The Korea Herald


[Market Eye] Is Arm M&A still a pipe dream?

Semiconductor arms race likely to chip away at financial incentives as new consortium is building to propose UK chip design juggernaut takeover

By Son Ji-hyoung

Published : April 17, 2022 - 15:22

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From left: SK hynix Vice Chairman and CEO Park Jung-ho, SoftBank Chief Masayoshi Son and Intel CEO Pat Gelsinger (Photos courtesy of SK hynix, GettyImages and Reuters) From left: SK hynix Vice Chairman and CEO Park Jung-ho, SoftBank Chief Masayoshi Son and Intel CEO Pat Gelsinger (Photos courtesy of SK hynix, GettyImages and Reuters)
Antitrust hurdles brought down a $40 billion deal in February, which would have otherwise allowed graphic processor giant Nvidia to control United Kingdom-based chip design giant Arm.

A few months later, there are signs that a consortium of strategic investors is building, joined by South Korea-based memory chip maker SK hynix. The consortium is looking to salvage what was considered the largest deal in the history of the global chip industry.

All eyes are on whether the consortium would be able to alleviate regulatory concerns, promise huge spending on par with Nvidia’s proposal and at the same time find Arm financially appealing.

Experts say this is likely a pipe dream against the backdrop of an intensifying global semiconductor chip arms race.

Nationalistic pressure

As chips are becoming more and more scarce, the world is recognizing chips as national strategic assets.

So do companies like Arm, which designs most of the world’s processors for smartphones, autonomous cars and Internet of Things devices, among others.

This analysis has led to the UK competition authorities’ renewed scrutiny of the Arm deal in November, citing competition and national security concerns. The US Federal Trade Commission also filed a complaint challenging Nvidia’s Arm acquisition.

This scrutiny was similar to the “significant regulatory challenges preventing the consummation of the transaction” between SoftBank and Nvidia, as stated in the joint statement about the deal‘s termination in February.

A prospective consortium is unlikely to be a game-changer surrounding the Arm deal, experts said, given that there is little sign of relief in the tug-of-war between the world’s superpowers, especially in the wake of an apparent war between Ukraine and Russia.

“Nvidia’s talks centered around not only monopoly issues, but also national security issues. For the consortium, I don’t see that changing very much,” said Cameron Johnson, head of APAC strategy at advisory firm FAO Global.

This comes against the backdrop of the United States, China and Europe’s respective bids to increase chip production, encourage chip-related research or offer tax breaks to chip supply chain companies with new legislation. Here in Korea, the incoming Yoon Suk-yeol administration is poised to map out plans to provide more government subsidies for chip plant expansion, streamline regulatory processes for chip-related investment and bolster the recruitment of chip experts.

With that in mind, any consortium will inevitably face opposition from those excluded from the group acquiring Arm. The Arm acquisition requires regulatory approvals in the US, UK, the European Union and China.

“If you look at the names on the consortium, there is no Chinese name,” Johnson said. “It will still be incredibly challenging to get anything approved.”

A visual concept image of Arm's CPU (Arm) A visual concept image of Arm's CPU (Arm)

Money pit

Another point of concern raised by detractors of the Nvidia-SoftBank talks was a possible discriminatory client treatment of Arm -- such as modifying the level of product support, licensing fees and research and development specific to its competitors -- if controlled by a certain party or a group.

This would be a regulatory challenge for the consortium to overcome, but overcoming it would not sufficiently address the problem. Market watchers doubt whether the new investor group would find Arm financially attractive in its costly bet, while having Arm treat its competitors equally.

Ideally, a consortium should give all Arm’s clients -- those in and out of the consortium -- equal access to Arm’s chip-related intellectual property and at the same time have the financial commitment for Arm’s technology innovation readily available.

Nvidia had sought to quell concerns of opposing parties, with pledges to offer an open licensing program for Arm’s intellectual properties, expand its R&D and product roadmap, promote interoperability and protect any confidential customer information. A partnership proposal related to Nvidia’s data center business was also offered to Arm.

Arm has also been tasked with catching up with competitors’ chip architectures such as x86 by Intel and AMD with more intensive R&D spending. Arm’s latest UK regulatory filing showed that its R&D spending for the fiscal year ending March 2021 came to $886.2 million, up 24 percent from a year prior.

“Arm requires significant financial resources to continue innovation, but the investor may not reap the full benefits of these investments due to competitors having equal access to new technologies,” said Yang Wang, senior analyst at Counterpoint Research.

Moreover, the price tag on the company itself has grown larger. SoftBank hopes to float Arm shares in New York by March 2023, at reportedly a minimum $60 billion valuation, up 50 percent from what was proposed to Nvidia.

SoftBank, which has fully owned Arm in a $31 billion deal since 2016, appears to be inclined to Arm’s initial public offering -- a means to cash in on its investment and skirt antitrust hurdles.

“An IPO is the most logical way to allay regulatory concerns. A consortium takeover is still possible, but the deal will need to solve significant hurdles,” Yang noted.

Veteran dealmaker

Observers are also paying attention to whether dealmakers in the consortium could make a difference, in contrast to the Nvidia case.

SK hynix Chief Executive Officer Park Jung-ho has recently expressed interest in making a bid to join the consortium. Park is known to be a seasoned dealmaker behind many of SK Group’s purchases. They include SK hynix, security service firm ADT Caps, rebranded as SK Shieldus; Kioxia, formerly known as Toshiba’s memory chip operations; and Intel’s SSD and NAND operations, now branded as Solidigm.

Some of these deals have proven to be lucrative. SK hynix rose to become one of the top three memory chip powerhouses along with Samsung Electronics and Micron. SK is also looking to float SK Shieldus up to a 3.5 trillion won ($2.9 billion) valuation, after the group bought the company’s 100-percent equities and debt for nearly 3 trillion won jointly with financial investors including Macquarie.

Park also has the Solidigm deal under his belt, one of the world’s few chip-related deals that involved a regulatory green light from China. He is also aware of the consortium approach, as seen in the Kioxia deal involving a Bain Capital-led consortium.

Park’s hinting at an Arm acquisition reignited the prospects of Arm consortium talks, first suggested by US chip giant Intel’s Chief Executive Officer Pat Gelsinger in February.

Park told reporters in March immediately after the chipmaker’s shareholder meeting that forming a consortium with global partners to buy Arm could be a way to prevent “(allowing) a single entity to take full advantage of the benefit” from controlling Arm. His remarks followed a show of interest in visiting the US for consortium talks as early as April.

But experts say an Arm acquisition would be a totally different story, considering how consequential Arm is in the global tech industry.

“Arm holds enormous competitive sway over the tech industry, and the regulatory scrutiny is likely much more intense than the Kioxia deal,“ Yang said.

SK hynix said in a filing with the financial authorities here that it was reviewing strategic options including Arm co-investment, but no decisions have been made.