% of its value since the start of the year.

SoftBank, which owns 75% of Arm, is considering selling a smaller portion of the stock now, giving it an opportunity to get more for the rest later. An $8 billion term loan SoftBank raised in April from 11 lenders, secured with its Arm shares, has given the company the financial space to do this.

A second issue is Arm's joint venture Arm China. For two years, Arm has tried to replace Allen Wu, the CEO of Arm China. Wu was fired last week, replaced by co-CEOs Liu Renchen and Eric Chen.

But on Thursday Arm China said in a post on Weibo that Wu was refusing to hand over management of the company and challenging the legality of the board's decision.

Figure 1: SoftBank, which owns 75% of Arm, would like to issue an IPO before March 2023. (Source: SOPA Images Limited/Alamy Stock Photo) SoftBank, which owns 75% of Arm, would like to issue an IPO before March 2023.
(Source: SOPA Images Limited/Alamy Stock Photo)

To complete its IPO next spring, Arm needs to complete its financial review between June and September of this year. Yet Arm China, at least under Wu, currently refuses to disclose its results, which makes that financial review impossible. There hasn't been a financial audit of the Chinese joint venture for two years.

Another route Arm tried to take last month was to transfer its 47% stake in Arm China to an independent entity, downgrading Arm China from a joint venture to an investment. If Arm China is simply an investment, the thinking goes, Arm may be able to get away with an IPO without an audit of its results.

But it's never quite that simple. And, in addition to refusing to step down, it appears Wu may be refusing to approve the transfer of ownership of the stake, too.

Playing all sides

Arm has been nicknamed the Switzerland of the chip industry because of its neutral role supplying designs to almost all players in the industry. It has more than 500 clients, and its energy-efficient chip architectures are used in about 95% of the world's smartphones. Many of Arm's customers may take stakes in the company after it lists, said Hauser.

​​Qualcomm CEO Cristiano Amon hinted in June that if Arm listed publicly, his company would be inclined to grab a chunk of it.

"If Arm has an independent future, I think you will find there is a lot of interest from a lot of the companies within the ecosystem to invest in Arm," he said.

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Apple and TSMC may also take stakes, said analysts. If it lists in New York, Arm will follow in the 2021 footsteps of chipmaker GlobalFoundries, which raised $2.6 billion in its IPO.

And SoftBank sees a plus side, too. It gets to keep a $1.25 billion deposit paid by Nvidia.

Sometimes breaking up can be good to do, it turns out.

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Pádraig Belton, contributing editor special to Light Reading

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Pádraig Belton

Contributor, Light Reading

Contributor, Light Reading

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