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Softbank Takes the 'Long View' with ARM
Japan's Softbank is planning to buy UK semiconductor architecture designer ARM for £24.3 billion (US $31 billion), representing a 43% premium on ARM's pre-announcement share price. If the deal goes ahead, it seems like a lot for a company, which although highly profitable, had just $1.5 billion sales and single-digit growth in 2015. What does Softbank see in strategic value to justify the price ticket?
ARM's Business Model
ARM does not make chips, but licenses its core processor architecture to other companies. The average fee is a little under $0.10 per chip, an affordable fee in the context of powerful, relatively expensive devices like smartphones, tablets and servers.
To date, over 90 billion products have been shipped with ARM-powered processors. The bulk of these have been mobile devices, where low energy consumption is most critical; 95% of the world's cellphones use at least one chip using an ARM core or IP, and most use several (signal processing, graphics, controllers etc).
In 2015, 15 billion chips were shipped with ARM cores, 32% of total processor shipments estimated at 47 billion units. However, as ARM does not actually sell chips, in revenue terms its licensing income represents well under 10% of a mobile applications processor market valued at $18 billion.
45% of ARM's 2015 usage was in mobile devices, but use of its low power architectures is spreading into non-portable areas as energy consumption becomes increasingly important e.g. network servers and data storage. As its market share increases in new areas, ARM's sales will outgrow the semiconductor market, indeed this week it is expected to report quarterly revenue up 20%.
Who Is Softbank?
Softbank is an investment holding group run by entrepreneurial Chief Executive Masayoshi Son, Japan's richest man, who has a history of placing bets on tech start-ups. His biggest success story is Alibaba, in which Softbank invested $20 million for a 32% stake in 2000. Alibaba has risen to become China's leading e-Commerce provider, valued at about $200 billion, netting Softbank over $60 billion. Currently, Softbank is selling its majority stake in Finnish gaming company Supercell (Clash of Clans) to China's Tencent, tripling its investment in three years.
From a business perspective, Softbank is focused on communications and internet services. Its domestic operating company has over 30 million wireless subscribers in Japan (Softbank bought out Vodafone Japan to add to its own J-Phone subscribers) and it owns 35.5% of Yahoo Japan, which provides Internet and advertising services. Softbank also owns 80% of Sprint, the #4 US mobile communications supplier, which it bought for $22 billion in 2013.
Does ARM Fit With Softbank?
Despite talk about a 'paradigm shift' at Softbank towards investment in the 'Internet of Things', it is difficult to see the strategic business fit between ARM and provision of mobile internet services. This synergy is also clearly lost on some Softbank shareholders who have criticised the deal and have seen a 10% fall in their stock value since the announcement. Softbank has over $100 billion debt load and there are also concerns that the ARM deal will over-extend the company.
From a financial point of view, ARM will not shift the needle in Softbank's $90 billion revenue, although it will make a useful profit contribution. So, it looks as though this investment is mainly based on an expectation of future growth in strategic value in ARM as it continues to expand its business, which means Softbank may have to stay in for the long haul.
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