NVIDIA Strikes an ARMs Deal to Take All the Chips
If NVIDIA NVDA gets regulatory approval to buy privately-held Arm Holdings from Softbank Group, it will not only be the biggest semiconductor deal ever at $40 billion, it could be the most controversial and powerful.
In the video that accompanies this article, I go over as many of the details and nuances of that controversy as I can in 15 minutes. Which is not any easy feat since Arm has customers across dozens of technology industries and countries, and there are regulators on at least 3 continents who might have a say about the potential conflicts.
And therein lies the problem for NVIDIA's CEO Jensen Huang in pulling off this deal: Arm provides key design architectures for Apple AAPL, Qualcomm QCOM and Samsung among many other important players including Intel INTC, Advanced Micro Devices AMD, and Huawei.
While it doesn't concentrate power for NVIDIA since Arm offers Jensen & Co. access to new markets like mobile devices and CPUs for data centers, it might alarm many of its competitors just the same who don't want him having access to Arm's open-licensing IP model which has always emphasized customer neutrality.
Jensen was well aware before the deal was announced Monday that there would be objections like this. He and Arm management went out of their way to emphasize that NVIDIA would "continue ARM's open-licensing model and customer neutrality."
Here's what I wrote to my TAZR Trader group on Monday morning Sep 14, where we own NVDA shares...
According to a good Reuters story this morning by Stephen Nellis, Josh Horwitz, and Hyunjoo Jin, Nvidia's Arm deal sparks quick backlash in chip industry...
Arm has unparalleled reach as a supplier of designs and intellectual property to most of the global semiconductor industry, licensing its technology to customers such as Intel, Qualcomm, and Samsung. Arm’s open approach of licensing its designs to all comers has turned the 160 billion chips sold based on its technology into a huge ecosystem of devices from smart phones to smart toasters.
The obvious question goes from "who outside of NVIDIA and Softbank would actually benefit from this deal?" to "who wouldn't get impacted negatively by it?"
The Reuters story (linked above) describes immediate cries of opposition from Nvidia's chip industry rivals, with murmurs of objection emerging in South Korea and China within hours of the deal's announcement.
And the biggest surprise of all would be if the deal makes it past a gauntlet of regulators, including the UK (Arm's home base) and Europe as well as various Asian and US interests.
I'm a Believer: $40 billion is a great deal for NVIDIA!
While I was initially very skeptical last month when the rumors started flying around, now that I know much more about Arm Holdings, I really like the price tag that would allow Jensen Huang to expand his technology empire.
In fact, my first reaction Monday morning was "Why are they getting such a good deal when Softbank founder Masayoshi Son paid $32 billion to take Arm private four years ago and said at the time it was his most important acquisition, destined to be the crown jewel of Softbank's tech empire?"
Here's what I told my group that afternoon...
The $40 billion math: NVIDIA will pay $21.5 billion in stock and $12 billion in cash for Arm. SoftBank also may receive up to $5 billion in cash or stock if Arm hits certain financial-performance targets. Nvidia also will issue $1.5 billion in stock to Arm employees.
Under the deal, SoftBank will end up with an ownership stake in NVDA of just under 10%.
Another oddity of this deal I have not discussed is about Softbank founder Masayoshi Son, a Korean-descent Japanese billionaire tech entrepreneur who struck gold with his early investment in Alibaba and then got his $100 billion Vision Fund started with a big leg up from the Saudi crown prince.
Son purchased U.K. chip-designer Arm for $32 billion in 2016. And now he appears to be selling it far below its market value which I estimate to be north of $50 billion.
This the same guy who made lots of wild "new economy" bets in the past decade on everything from Uber to WeWork -- both of which he took big loss write-downs on this year.
And while he is rumored to be raising cash -- and trying to leverage stock market euphoria with huge call option purchases on Nasdaq leaders -- he now turns and sells Arm Holdings at a discount?
What exactly is going on here?
(a) Son knows something about growth obstacles for Arm that we don't
(b) Son is bleeding cash via debt/leverage and desperately took first deal he could
(c) Son is naive, afraid to go into the M&A deal market with anyone else but Jensen Huang
(d) Son has an important, influential, visionary relationship with Jensen Huang
(e) Son loves NVDA's bright future and will gladly take tens of millions of shares in the new company
In a nod to the cynical skeptics, NVIDIA publicly said it would "continue ARM's open-licensing model and customer neutrality." And on a conference call with investors, Nvidia CEO Jensen Huang said the combination "makes financial sense, and it’s a great deal for SoftBank and us."
I've always seen Son as visionary, but possibly business/market naive.
But from the choices above -- which ascend from (a) to (e) on a scale of cynical skepticism to rational vision -- I lean toward (d) and (e).
Son might be wacky, but Jensen isn't stupid. In other words, it would be a terrifically smart acquisition for NVIDIA.
And so that's why so many on the Street like this deal -- if Jensen can pull it off and they get past all the regulators across at least 3 continents.
The fact that Arm's technology goes into chips powering billions of devices shipping each year -- everything from smartphones to video cameras to hard drives to washing machines -- is obviously both good news and bad news for this deal.
Great for Jensen if it happens, but likely not to happen for how great it is. Here's what the "Sensei of AI" had to say...
“It’s a company with a reach that’s just unlike any company in the history of technology,” Nvidia CEO Jensen Huang said in an interview with Bloomberg. “We’re uniting Nvidia’s leading AI computing with Arm’s vast ecosystem.”
“AI is the most powerful technology force of our time and has launched a new wave of computing,” Huang said in a statement. “In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI."
When I hear Jensen say these words, my mind soars about the possibilities both as an investor and a philosopher of economic/technological/cultural change.
(end of TAZR commentary from Monday evening)
Be sure to watch the video with lots more details on Arm's key roles in chip design, how NVIDIA will leverage them, and analyst reactions to the potential deal, including where the $700 NVDA price targets come from.
I also share a bit of history about Cambridge, UK-based Arm's name and how it was altered at the behest of Apple many years ago.
Cooker's bottom line: Great potential deal for NVDA, even with a $40B price tag. But so many doubts about whether it closes that maybe the NVDA share price has more upside potential to $600 than $430 (+/- 15%) simply by virtue of the market validating their M&A power to innovate and dominate in ways that Intel, Qualcomm, and Samsung had not considered. In other words, they have the carte blanche to buy anything they want to take on the old goliaths.
Disclosure: I own NVDA shares for the Zacks TAZR Trader.
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