Quick take: Implications of ARM’s acquisition by Softbank
What happened?
— Japan’s Softbank Group has announced it is acquiring UK chip designer ARM Holdings in a $32B (£24.3B) all-cash deal;
— 1,700 pence per share, a 43% premium to Friday’s close;
— Friendly takeover.
What are the implications?
— At $32B, one of the largest tech acquisitions ever (Dell/EMC $67B, Arago/Broadcom $37B, Microsoft/LinkedIn $26.2B, Facebook/WhatsApp $22B, HP/Compaq $19B) — continuance of robust tech M&A market we’re seeing this year.
— At c. 18x CY17E revenues and 29x CY17E EBITDA, Softbank have paid a huge premium (41% premium to all-time high closing price of 1,205p, 72% premium to volume-weighted close of 998p of last 6m). Positive data point regarding continued tech M&A appetite and good support for robust M&A valuation trends we’ve seen YTD. 10% recent weakening of Sterling will have assisted Softbank and reduced effective cost.
— Potential for a bidding war for ARM between Softbank, Apple and Samsung? High premium offered may prove a successful effort to avoid this.
— A bet on IoT is the stated rationale, as low-power chips are embedded in a broader range of industrial and consumer devices. SoftBank CEO has a particular IoT/AI/robot vision of the future for the IT industry, and acquired Sensinode (Finland-based IoT software play) in 2013. Pragmatically, before the acquisition was announced the majority of ARM’s growth was at least expected to come from non-mobile — embedded, networking, server and other.
— A welcome “post-Brexit vote, the UK is attractive to investors” message. While Theresa May struck a cautious note about foreign takeovers of UK companies in her pre-PM hustings speech, the deal is not subject to anti-trust or regulatory conditions and, more broadly, the move will be welcomed politically. (Alternative take — that core UK assets are being acquired cheaply by overseas investors given the 10%+ fall in Sterling — is, in my view, rebutted by the premium Softbank paid well above this).
— Intention to double ARM’s UK jobs, and increase R&D investment (which is tough to do as a public company) good for UK workforce and broader innovation.
— SoftBank intends to keep ARM independent, maintain ARM’s partnership model, maintain management and Cambridge base, and double number of UK ARM jobs over next 5 years.
ARM primer — IP-led, diversifying into non-mobile
— Designs energy-efficient chips that have powered the mobile revolution; 95% of smartphones sold worldwide in 2015 had ARM tech; 30% of all chips sold worldwide in 2015 that had processors.
— ARM IP is used by customers in return for recurring long-term royalty revenues.
— Analysts predict ARM 2017E revenue of c. £1.30B-£1.35B and 2017E EBITDA c. £825m-£840m.
— Continued strong (15%+) growth expected in ARM royalty revenue, driven by increasing pricing and traction in non-mobile areas. ARM good at increasing value per device and creating new revenue streams.
— Benefited from weaker £ v $ and diversified revenue streams (embedded systems, network, server — versus smartphones and tablets) at a time of macro uncertainty.
— 4,064 employees globally
Softbank: an active conglomerate that takes big bets
— A telco and internet conglomerate that has invested substantially in early and later stage companies in Japan and the US.
— Tokyo-listed, £49B market cap, £66B revenue, £7.5B EBIT.
— Significant debt; to build firepower and pay down some debt, SoftBank recently sold $10B of shares in Alibaba and exited SuperCell for $7B.
— Softbank CEO regained control of SoftBank’s acquisition strategy after his successor resigned in June.
