SoftBank didn’t need a broken arm

Just because the failure of SoftBank Group Corp’s sale of Arm Ltd. to Nvidia Corp. seemed inevitable, it doesn’t mean the scuttled deal is any less painful. Executives at Nvidia, the most valuable US chip company, have started telling people that it doesn’t expect to close the $40 billion purchase announced in September 2020, Bloomberg News reported. SoftBank, which was betting on a windfall, is meanwhile starting to pave the way for listing the British semiconductor designer, according to the report.
Investors ought not be surprised. Regulators across the globe have sneered at the merger of Nvidia with Arm, the Cambridge-based architect of semiconductors used in almost every facet of the world economy.
Their skepticism centers on the quite-reasonable notion that an Nvidia-Arm merger would create a virtually-unstoppable powerhouse in an industry that has already gained international attention due to chip shortages. Arm designs the very core of processors made by Apple Inc., Qualcomm Inc. and Samsung Electronics Co., and for years its executives used that ubiquity as
a poison-pill argument against getting taken over by any of its clients.
Yet both Nvidia and SoftBank kept clinging to the belief that they could push this deal through.
Unknown a decade ago, Nvidia found a lucrative niche in its earliest days by entering the market for chips that process graphics in computers. From there it started selling to games consoles, before pivoting to even thirstier computing tasks such as artificial intelligence. The recent demand for AI and electric vehicles has boosted both sales and its market value.
That’s been a boon for SoftBank, too, because more than half the proceeds of its sale of Arm were to come in Nvidia stock. At $584 billion, Nvidia is now worth 92% more than when the deal was made. The share portion of the sale alone is valued at over $40 billion, plus as much as $17 billion in cash that was to go with it.
SoftBank really needs that money, and it won’t get nearly as much from an IPO. After taking Arm private for $31 billion in 2016, the Japanese conglomerate currently values the company at $24 billion. But with revenue of $2.5 billion per year, such a price tag still looks rich. While Nvidia itself trades at 24-times sales, it manages to attract such valuations because it’s on track to hit revenue growth of 60% for this fiscal year. Qualcomm, another possible comparison, is valued at around 5.7-times sales and the Philadelphia Stock
Exchange Semiconductor index averages closer to
7-times.
Whatever figure IPO investors settle on, SoftBank is going to miss out on the big cash prize it was hoping for, because not only will it get so much less, it also won’t be able to offload the entire company onto public markets. At best, it’ll be able to borrow money using its Arm holdings as collateral — a tactic it has often deployed with its large stake in Alibaba Group Holding Ltd.
And it needs that cash because the balance sheet is looking quite burdened.
But now investors have reason to fear the magic is gone, and they may be left wondering where the cash will come from to pay its debts.
—Bloomberg

A handful of winners for its Vision Fund have helped fill the coffers, yet it’s also had some notable failures, including troubled rental startup The We Co. (better known as WeWork). Not only did that debacle hurt the bottom line, it damaged SoftBank Chairman Masayoshi Son’s reputation as a master dealmaker. Pulling off the Arm sale, with a lucrative bag of Nvidia shares, was supposed to be the transaction that proved he’s still got the magic touch.
But now investors have reason to fear the magic is gone, and they may be left wondering where the cash will come from to pay its debts.

—Bloomberg