Introduction:
Arm, a company that designs chips and is owned by SoftBank, has applied to start selling its shares to the public on the Nasdaq stock exchange. This is a big deal and one of the largest “initial public offerings” (IPOs) in recent times.
Arm operates as an intellectual property enterprise that deals with licenses and royalties. Rather than producing physical silicon chips, the company’s business model revolves around licensing its intellectual property to companies like Apple, Qualcomm, and Nvidia. These companies then leverage Arm’s designs to create and manufacture their own chips.
About a year and a half ago, another company called Nvidia, which makes chips too, wanted to buy Arm for $40 billion. But that plan got canceled because the government (specifically the Federal Trade Commission) took legal action to stop it.
What is ARM
ARM is a British company that creates designs for computer chips, including processors and other types of chips used in various devices and systems. Instead of making the chips themselves, ARM sells licenses to other companies that produce the chips. They consider themselves to be like the research and development department for the entire chip-making industry.
Back in 1990, ARM spun off from a company called Acorn Computers. At that time, they were working with Apple to create chips for a new handheld computer, but the project didn’t go well. Apple sold its portion of ARM, using the money to buy another tech company. Soon after, Nokia and then other phone makers, including Apple, started using ARM’s chip designs. When Steve Jobs came back to Apple, he used ARM designs for the first iPod, iPhone, and iPad.
In 2016, SoftBank bought ARM for $24 billion, paying more than the value of ARM’s shares at that time. Some people were unsure about SoftBank taking on extra debt for this purchase, but it turned out to be a great move. ARM’s chip designs became very popular.
Today, ARM’s chip designs are used in all sorts of devices like tablets, computers, smart TVs, smart homes, electric cars, drones, and even things like electronic passports and streetlights. Nearly all the world’s smartphones, including ones made by Apple, Android, and Samsung, use ARM technology. The same goes for about 95% of chips made in China.
UK didn’t want IPO in US
To help with this process of going public, ARM has asked four big banks (Goldman Sachs, JPMorgan Chase, Barclays, and Mizuho Financial Group) to help them get ready for the stock market.
It’s important to note that this decision to list ARM on the stock market in the US is not what some people in the UK wanted. They were hoping ARM would be listed on a stock market in London.
The UK government wanted this because it would make London more attractive for big companies to sell their shares. ARM used to be listed on both the London and New York stock markets before SoftBank bought it in 2016.
NVIDIA wanted to Buy ARM
A while back, in 2020, SoftBank had planned to sell ARM to a US company called NVIDIA for $80 billion. But that didn’t happen because some governments said it might hurt competition.
The Nvidia-Arm deal was terminated on February 7, 2022, after the Federal Trade Commission (FTC) sued to stop the deal. The FTC argued that the deal would give Nvidia too much control over the semiconductor industry and would stifle innovation.
The FTC’s lawsuit was joined by a number of other regulatory agencies, including the European Commission and the UK Competition and Markets Authority. Nvidia had tried to address the concerns of regulators by proposing a number of measures, such as setting up a separate licensing entity for Arm’s chip designs. However, these measures were not enough to convince the regulators.
The collapse of the Nvidia-Arm deal was a major setback for Nvidia, which had seen the deal as a way to expand its reach into the mobile and data center markets. The deal was also seen as a threat to Arm’s independence, as Nvidia is a major competitor to many of Arm’s customers.
Now, instead of selling, ARM is planning to let people buy shares in the company through the stock market. Even though this might not make as much money as selling to NVIDIA, ARM is talking to NVIDIA, Apple, and Amazon about them buying some of these shares when they become available.
Read more: Why Everyone is Talking About NVIDIA’s $6 Billion Profit in 1 quarter
The CHINA angle
The China angle in Arm’s IPO is that Arm China, an independent entity that has the exclusive rights to distribute Arm’s technology in China, is Arm’s largest customer and presents “significant risks” to Arm’s business.
Arm China accounts for about 25% of Arm’s worldwide revenue, and its revenue has been growing rapidly in recent years. However, Arm China has a history of late payments, and it is unclear who actually controls the company. This uncertainty has raised concerns among investors about Arm’s exposure to China.
In addition, the Chinese government has been promoting its own semiconductor industry, and it could potentially restrict Arm’s access to the Chinese market. This could hurt Arm’s business and make it more difficult for the company to go public.
Overall, the China angle is a significant risk factor for Arm’s IPO. Investors will need to carefully consider this risk before investing in the company.
Here are some other specific risks that Arm has identified in its IPO filing related to China:
- The Chinese government could impose export controls on Arm’s technology, which would make it difficult for Arm to sell its products to Chinese customers.
- The Chinese government could require Arm to transfer its technology to Chinese companies, which would undermine Arm’s competitive advantage.
- The Chinese government could block Arm from acquiring or investing in Chinese companies, which would limit Arm’s growth opportunities in China.
These risks highlight the challenges that Arm faces in doing business in China. The company will need to carefully manage these risks in order to be successful in the Chinese market.
Why this matters
ARM wants to do this because some private investors who own a part of the company (about 25%) through a fund managed by SoftBank wanted to be able to turn their investment into cash. Just before this stock market listing, SoftBank bought back that 25% from the investors. Also, ARM wants to give its employees the chance to own part of the company too.
ARM could become a big deal and attract a lot of attention. This is because well-known companies like Apple, Amazon, and NVIDIA are interested. This might encourage more investors to get involved. Overall, this could help the stock market by bringing more exciting companies to the public.