(Bloomberg) — The money that SoftBank Group Corp. stands to reap from selling Arm Ltd. has climbed by more than $10 billion since the deal was forged last year, giving the Japanese company extra motivation to press ahead with the transaction despite growing regulatory opposition.
When Nvidia Corp. first agreed to buy Arm from SoftBank last September for about $40 billion, the deal already promised to set a record as the biggest chip-industry takeover. An increase in the value of Nvidia stock — the main component of the sale price — has since sent the potential payday for SoftBank above $50 billion.
That’s the good news. The bad news is SoftBank is facing longer odds that it can actually complete the deal. It has to get the transaction past regulators in the U.K., where Arm is based, as well as the European Union, the U.S. and China. It may be difficult to satisfy everyone, which could force SoftBank to pursue a Plan B: an initial public offering of Arm that wouldn’t be as lucrative.
“A lot could go wrong,” Kirk Boodry, an analyst at Redex Research, said in a research note.
SoftBank acquired Arm in 2016 for $31 billion, meaning it would get a return of about 60% if the Nvidia sale is approved at current levels. The Japanese conglomerate has been offloading some of its sprawling assets and has discussed becoming a slimmed-down private company by buying out its public investors.
In Arm, SoftBank has a three-decade-old chip designer whose technology is found in almost all smartphones, including Apple Inc.’s iPhone, as well as factory equipment and cars. The pervasiveness of that technology is one reason the Nvidia purchase faces so much scrutiny.
Last week, Bloomberg reported that the U.K. is considering blocking the takeover due to potential national-security risks. The U.K. is currently inclined to reject the deal, a person familiar with government discussions said.
It’s unclear how Arm’s change from Japanese to American ownership would affect U.K. national security. But there are broader concerns about Arm’s ability to stay neutral if it’s acquired by Nvidia, which is based in Santa Clara, California.
Arm sells its chip designs to many of the world’s biggest technology companies, without playing favorites. Having SoftBank as a parent company didn’t significantly change that situation, but Nvidia — a chipmaker known for its 3D graphics processors — could present more conflicts of interest. Some of Nvidia’s rivals have said they would be ready to invest in Arm to help it continue independently. Others have publicly opposed the deal.
Chinese regulators, meanwhile, view the transaction through their own lens. They may consider things like their own “national economic policy or U.S.-China relations,” Boodry said.
“Chinese regulators have become much more proactive in shaping the economy/industry as they would like to see it,” he said.
While Arm wasn’t mentioned on SoftBank’s earnings call Tuesday, the Chinese regulatory environment dominated the conversation. SoftBank founder Masayoshi Son said he’s slowing his company’s investments in China as he waits to see how a crackdown on tech companies there plays out.
But the soaring value of Nvidia’s stock will make it hard for SoftBank to give up on the Arm deal. Nvidia ranks third among gainers this year on the Philadelphia Stock Exchange Semiconductor Index, or SOX, with a surge of 53%.
If SoftBank fails to get the transaction cleared, its options are less attractive. A potential IPO of the business — something it’s previously considered — would face difficult comparisons.
Chip companies with similar revenue — MKS Instruments Inc., with $2.69 billion, and Entegris Inc., with $2.08 billion — have market values far below $50 billion. Entegris has a market capitalization of $16.3 billion, and MKS is worth $8.4 billion.
In the latest quarter, Arm reported a 57% gain in revenue to $675 million and posted its first profit since 2017. Over the past 12 months, its sales have amounted to about $2.2 billion.
On average, members of the SOX are trading at eight times their revenue over the previous 12 months. Based on that, Arm is worth just $17.5 billion. Nvidia is currently trading at almost 26 times its trailing 12 months of sales, giving it the highest ratio on that index. The next highest is Monolithic Power Systems Inc. with a ratio of about 20 times revenue.
So if it goes the IPO route, SoftBank would have to convince public investors that Arm should be valued at similar levels as Nvidia — a stock that has climbed more than 1,200% in the past five years.
In other words, it may be a tough sell.
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