Advanced Computing in the Age of AI | Saturday, January 22, 2022

Nvidia Responds to Deepened UK Probe of Its Proposed $40B Arm Acquisition 

GPU-powerhouse Nvidia is continuing to try to keep its proposed acquisition of British chip IP vendor Arm Ltd. alive, despite continuing concerns from several governments around the world.

In its latest action, Nvidia filed a 29-page response to the U.K. government to point out a list of potential benefits of the proposed $40 billion deal. The Nvidia response followed a November 2021 action by the U.K. Competition and Markets Authority (CMA), which unveiled its intentions to conduct an in-depth, 24-week “Phase Two” investigation into the proposed merger. That investigation follows the CMA’s earlier Phase One investigation, which determined that more information was needed to review the matter fully.

The filing of the Nvidia response to the CMA was first reported by SeekingAlpha.  The Nvidia report was published by the CMA for public inspection after it was received from Nvidia.

The Nvidia filing argues that the CMA was wrong in ordering a Phase Two inquiry, saying that the facts of the case so far support Nvidia’s stance that the acquisition would be good for the chip marketplace and for Arm.

“The vision of Arm that the [CMA] decision describes – an entity that ignores its profit motive and has no competition – is a mirage,” Nvidia argues. “Arm is a private for-profit business at a crossroads. After acquiring Arm several years ago, SoftBank increased Arm’s headcount, hoping to spur long-term growth in several markets, including datacenter and personal computer, long dominated by Intel and x86. SoftBank’s investment phase has concluded, and one way or another, SoftBank intends to exit Arm.”

Before the Nvidia merger proposal came about, Arm had previously considered an IPO but rejected that course, Nvidia argued. “As a standalone business, Arm faces significant challenges to growth,” the Nvidia response said.

“Nvidia did not approach SoftBank to buy Arm,” the Nvidia filing continued. “Nvidia is a strong supporter of the x86 ecosystem and has developed accelerated computing platforms for x86 PCs and data centers throughout its history.” Instead, it was SoftBank that approached Nvidia about such an acquisition, the company said.

“The parties realized that Nvidia would be uniquely suited to help Arm create new IP and develop a world-class ecosystem that could stand as an alternative to x86, giving customers more choice and growing markets worldwide,” the filing continued.

The proposed transaction would “materially change Arm’s incentives and opportunities,” giving the merged companies “every incentive, and the ability, to dramatically increase investment in Arm R&D across the board, rather than facing the difficult choices of where to de-invest and face further customer and competitive pressures,” the Nvidia response said.

Nvidia also challenges another premise of the CMA’s Phase One report, which contends that the acquisition would foreclose competition in numerous downstream markets.

“The decision’s logic and conclusions are flawed,” Nvidia said in its response. “First, the decision ignores competition from Intel in every relevant market. Antitrust law preserves competition – it does not empower customers and competitors with veto rights over acquisitions.  The decision appears to lose sight of this fundamental principle, contending instead that if enough high-profile Arm customers object to the deal, the transaction must be anticompetitive and should be blocked. But even if some customers and competitors are unhappy with Arm’s plans, the transaction has no risk of foreclosing competition.”

The deal if approved could not have antitrust implications for Intel, which has been the dominant CPU supplier for over 30 years, Nvidia argued. “Downstream customers have several Intel options – Intel not only offers its own CPU designs, but now also licenses x86 IP for third parties to make their own custom CPU and SoC designs. The decision disparages Intel, AMD, and hundreds of RISC-V supporters as forever unable to compete with Arm. No industry observer can seriously contend that Intel, AMD, and Arm’s other competitors are so incapable that they cannot even compete with Arm.”

With or without the merger, Arm cannot damage competition, Nvidia argued.

“Deal opponents romanticize Arm’s past and either ignore or disparage Arm’s most powerful competition,” Nvidia continued. “But if Arm had market power, it would have sizable revenue growth and would be enormously profitable. Rejecting the prospect of any remedy, the [CMA] decision would not promote competition. Rather, it would prevent Arm from bringing competition into areas that have been long dominated by x86. The alternative outcome urged by deal opponents would result in a standalone, profit-maximizing business without any guarantees about licensing policy or investments. It would likely result in less investment in the U.K., less resources for Arm, less innovation, and less competition worldwide.”

In a written statement provided to EnterpriseAI, Nvidia said it submitted the response to the CMA to share more information about its intentions.

“Our Phase One submission explains that the transaction will help accelerate Arm and boost competition and innovation, including in the UK,” the statement said. “We continue to explain the transaction’s benefits and are working to address the regulators’ concerns in Phase Two.”

Spokespeople for the CMA and for the U.K.’s Secretary of State for Digital, Culture, Media and Sport could not be reached for comment about the Nvidia response today.

Nvidia’s now 15-month-long, $40 billion proposal to acquire chip IP vendor Arm has been hitting a string of potential regulatory roadblocks since October.

In December, the U.S. Federal Trade Commission (FTC) filed an administrative complaint on Dec. 2 to attempt to block the blockbuster transaction. The administrative complaint, which will be heard by an administrative law judge in August of 2022, alleges that if the merger is permitted it will give the companies “the means and incentive” to stifle innovative next-generation technologies, including those used to run data centers and driver-assistance systems in cars, according to the FTC’s filing.

The FTC’s administrative complaint followed related actions taken by regulatory agencies for the U.K. government and the European Commission (EC), including the U.K. government’s Phase Two investigation that was announced in November.

On Oct. 27, the EC unveiled its own “in-depth investigation” of the proposed merger proposal, saying it wants to look at whether the merger could stifle fair competition in the marketplace. An initial investigation phase by the EC determined that it needed more time to evaluate the proposed merger and its effects before it issues a final decision in the case.

All three agencies – the FTC, the UK’s CMA and the EC – say they are reviewing the proposed acquisition in more depth due to a variety of concerns, including how it could stifle competition, reduce innovation in the semiconductor industry and cause potential harm to national security.

The Nvidia merger proposal for Arm was announced in September 2020 and has been the subject of controversy as well as praise. Several major tech companies, including Google and Microsoft, have vocally opposed the deal, issuing repeated concerns about its negative effects on competition and pricing.

But in June of 2021, three other chip companies – Broadcom, Marvell and MediaTek – backed the acquisition and began publicly saying that they see the move as one that could ultimately benefit their own businesses.

The Nvidia acquisition of Arm was set up when Japanese technology investment company SoftBank, which bought Arm in July of 2016 in a $32.25 billion all-cash deal, chose to sell the company after hemorrhaging cash since the first quarter of 2020. SoftBank had been looking to sell off assets to raise money after the company’s earlier bets on the rise of connected devices failed to pay off. The company’s Vision Fund, its AI investment fund, suffered a $13 billion annual loss in its fiscal year ending in March 2020.

Acquiring Arm would solidify Nvidia’s standing as a major player in wireless and other markets as it makes steady inroads in enterprise data centers. The graphics leader has released a stream of ever-more powerful GPUs targeting machine learning and other AI workloads that now dominate corporate data centers.

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