Softbank and Arm Holdings (ARM)

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

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.