tokyojoe

You have not given a single strategic imperative for the Nvidia acquisition. They have full access to the IP.

The real issue here is Nvidia are hugely overvalued thanks to the vagaries of the US tech stock market and the ‘irrational exuberance’ that surrounds it. Just a short while ago, Tesla was valued at over $800 billion, Apple has topped a trillion and now Nvidia on $16 billion sales at >$300 billion. As a result that have a while loymtvof stock value burning a hole in their pocket and are looking for something to buy. Unfortunately, ARM is in the frame.

When you make an acquisition, you have to ask whether it positions the combined business uniquely, will is cannibalise existing business (in this case almost certainly because ARM’s great appeal besides its IP and eco-system is that it is independent), will it move the stock price in the right direction, will it improve EBIT, what are the synergies etc etc. A typical M&A will invoke dozens of considerations like this.

More investment into ARM? They own the mobile phone space - Apple, Samsung and almost every other brand (many in China where I worked for a few years). They’ve seen off Microchip in the general purpose 32 bit uC space and dominate IoT applications, Bluetooth etc.

There’s nothing stopping Nvidia copying the existing ARM model right now. They don’t need to buy ARM to do that.

Nvidia stock price will moderate down (as will all semiconductor companies in the coming months as the chip shortages abate) and with it a more realistic valuation.

(What do I know? Been involved in a few M&A’s. ;) )

That’s exactly what it was - an opportunity to cash in. The other side of this coin is when you have supply shortages and/or a stock mkt run as we now have, some companies end up with huge mkt caps and are able to make purchases like this one. There is an argument that says it’s destructive in a bad way (not Schumpeter’s ‘creative destruction’) because ultimately it reduces competition and innovation.

Nvidia don’t need ARM in-house to be successful. They already are. They are overvalued and have a huge mkt cap and are looking to make an acquisition as a result. Ultimately, the stock market will decide what Nvidia does with ARM. The pressure to deliver Q on Q improvements is immense. And re slashing and burning, it happens all the time in semiconductors. When you make an M&A, the first thing you look for are cost reduction opportunities because that’s one of the P&L drivers which in turn drives stock price (supply shortages notwithstanding). As for synergies (the other big thing in an M&A) I just don’t see any. If ARM goes to Nvidia it will be a disaster for ARM. Herman Hauser, ARM’s founder (now retired) has said as much. He was very unhappy about the SoftBank deal as well.

ARM is used across a huge array of end market segments. Granted, none are as big as mobile, but they’re important nonetheless. To say that all ARM SoC vendors are competitors is therefore not strictly true.

This reminds of the analyst who predicted AMD’s acquisition of ATI would kill off Intel. Nothing of the sort happened.

If a chip supplier like Nvidia buys ARM and uses its products, it will ultimately have an outsize say over ARM’s product (actually IP) roadmaps. That’s not going to make ARM’s current customers happy. Nvidia want to diversify- that’s why they’ve targeted ARM. They don’t need the technology- it’s readily available to licence.

Arm is valued at $40 billion on c. $ 2 billion in annual sales while Nvidia is valued at > $300 billion on $ 16 billion in sales. With a valuation of 300 billion, why buy ARM and almost certainly damage the ARM business model which is as an independent processor IP provider?

And how will Huawei (and China), big ARM licensees, react to ARM being owned by a US company given the bad blood in that area.

For ARM, it’s a strategic disaster IMV. Better to stay independent!

Power consumption is a key application requirement for mobile. I don’t know that GPU’s are designed to run on the smell of an oil rag which the ARM processor cores do.

You’re talking about M&A (market consolidation) and I am talking about the supply and value chain. Two completely different things.

The supply/value chain is broken up into little chunks with specialists focusing on a narrow activity eg chip design or fabrication or assembly or test etc. There are a few specialists like AD and TI that are still vertically integrated to some extent eg design and fabs, but that’s because they have specialty analog processes for things like opamps , references and so forth. However, a lot of their assembly and test is sub contracted out. For digital devices and companies like ARM, very few still run fabs (semiconductor speak for ‘fabrication plant’) - they leave that to giant fab only companies like TSMC, UMC et al. How this works is the fabs run standard processes and companies design products to be produced using those processes - so by standardising, costs are reduced. A fab process takes 2-3 yrs and a few hundred million $ to develop. Samsung and Intel still have fabs doing predominantly digital, but they have the scale and heft to afford the $1-2 billion every 7 yrs to invest in new plants. There are few others though ( mainly in memory).

You might be right here.

Yeah. Looks like that. :)

The semiconductor supply chain is now almost completely disaggregated ie everyone specialises in just a small part of the value chain. ARM’s speciality is in CPU design and it has carved out for itself the enviable position of being the defacto standard for mobile applications - almost every single phone on the planet has ARM processor(s) running it. And their products are in dozens of other end applications segments as well. These chips are embedded in System on Chip IC’s and manufactured by third party companies like TSMC and UMC etc to end customer specifications, like Apple or Samsung for example.

The problem with the original SoftBank deal, and now the Nvidia deal, is that these companies will simply hollow ARM out (slash R&D, cut staff etc) to pump up the target’s value, before flogging it off or breaking it up. The stock market doesn’t value synergies, although it is quite happy to punt this aspect when M&A deals are in the offing. Given its strategic position as the defacto standard for mobile comms, that’s a serious threat.

ARM also gives the UK strategic leverage in any trade negotiations. Would we knowingly allow Rolls-Royce Jet Engines to be flogged off? No. Ditto ARM.

So, I think this is the right policy and hopefully the government will see fit to step into other deals like this and block them.

I’ve been through a PE acquisition. We were stripped bare and bits sold off before finally getting our mojo back. I benefited handsomely but we were not the company we were before and the job losses in the process were huge. It will be no different with Nvidia’s proposed take over of ARM.

(disclaimer: I was a semiconductor executive in a global MNC).