SoftBank to acquire UK’s Arm Holdings for £24.3bn
The Financial Times
By Arash Massoudi, James Fontanella-Khan, Richard Waters and Lauren Fedor
July 18, 2016
Purchase of chip designer is a big bet by Masayoshi Son on the internet of things
Japan’s SoftBank has agreed to acquire Arm Holdings, the UK’s pre-eminent technology company, for £24.3bn, in an enormous bet by the Japanese telecoms group that the smartphone chip designer will make it a leader in one of the next big markets, the “internet of things”.
The takeover of Cambridge-based Arm, which was founded 25 years ago and now employs 4,000 people, will be the largest acquisition of a European technology business.
SoftBank will pay £17 in cash for each share in Arm, a 43 per cent premium to its closing price last week. Arm shares were trading at £16.93 at midday in London on Monday.
The deal, announced on Monday morning, comes just weeks after the UK voted to leave the EU, a decision that raised questions over the attractiveness of the country’s business community. But Arm, as a global force in chip design, is better insulated from the Brexit vote than many other UK companies by its leadership role in a key segment of the chip industry and the fact that it earns in US dollars.
Philip Hammond, the UK’s new chancellor of the exchequer, said SoftBank’s investment would be the largest ever from Asia into the UK. The deal would “guarantee to double the number of jobs in Arm in the UK over the next five years and turn this great British company into a global phenomenon”.
“Just three weeks after the referendum decision, it shows that Britain has lost none of its allure to international investors.”
SoftBank said on Monday it intends to create at least 1,500 new Arm jobs in the UK in the next five years, as well as increase hiring overseas. The company also said Arm would maintain its headquarters in Cambridge.
Masayoshi Son, the charismatic 58-year-old chairman of the Japanese group, had a call on Sunday with Theresa May, the UK prime minister, and Mr Hammond. This was followed up by a meeting with the chancellor on Monday morning.
“As I presented this morning, I told them about our plans to double employees, keep the headquarters in Cambridge and [our plans] to enhance the ecosystem of the UK. They said that was all good things. They said wow,” Mr Son said.
Mr Son told a press conference that Brexit did not affect the decision to buy Arm.
“I did not make the investment because of Brexit. The paradigm shift is the opportunity,” he said, referring to expected growth in the internet of things — interconnected gadgets and devices. “It will be a big opportunity for all of mankind and products used.”
After taking into account £1bn of cash held by Arm, the deal gives an enterprise value for the business of about £23.3bn. This is 24.4 times Arm’s 2015 revenues of £968.3m and approximately 56.8 times adjusted profit after tax of £428.9m.
The fall in sterling following the June 23 referendum has left the UK currency nearly 30 per cent lower against the Japanese yen over the past year, making Arm an attractive target. Since Brexit polling day, the yen has risen by about 11 per cent against the pound. However, this is offset by a 16.7 per cent rise in Arm shares since their Brexit polling day close.
Mr Son has built SoftBank into a sprawling global telecoms and media conglomerate worth $68bn and comprising holdings that range from a majority stake in Sprint, the fourth-largest US mobile carrier, to Yahoo Japan, the country’s most popular internet search engine.
With a fondness for big “crazy ideas”, Mr Son has been looking to deploy a huge war chest of cash he has accumulated from successful investments.
Some of his previous deals include a $20m investment in ecommerce company Alibaba in 2000 that is now worth $65bn, and the $15bn acquisition of Vodafone’s lossmaking Japanese arm in 2006 that has positioned SoftBank as the number three carrier in the market.
Over the past decade, SoftBank has participated in more than 140 deals worth about $82bn, according to Dealogic data. They range from buying small stakes worth a few million dollars in little known start-ups to multibillion-dollar investments in fast-growing companies such as Didi Chuxing, the Chinese ride-hailing mobile app and competitor to Uber.
The Arm deal comes only weeks after Mr Son abruptly parted ways with his chief dealmaker and heir apparent Nikesh Arora, a former Google executive.
Arm has often been talked about as a potential acquisition target for Intel, the world’s largest chipmaker, which failed to capitalise on the smartphone boom. Intel’s chip architecture, known as x86, was developed for PCs and has been ill-suited for battery-powered devices for which efficient power consumption is key.
The FTSE 100 company has also targeted one of Intel’s most successful businesses, in making chips for servers.
Arm’s technology was originally developed in the 1980s at Acorn, a British computer maker. It was spun off into a separate company, with significant backing from Apple, and its technology was used in the first generation of mobile devices including Apple’s handheld Newton.
Arm’s business model has relied on licensing its technology to other hardware makers including Apple and Samsung Electronics, giving it a near-ubiquitous presence in mobile devices. It receives a small royalty for each device, relying on very large volumes.
Last year, 15bn chips based on its technology were shipped, nearly 3bn more than the year before. Nearly half of those were in mobile devices, though Arm is seeing faster growth in chips for networking equipment and the internet of things.
As purely a designer of chips rather a manufacturer, Arm’s intellectual property model leaves it with a high profit margin. However, its revenues of about £1bn last year made it a minnow by global chip standards. The purchase price is equivalent to 70 times its net income last year, and more than 50 times earnings before interest, taxes, depreciation and amortisation.
Hermann Hauser, Arm’s founder, described SoftBank’s proposed takeover of the company as one of the “sad and unintended consequences” of Brexit.
“The future of Arm could have been determined by the UK management team. Now it will be determined in Japan,” he told the FT.
Mr Son told the press conference that he only met Stuart Chambers, the chairman of Arm two weeks ago. He said all due diligence and the arrangement of the funding was done since.
The Raine Group, Robey Warshaw and Mizuho Securities are advising SoftBank on the deal. Arm is advised by Goldman, Lazard, UBS and Barclays.
SELECTED ACQUISITIONS BY SOFTBANK SINCE 2000
|2000||Alibaba||China||$20m (now owns 28%)|
|2006||Vodafone (Japanese arm)||Japan||$15bn|
|2012||Fukuoka Dome (baseball stadium)||Japan||$1.1bn|
|2013||Sprint Nextel||US||$22bn (77%)|
|2013||Supercell||Finland||$1.5bn (51 per cent***)|
|2015||Coupang||S Korea||$1bn (undisclosed)|
|2016||Didi Chuxing||China||Part of investment round totalling $4.5bn (18%)|
*Includes size of stakes if not 100 per cent. **Later purchase took its ownership in Brightstar to 100 per cent ***Does not include other investments