Category Archives: Technology

Softbank and Arm Holdings (ARM)

July 19, 2016 By in mergers and acquisitions, semiconductor manufacturing, Uncategorized Tags: , , , 1 Comment

My thoughts:

–the price Softbank is offering for ARM seems very high to me.  That’s partly intentional on Softbank’s part, not wanting to get into a bidding war.  It’s also based on Softbank’s non-consensus belief that the development of the Internet of Things will be a much bigger plus for ARM than the consensus understands.

–I’m rereading the resignation of Nikesh Arora as a sign of his disapproval of the acquisition, not of Masayoshi Son’s remaining at the helm of Softbank

–ARM seems to be content to be bought.  And why not?  Holders of ARM stock and options will get a big payday.  Softbank has no semiconductor design expertise, so ARM will likely run autonomously under the Son roof.  Softbank is also apparently promising to keep the company headquarters in the UK as well as to substantially increase the research staff.

–A competing bid is unlikely.  That’s mostly because of the price.  But ARM management knows it would never have the operating freedom as a subsidiary of Intel or Samsung (the most logical other suitors) that it would as part of Softbank.  When the company’s assets leave in the elevator every night, any unfriendly bid is inherently risky.  Doubly so when it threatens a really sweet deal.  No, I don’t think antitrust issues would be a deterrent to a bid.

–Will the UK allow the deal?  The Financial Times, which should be in a position to know, suggests that the UK might not.

How so?

ARM is basically the country’s only major technology company, so domestic ownership may be an issue of national prestige and pride.  There’s certain to be some opposition, I think.  And crazier things have happened.  For example, France disallowed Pepsi’s bid for Danone on the argument that the latter’s yogurt is a national treasure.  In the late 1970s, the US barred Fujitsu from buying Fairchild Semiconductor on grounds that foreign ownership presented national security risks   …and then allowed it to be sold to French oilfield services firm Schlumberger.  More recently, the US scuttled the sale of a ports management business that runs Newark and other US ports to the government of Dubai, an ally, on security grounds.  The would-be seller was also foreign, P&O of the UK.

This is the major risk I see.

Softbank and ARM Holdings

July 18, 2016 By in Japanese development, Technology, Uncategorized, Wireless Tags: , , , Leave a comment

a brief history of Softbank

Softbank is a Japanese company incorporated in 1981.  It has a non-establishment CEO, Masayoshi Son, notoriously opaque financials and a reputation as a maverick in its home country.  The company’s earliest successes came as an investor partnering with international internet companies entering Japan, like Yahoo and eTrade.  It was also an early supporter of now-huge Chinese internet businesses.

In 2006, it became an active business owner, entering the Japanese cellphone market by acquiring Vodafone’s network.  It revolutionized that business in Japan by rebranding as Softbank Mobile and launching a very successful discount cellphone service.

In 2012 it decided to employ the same strategy in the US, buying a controlling interest in Sprint.  Softbank appears to me tohave made the bold $21+ billion commitment thinking it could build a viable nationwide network by merging Sprint with T-Mobile.  Anti-trust regulators prevented that from happening, however, leaving Sprint in its current weak position and Softbank with a mess.

About a year ago, perhaps chastened by his Sprint error, Mr. Son announced he was stepping down as CEO and hired his apparent successor, Google executive Nikesh Arora.

Late last month Mr. Arora, who had been working to reduce Softbank’s financial leverage through asset sales, announced he was leaving the company, and Mr. Son that he was now planning to remain as CEO for perehaps ten more years.

This weekend we learned why–Softbank announced that Arm Holdings, the UK-based chip design firm, had accepted its all-cash bid of £24 billion ($32 billion), a 40%+ premium to its Friday close in London.

which Son is making this purchase?

Is it the prescient buyer of Alibaba and Vodafone Japan?    …or is it the sorely disappointed purchaser of Sprint?  Mr. Son is apparently arguing that development of the Internet of Things will generate a surprisingly large explosion of licensing fees and royalties for Arm.

More tomorrow.

McKinsey: digital “haves” vs. “have mores”

January 6, 2016 By in Technology, Uncategorized Tags: , 1 Comment

haves and have-mores

The consulting firm McKinsey and Company published a study on the digital economy last month, titled “Digital America:  A tale of the haves and the have-mores.”

It makes two main points:

–the price of information and communication technology goods and services has dropped by about 2/3 over the past two decades.  So conventional measures of GDP are probably underestimating the positive impact of ICT on overall economic growth in the US.

More important for us as investors,

–the pace of digitization varies very widely by company and by industry.  The leaders have increased their digital capabilities over fourfold over the past 15 years.  The rest have 14% of the leaders’ digital presence.  That’s up from 8% in the late 1990s.  But the great mass of firms have barely closed any of the gap.

Laggards have only a fifth of the digital assets of the leaders and have only 7% as many workers performing digital tasks.

most/least digitized

most

Interestingly, McKinsey lists as the most digitized sectors:

ICT itself

Media (?)

Professional services

Finance and insurance (insurance?).

I guess I have to remember it’s a relative list.

least

The least digitized are:

Government

Healthcare

Hospitality

Construction

Agriculture and hunting.

competitive advantage

McKinsey also points out that the most digitized–think Google, Facebook, Amazon, Netflix–have an immense competitive advantage over their rivals.  That expresses itself in increased market share and higher profit growth–although personally I think we have to take the second on faith with firms like AMZN, which are plowing their cash flow back into expanding their reach.

significance?

In a year that will probably be flattish–even though the first couple of trading days make one think of flattish as an aspirational goal–looking to firms who are establishing digital leadership is a reasonable investment strategy.  Growth investors will likely try to find fast-growing leaders, both large and small.  Value investors will probably try to find laggards who now understand their potential predicament and are acting aggressively to remedy their shortcomings.

All we have to do is find names.

Square, venture capital and the late-1990s Internet bubble

November 20, 2015 By in Industry Analysis, internet, internet bubble, stock market, Technology, Transport, Utilities Tags: , , , , , , , , , , 1 Comment

a bubble deflating

Internet payments company Square came to market yesterday.  It has a two-letter symbol, SQ, and trades on the NYSE, not NASDAQ.  But the most salient fact about the offering is that the IPO price was a lot below the private market value that venture capital investors had placed on SQas little as a year ago.

At the same time, the small number of mutual funds which have been aggressive venture capital buyers in Silicon Valley have been, more or less quietly, writing down the carrying value of their non-public company holdings.

What we’re seeing is, I think, a smaller and much more benign–both for the economy and for us as stock market investors–analogue of the deflation of the Internet mania of the late 1990s that started in early 2000.

the late 1990s and the internet

I remember noticing in 1998, that earlier- and earlier-stage companies were coming to market successfully.  Some were little more than concepts.  Take Amazon (AMZN), for example, which IPOed in mid-1997.  The pre-offering roadshow that I saw emphasized that investors had made gigantic fortunes on buying unknown companies like Microsoft during the personal computer era and that AMZN was a lottery ticket to a similar outcome in the Internet Age.  Of course, even a success like AMZN didn’t turn profit for its first eight years as a public company, surviving on the proceed from the IPO and follow-on debt offerings.

I thought at the time, and unfortunately committed my theory to writing, that we were seeing a fundamental change in the role of the stock market in capital formation.  Portfolio managers were gradually taking on the role previously played by venture capital.  So, I mused, managers of mutual funds like me might have to think about reserving a small place–no more than, say, 5%–of their portfolios for developing companies that they normally wouldn’t have touched with a ten-foot pole.

Not my finest intellectual hour.

today’s bubble deflation

The slow escape of air from the venture capital bubble that is now going on will not have much effect on publicly traded companies, I think, for several reasons:

–the amount of money involved in this speculation is much smaller

–investors of all stripes still wear the scars of 2000-2001, so they haven’t been anywhere near as crazy this time around

–the people who are losing money now are, or represent, wealthy, seasoned speculators, not retail investors

–maybe most important, much of the original internet froth surrounded highly capital-intensive efforts to build a global physical internet transport infrastructure.  Names like Global Crossing and Worldcom come to mind.

Yes, too much physical capacity did get built back then, and some builders were highly financially leveraged.  But also dense wave division multiplexing, a technological breakthrough in technique (basically, putting glorified prisms on each end of a cable), made it possible for each fiber optic strand to carry 2x, 4x, 8x, 16x ( in 2015 the number is 240x)…  more traffic than initially anticipated.  Thanks to DWDM, suddenly, despite the rapid growth of internet traffic, an acute shortage of signal transport capacity turned to mind-boggling glut.  The transport industry was facing collapse as customers played a ton of potential suppliers against each other for lower prices.  Naturally, new construction–and related orders for all sorts of high-and low-tech components, dried up completely.   So did investment, employment in civil engineering   …and the stocks.

In today’s software world, there’s no equivalent, other than perhaps the market for software engineers.  And there are no signs I can see of recession in this arena.  Quite the opposite.