SoftBank’s Stakes Magnified as Arm’s IPO Runs into Troubles

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The upcoming initial public offering (IPO) of chip design company Arm holds immense significance for other tech firms aspiring to go public. As there have been few public offerings since the beginning of 2022, Arm’s IPO, expected as early as September, will serve as a barometer for the market’s renewed interest in the tech sector this year.

However, Arm’s owner, SoftBank, faces the challenge of obtaining the premium valuation necessary to improve its own reputation as a tech investor, which has been battered in recent times. Taking Arm public comes at a time when the chip company’s primary market is no longer experiencing significant growth, its business model is in transition, and it is entangled in a legal dispute with one of its major customers.

The chip sector, like much of the tech industry, is also undergoing a shift in valuation as investors strive to identify companies that will benefit from the anticipated generative AI boom and those that may be left behind. Each of these issues would complicate an IPO, but when combined, they make for an especially challenging share sale.

SoftBank is actively seeking deep-pocketed anchor investors to establish a firm foundation for the offering price. While discussions with Amazon for a stake in Arm have been reported, SoftBank has also been approaching Arm’s customers, who rely on its technology in their own chip designs.

Arm’s difficulties stem from the maturing smartphone market, where its designs for low-power processors are considered the standard. Apart from a few successes in data centers and automobiles, SoftBank’s hopes of expanding Arm’s technology into new markets have not materialized, leading to an 11% decline in revenue in the last quarter due to weak smartphone demand. This is not an ideal situation just prior to an IPO.

Arm primarily focuses on designing CPUs, which are general-purpose chips used in various tasks performed by devices like smartphones. As a result, Arm plays a peripheral role in the AI boom. The substantial data processing requirements of machine learning have led to increased sales of GPUs and networking chips that can accelerate data processing and transfer. Chips utilizing Arm’s technology only have a secondary role in managing these functions.

SoftBank has already learned the costly lesson of missing out on hot chip investing trends. Six years ago, it acquired $3 billion worth of shares in the AI market leader, Nvidia. If SoftBank had held onto these shares instead of selling them for short-term profits, they would now be valued at $50 billion – potentially exceeding the total value of Arm’s IPO.

Moreover, Arm’s business model is at a crossroads. Arm generated an average of 9 cents in revenue for each of the 30 billion computing devices containing its technology shipped last year. To capture a larger share of the market, Arm has proposed charging device manufacturers directly in addition to its licensing fees and royalties from chipmakers. However, as the IPO approaches, there are no indications of whether this plan will succeed.

Simultaneously, the company faces pressure as some customers begin undertaking more of the chip creation process using Arm’s designs. In addition to selling technology blueprints, Arm also offers computing “cores,” which are the foundational components of chips.

For instance, Apple now designs its own cores, reducing the need to pay Arm solely for an architectural license. Qualcomm, one of Arm’s major customers, is following a similar path after acquiring Nuvia, a startup that designs its own chips based on Arm technology.

Estimates suggest that opting for just an architectural license could reduce a customer’s expenses by half. The threat is amplified by Arm’s heavy reliance on a small number of prominent customers.

Arm’s decision to take Qualcomm to court illustrates the high stakes involved. In what appears to be a dispute over licensing fees, Arm filed a lawsuit arguing that Qualcomm’s Arm license does not permit the use of Nuvia technology, resulting in a countersuit.

All these factors contribute to the importance of SoftBank’s efforts to secure investment from Arm’s major customers. Aside from helping stabilize the price, such a move would provide powerful validation for Arm’s business during an uncertain time. However, despite weeks of reports regarding these discussions, there is currently no sign of a finalized agreement.

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