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ARM: We’re Turning Japanese

This is what $32 billion gets you: Almost the whole world. UK-based ARM announced last night that it has agreed to be acquired by Tokyo-based SoftBank, a large holding company that owns many technology firms as well as some technical publications. It’s also the majority shareholder in U.S. celluar carrier Sprint. It’s fair to say that SoftBank’s holdings are wide-ranging. 

What does this mean for ARM, ARM’s employees, and ARM’s customers? 

Not much, really. Under the terms of the deal, SoftBank said many reassuring things. It will keep ARM’s headquarters in Cambridge, where it’s been since the very beginning; it will retain ARM’s management structure; and it will hire several thousand more employees in the UK. In fact, SoftBank committed to doubling ARM’s UK headcount, which is a remarkable commitment given that the company already employs over 3,000 people among its varous UK offices. It’s taken ARM almost 20 years to get to that headcount; SoftBank says it will double it in another five. No doubt the hiring guarantee will make the takeover more politically palatable. 

The terms of the deal were quite favorable to ARM. SoftBank is offering about USD $32 billion, all in cash, which is a generous 43% premium over ARM’s current stock price. It’s also a huge 50x to 70x P:E ratio (price to earnings), putting ARM into Facebook territory as far as market valuation and optimism goes. Clearly, SoftBank is quite bullish on ARM’s prospects. 

On the flip side, the UK Pound has steadily declined in value versus the Japanese Yen, making the price easier for SoftBank to swallow. Compared to a year ago, the ratio has slipped by about one-third as “Brexit” concerns have weighed on the UK economy. Thus, the 43% premium for ARM’s shares isn’t as painful for the Japanese company as it might have been. 

Even so, these negotiations have certainly been in the works for some time, and must have been agreed in principle before the outcome of the “Brexit” vote was known. The acquisition would have likely gone ahead regardless of the vote. The financial terms might have changed, but the deal likely would have gone forward either way.

I’ve participated in a few acquisitions, both as acquirer and as acquiree. Coincidentally, one of my employers was even acquired by SoftBank many years ago. I met Masayohi Son, the founder and CEO of SoftBank, and we spoke briefly about his plans and strategy. Even 15 years later, I remember him as a remarkable man (with very good English), who said that he liked to own “infrastructure.” He talked about the California Gold Rush and how it wasn’t the gold miners who got rich, but the people who supplied them: Levi Strauss and his blue jeans; Leland Stanford and Charles Crocker and their railroad, and so on. “Infrastructure,” he said, “is the most exciting kind of technology.” His acquisition of ARM would seem to fit right into that strategy. 

Once ARM is Japanese-owned, I wouldn’t expect much to change. In my experience, SoftBank doesn’t make big changes to the companies it acquires. Son-san prefers to simply skim some cash from his profitable ventures, not micro-manage them. His obligation to double the headcount in the UK is likely a political maneuver designed to ease government approval of the deal and to calm concerned employees. It’s hard to tell what ARM would do with another 3,000 or so new employees, but they’ve got five years to figure that out. Every employee who’s there today can look forward to having a new partner soon. 

Before last night’s deal was announced, there had been talk that another company might acquire ARM, perhaps Intel or Apple. Both possibilities made good strategic sense, but now those rumors can be put to rest. ARM is now out of reach — unless SoftBank chooses to resell its newest prize. That’s very unlikely, at least for the next five or ten years. 

SoftBank isn’t likely to exert any kind of technical pressure on ARM. The CPU architecture isn’t suddenly going to change, nor is the company’s business model about to be overturned. I would expect business as usual at ARM, and for its licensees and developers, for the foreseeable future. Only the financial reporting structure changes. For everyone else, it’s business as usual. 

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