Summary
On July 18th, Japan’s Softbank Group Corp. (Softbank) announced a strategic agreement to buy ARM Holdings Ltd. (ARM). In a USD32 billion cash bid. The news of this bid has stirred many to speculate about the financial validity and the politics, but what could this mean for the processor industry and electronics overall? IHS takes a look at this question.
Outlook and Analysis
Softbank originated as a software distributor in 1981 and quickly expanded to include PC- and software-media publishing. The company expanded as a securities investment firm in 1994 and continued investing in securities and technology media outlets. Since the turn of the century, Softbank has grown primarily by acquiring and growing communications companies in mobile and broadband markets, which helped insulate the Softbank from the sluggish PC market in the last decade, thanks to a prescient view of the growth in mobile technologies. With mobile handsets beginning to enter market saturation in many mature economies, the internet of things (IoT) has become the next great disruptive technology. Softbank’s investment in ARM might not only be paid back by further growth in ARM, but also help protect the company’s other investments and drive future investment strategies.
Softbank’s vision includes “contribut[ing] to people’s happiness through the Information Revolution.” So despite surprise by many that Softbank would be interested in a semiconductor technology, it is both within their vision -- and a really valuable resource -- for their business model, as they ride the wave of PCs and software, to mobile technologies and IoT.
The cost is steep for Softbank, representing its largest investment yet, but while ARM annual revenues for 2015 were just short of USD1.5 billion, the company represents a crucial piece of technology that is in virtually all of the technology markets guiding the “Information revolution” at the core of Softbank’s vision. ARM is in almost every mobile handset on the current market and microcontrollers based on ARM core technology lead the market, with approximately 24 percent of all revenues going to microcontroller (MCU) suppliers for MCUs based on ARM core technologies in 2015. ARM also announced last year their intention to be in 45 percent of servers by 2020 - an aggressive but significant sign of ARMs strategies for its system-on-chip (SoC) platforms for cloud computing growth.
ARM is also a significant stakeholder in the graphics processor market. Many disruptive technologies will literally have a graphics solution at their core. Applications for advanced driver assistance, augmented and virtual realities, robotics and similar embedded-vision technologies will be extremely competitive markets for graphics processor cores, such as ARM Mali. Also, current software developments could easily push these cores into other fields. including natural speaking interpreters, deep learning and related applications. This is a very competitive field with many stakeholders including large processor vendors such as Qualcomm, NVIDIA and IP suppliers like Imagination Technologies competing for these sockets.
Finally, ARM has not simply been riding the wave of their processor core success, the company has recently invested in furthering their IoT strategies. Examples of this vision include the acquisition of Sensinode in 2013, a software company specializing in IoT connectivity technologies; Sunrise Micro Devices in 2015, a developer of silicon internet-protocol (IP) core technologies for IoT connectivity; Apical in 2016, a specialist in embedded-vision and embedded-imaging technologies for processing images at the camera, a typical strategy supporting graphics in IoT applications. It is this symmetry between ARM’s vision, and that of Softbank, which might have been the tipping point for Softbank to take notice. Given the current potential growth markets, other communications market players -- both in and outside of semiconductors -- could also take notice.
Players who will be concerned
While Softbank is interested in ARM, they are not the only players in the market who have a vested interest in the company. Some of the largest semiconductor suppliers in the world have a significant stake in the future of ARM. Apple, Broadcom, Qualcomm and even Japan’s own Renesas Electronics, Socionext and Toshiba are just a few of the dozens of large processor designers that have a strategic interest in what happens to the company. Some might envision these tech giants attempting to outbid Softbank, in order to protect their own interests, but this is outcome is unlikely: ARM’s critical stake in mobile technologies and IoT has been clear to these stakeholder’s for decades now. An attempt by any one of them to control ARM could easily lead to a tremendous upheaval in the semiconductor industry. The vendors that are ARM’s current primary customer base would quickly take offense to a competitor attempting to take control of their primary core supplier. It could lead to bidding wars and reversal of market strategies regarding core technology investments. ARM is not the only core technology provider on the market. Imagination Technologies, provider of MIPS-based system on chip (SoC), MCU and Imagination’s own PowerVR graphics could easily experience a drastic increase in client base, if ARM were owned by a semiconductor supplier. Many processor vendors could also move to make proprietary core solutions of their own. As concerned as these companies might be about a communications conglomerate taking control of ARM, the risk involved for these suppliers seems much too high for such a bidding war.
Softbank should be more concerned with other ARM clients seeing Softbank as a competitor. Specifically, Huawei, Xiaomi and other mobile technologies vendors in China might not like the idea of Softbank holding such a critical supply chain component. If a bidding war were to ensue, it would not from a semiconductor supplier. It is much more likely to come from another communications company or pure holding company with a significant strategy for communications and IoT investment.
Politics
The purchase appears to be an opportune buy for Softbank, with Brexit raising the value of the yen compared to the British pound. Softbank’s Chief Executive Officer, Masayoshi Son, advised that this move has been under consideration for some time, the decision to move forward happened only a couple of weeks ago, which coincides with the effect of Brexit on monetary conversion rates. While the U.K. has historically been opposed to international takeovers, the economic effects of Brexit may be weighing heavily on that strategy at this time. It seems that in order to smooth the approval process, Son contacted the new British Prime Minister, Theresa May, before the announcement, and Softbank’s announced strategy to double the workforce of ARM in the U.K. over five years is a likely outcome of that conversation. However, it is unclear whether the workforce increase will result in new jobs for ARM or redistribution from other regions. It is likely to be more of the former and a little of the latter. Regardless, it is unlikely that the acquisition will experience enough political opposition to disrupt the deal.
Conclusion
Overall, this acquisition is likely to mean not much will change for most of the semiconductor industry. Of course, some large financial institutions and communications giants could now be struggling through spreadsheets, to determine the likelihood of a bidding war; but for most semiconductor suppliers, it will remain mostly business as usual. Even so, if Monday morning’s double-digit jump in the shares of Imagination Technologies is any sign, there are a lot of people worried that some downstream suppliers will begin to demand alternatives, especially in Eastern markets. While Imagination Technologies will probably benefit from the deal, the growth in 5G, IoT, embedded-vision markets and other disruptive technologies will generate plenty of room for core technology providers to post healthy growth in these markets.
