Advanced Computing in the Age of AI | Monday, May 23, 2022

Nvidia Reportedly Backing Away From its Proposed $40B Arm Acquisition 

For GPU-maker Nvidia, it was not supposed to end this way, with the company giving up on its grandiose plans to acquire chip IP vendor, Arm Ltd.

But after more than 18 months of prying eyes from government agencies from the U.K., the European Commission, the United States and China, it appears that the Arm deal is being severed, bringing an end to the company’s apparently unsuccessful efforts, according to a Jan. 25 report by Bloomberg. The proposed acquisition has been mired in controversy almost from the start due to concerns from government regulatory agencies around the world about the anti-competitive effects of the move.

“Nvidia Corp. is quietly preparing to abandon its purchase of Arm Ltd. from SoftBank Group Corp. after making little to no progress in winning approval for the $40 billion chip deal,” said the Bloomberg story, which cited unnamed sources who are familiar with the matter.

“Nvidia has told partners that it doesn’t expect the transaction to close, according to one person, who asked not to be identified because the discussions are private,” the story continued. “SoftBank, meanwhile, is stepping up preparations for an Arm initial public offering as an alternative to the Nvidia takeover, another person said.”

In a statement to EnterpriseAI, Robert Sherbin, the vice president of corporate communications for Nvidia, had no comment on the Bloomberg report. “We continue to hold the views expressed in detail in our latest regulatory filings – that this transaction provides an opportunity to accelerate Arm and boost competition and innovation,” wrote Sherbin.

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

And while the deal seemed great to Nvidia from its start, it hit a string of potential regulatory roadblocks since October. In December, the U.S. Federal Trade Commission (FTC) filed an administrative complaint to attempt to block the blockbuster transaction. In November, the U.K. government’s Phase Two investigation into the deal was announced, just after the European Commission unveiled its own “in-depth investigation” of the proposed merger proposal in October.

The Nvidia acquisition of Arm came about 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 was 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.

Nvidia thought that acquiring Arm would solidify its standing as a major player in wireless and other markets as it made steady inroads in enterprise data centers. The graphics leader continues to release a stream of ever-more powerful GPUs targeting machine learning and other AI workloads that now dominate corporate data centers.

Potential Scuttling of Deal Not a Surprise: Analysts

If the Bloomberg report is correct about the pending death of the acquisition deal, it will not be a shock, according to several IT analysts who spoke with EnterpriseAI.

Jack Gold, analyst

“When you are facing hurricane-force headwinds, it is probably not a good idea to keep going,” said Jack E. Gold, the president and principal analyst at J. Gold Associates, LLC. “There were just too many obstacles for Nvidia to overcome to make this deal palatable to many agencies and countries. They tried hard to get the deal done, but in the end, there were just too many issues that could not be solved.”

And though Nvidia appears to be giving up on this deal, said Gold, the company will certainly continue to pursue other acquisitions in the future despite this setback. “They certainly have the resources to make more strategic deals and I am sure we will see some others come along. I just do not think they will be of the magnitude of trying to acquire Arm.”

What Nvidia could pursue later is a side deal with Arm to incorporate some of the Nvidia technology in Arm IP, said Gold. “I suspect that Arm will likely not be acquired but will probably take the going the public route instead. That way Softbank can divest and still get a return on their investment. It is possible that some other large company – not a direct chip competitor – could come along and try to acquire them, but after this, I do not think many semiconductor companies would be interested in re-trying the acquisition of Arm.”

Charles King, principal analyst with Pund-IT, said that “if the Bloomberg story is correct, it is likely that the two companies will retain the relationship they had prior to the acquisition effort – with Nvidia licensing Arm IP and designs to facilitate new product development.”

Charles King, analyst

King said that Nvidia’s reported decision to walk away from the deal “is the most sensible decision, no matter how painful the process.” It seems likely that Nvidia either determined that the deal would inevitably fail or that compromises regulators were demanding were unsustainable, he added.

“The current regulatory environment, especially in the U.S., is clearly different today than it was in 2020 when Nvidia and Softbank announced the acquisition,” said King. “I expect that other large-scale acquisitions in the tech industry, especially those that involve potential competitive conflicts, will be closely examined.”

For both Nvidia and SoftBank, the apparent end of the deal’s progress should not be seen as a failure, said King. “For its part, Nvidia made a solid effort that, while certainly ambitious, was aligned with the company's long-term strategy and well within its financial means. They knew that the deal was going to be highly complex and scrutinized. If they eventually walk away from it, both Nvidia and Softbank/Arm know they gave it their best shot. There is no shame in that.”

Deal Was “Red-Flagged” From the Beginning

Another analyst, Rob Enderle of Enderle Group, said the deal was endangered from the start because of the regulatory issues that it exposed.

“A sizeable dominant company doing a merger like this would have been red-flagged internationally like this one was,” said Enderle. “They needed to get through regulatory approvals quickly to get this done, so it failed because they did not do so.”

Rob Enderle, analyst

In the end, though, “Nvidia may be better off because this would have put a long-term magnifying glass on the company,” said Enderle. “As the deal aged, the related regulatory restrictions only increased, and it is unlikely the merged company would have been functional when done.”

Even without the acquisition, Nvidia “can likely get almost everything they wanted from Arm through licensing and partnering without restriction, given that is Arm’s business model,” said Enderle. “In addition, this attempt soured the well for any other sizeable acquiring company like Apple, forcing Arm down an IPO path to raise money and allowing the firm to remain independent for the foreseeable future.”

Essentially, that means that “Nvidia’s attempt had the benefit of assuring that Arm would not go to a competitor or hostile vendor (Qualcomm or Apple) while still allowing Nvidia to gain access to the IP and resources through licensing that they otherwise would have lost due to the failed merger,” said Enderle. “In a way, Nvidia is getting the vast majority of the benefit now while avoiding the vast majority of the cost.”

In addition, he said, “doing the deal now would be worse than not doing it due to the anticipated restrictions that would be imposed.”

What the merger attempt did for Nvidia is that it “flagged” the company with regulators as a sizeable, dominant company that needs to now be watched, said Enderle. “Facebook (and Google/Apple/Amazon) scared regulators worldwide about their power. A lack of ethical controls caused them to paint all large U.S. tech firms with the same lousy behavior, whether they behaved badly or not.”

That will likely have lasting effects, he said. “In effect, right now, large U.S. firms both domestically and internationally are guilty until proven innocent. Until that perception changes, large mergers will be increasingly challenging to accomplish, and even if accomplished, will likely fail due to regulatory restrictions.”

One Response to Nvidia Reportedly Backing Away From its Proposed $40B Arm Acquisition

  1. ARM needed this deal badly and an IPO valuation will be problematic. ARM is now facing competition from an army of competitors from the RISCV camp. They can only hope that the IPO valuation will be based on their legacy revenue stream since in the future, IP licensing will trend towards and order of magnitude lower than they currently are. The party is over and ARM knows it.

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