The Arm IPO could be near after Softbank's plan to sell the UK's tech 'crown jewel' to Nvidia collapses. The microchip designer could be the hottest Initial Public Offering of 2022.
Arm has been a key player in computing since the days of PlayStation One and the Gameboy Colour. Its first Initial Public Offering on the London Stock Exchange in 1998 came five months before the founding of Alphabet, when only 29% of UK households owned a personal computer.
Arm IPO: What makes Arm special?
Arm doesn’t manufacture microchips. It designs them. And then it licences out these designs to other companies. For example, the flagship Apple M1 and Samsung Exynos 2200 chips are based on Arm chip architecture.
And it’s hard to overstate just how widespread the company’s designs are. Televisions, smartphones, drones, smart homes, smart cars, wearable tech, and electronic passports all use its technology— almost anyone who uses the internet is exposed to an Arm product every single day.
For context, the company boasts that ‘if the 200 billion Arm-based chips shipped by our partners over the past three decades had been produced at a rate of only one per second, the first would have rolled off (in) 4,300 BCE.’
And amid the ongoing global microchip crisis, Arm’s political, economic, and strategic importance has become more significant than ever.
Arm IPO: isn’t Nvidia buying Arm?
In September 2020, chipmaker Nvidia expressed its interest in buying out the ‘Switzerland’ of semiconductors. The move was met with immediate opposition from competitors Intel and AMD. Softbank was one thing. Nvidia is another. Arm’s chip architectures are used in 95% of smartphones worldwide and feature in products sold by companies ranging from Apple to Samsung to Google.
After finding ‘significant competition concerns’ during its initial investigations, the UK’s Competition and Markets Authority (CMA) began a full ‘phase 2’ probe into the proposed merger. European Commission Vice President Margrethe Vestager argued ‘the acquisition of Arm by Nvidia could lead to restricted or degraded access to Arm’s IP, with distortive effects in many markets.’
And US Federal Trade Commission’s (FTC) Holly Vedova vowed to stop the ‘largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies.' The FTC sued Nvidia over the proposed ‘illegal vertical merger’ arguing it would allow ‘the combined firm to unfairly undermine Nvidia’s rivals.’
By comparison, Microsoft's controversial proposal to acquire Activision Blizzard is regulatory chicken feed. The deal had been worth $40 billion when it was first announced but had ballooned to $75 billion as Nvidia soared.
On Tuesday, the proposed takeover collapsed. The companies blamed the ‘significant regulatory challenges preventing the consummation of the transaction.’ CEO Simon Segars is now being replaced by the company’s head of intellectual property, Rene Haas, who had previously worked at Nvidia for seven years. Softbank CEO Masayoshi Son believes him to be ‘the right leader to accelerate Arm’s growth as the company looks to re-enter the public markets.’
In hindsight, history was not on Nvidia’s side. In 2018, Qualcomm was forced to abandon its $44 billion two-year attempt to buy NXP Semiconductors after failing to secure Chinese regulatory approval. Former US President Trump also blocked Broadcom's acquisition of Qualcomm in the same year. And last week, German regulators failed to approve a $5 billion deal between Taiwan GlobalWafers and German chip supplier Siltronic.
Arm IPO: a spanner in the works
Nvidia CEO Jensen Huang still expects ‘Arm to be the most important (CPU) architecture of the next decade.’ But while Son wants to launch ‘plan B’ during the next financial year, he faces a hurdle and a choice.
Before Softbank can launch a new IPO for Arm ,it will have to resolve an internal dispute with the head of its joint Chinese venture, Allen Wu. While the Arm China board voted to remove him in 2020, he refused to stand down and retains control due to his legal rights. Wu has launched legal action against Arm China, with a view to reappointment to the board.
Arm holds a 47% stake in the joint venture, and it contributes to a fifth of global sales. Worryingly, CFO Inder Singh has confirmed that he is currently unable to audit the venture’s accounts. He makes clear that it’s ‘important for us to make sure that we have certain rights that will be important for our financials (and) one of those will be the continuing right to audit revenues.’
Where will Arm shares list?
But Son’s choice is arguably more interesting. With a $23 billion fortune, he is Japan’s second-wealthiest person. But he also lost $70 billion in the dot-com crash, perhaps the largest personal loss in history. And on Tuesday, Softbank reported a 97% drop in quarterly profits, as the tech sector continues to sag. Having decided to launch an IPO, the question of where to launch is yet to be decided.
On Tuesday, he told reporters ‘The NASDAQ stock exchange in the US, which is at the centre of global high tech, would be most suitable for a listing.’ However, UK Business Secretary Kwasi Kwarteng has publicly stated he would ‘welcome a listing in London for Arm.' Only last year, market rules were reformed to attract tech IPOs by allowing dual-class share structures and reducing the number of shares required to be offered to the public to 10%. Extra concessions are not unimaginable.
But Janus Henderson’s Richard Clode thinks that US-listed semiconductor stocks such as AMD, Intel and Nvidia have been on a ‘tremendous run.’ Nvidia is now the seventh most valuable company in the US. And Clode argues that ‘growth semiconductors in the US now enjoy valuations well ahead of similar growth semiconductor franchises in Europe or Asia.’
And Apple alone is worth more than the entire UK index. Other NASDAQ companies like Microsoft, Amazon and Alphabet are all worth over $1 trillion. London-listed tech firms are minnows by comparison. And the NASDAQ hosted 753 IPOs in 2021, raising $181 billion of capital. Rivian alone amassed $12 billion and was the largest US IPO since Alibaba in 2014.
The dual-listing compromise
However, Arm’s new CEO has spent most of the last eight years in Cambridge, and would likely favour a listing in London. And it’s also worth noting that Son had his fingers burnt in 2019 during his first attempts to list WeWork in the US.
Arm co-founder Hermann Hauser called the company’s original sale to Softbank a ‘very bad day.’ Now he questions whether ‘London has a deep enough market to get an IPO of that size away.’ He does point out that ‘Arm of course had a dual listing in London and in New York before it was bought by SoftBank. And that's really my hope: If we can't get a London listing, at least a dual listing between London and Nasdaq.’ And cementing his comments, the Mail on Sunday has quoted a government source saying, ‘if it gets listed in the US, it will get listed in the UK.’
Arm’s spokesman has said it is ‘considering all options.’ Son could even choose to list in Tokyo or Hong Kong. But a dual-listing would raise the value of Arm shares. This could somewhat compensate for Softbank’s perceived loss; at one point the Nvidia deal valued it at $80 billion, while analysts now expect an IPO to raise between $30 and $40 billion.
And NewStreet Research analyst Pierre Ferragu thinks the company’s ‘near monopoly’ over parts of the market means that its revenue can grow in the mid-teens range every year for the next five years.’ Already, Softbank has reported that Arm’s net sales rose 40% year-over-year to $2 billion in the nine months to December.
Whether in the UK, the US, or elsewhere, the Arm IPO could be the trading event of the next financial year.
How to trade the Arm IPO with IG
If Arm launches in the UK, we’ll offer Arm shares right away on the day they list. You can:
Invest and own Arm shares by going short and long with spread bets, CFDs and share dealing on 16,000+ shares with the UK’s No.1 platform.* Learn more about trading shares with us, or open an account to get started today.
If it's a US IPO, it may take a few hours for the shares to be available to trade (as with all US listings for all brokers). We'll offer investing in ARM shares from £0 commission if you've traded 3+ times in the previous calendar month. Our standard rate is £10.
If you'd rather trade the stock with derivatives, you can do so commission and tax-free with spread bets, or for $15 commission with CFDs. Just bear in mind that spread betting and CFD trading is leveraged - this means that you'll only need a fraction of the total trade size to open your position, but your profit and loss will be based on the full position size. This means you could stand to gain or lose money much faster than you'd expect.
* Best trading platform as awarded at the ADVFN International Financial Awards 2021