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20 July 2020

If Softbank puts ARM up for sale, who could realistically buy it?

As reported last week, ARM is one of the few jewels in Softbank’s crown which has not lost its luster in recent months. That has led to speculation that the Japanese operator and holding company will seek to monetize its favorite son with an initial public offering (IPO) or even a sale.

This speculation was intensified when ARM said it was transferring two IoT businesses to their own division within Softbank, to focus on its core business in processor IP. Several analysts took the view that it was actually hiving off low margin activities to boost its overall profitability and cashflow as a prelude to an IPO or sale, to help offset Softbank’s recent heavy losses on investments such as WeWork.

Softbank has been disposing of assets from its huge and diverse portfolio since March, when it acknowledged how hard its results had been hit by failures and mismanagement in some of its digital properties, combined with the pandemic. It aims to raise $41bn to spend on debt reduction and share buybacks and has already sold off part of its stake in the new T-Mobile USA. Selling ARM would enable it to surpass that target.

Rumors of acquisition are nothing new to ARM, although the $32bn Softbank deal, struck in 2016, came as a surprise, and lost the UK one of its few heavyweight hi-tech businesses. Prior to 2016, ARM was periodically linked to Qualcomm, Intel and others – and it is unsurprising that those chip giants are considered to be in the frame again.

But ARM is a tricky acquisition for two reasons. One has always been the same – its value lies in intellectual property, core designs and services that can be adopted by a wide range of chip designers, creating platforms of huge scale, as it did with its smartphone processor cores. Acquisition by an individual licensee, or even a company with a rival architecture like Intel, would end that model. In 2010, in a previous phase of speculation about the future of the company, some analysts believed ARM might be acquired by a consortium of its key licensees.

The other, more recently important factor is the intensifying 5G trade war between China and the USA, which is embroiling technology companies in US allies such as Japan too. ARM is a major supplier to Huawei, despite having briefly severed ties when the USA placed the Chinese firm on its ‘entity list’ in April 2019, which could create challenges for a US acquirer. Of course, if Intel or Qualcomm bought ARM, they could stop working with Huawei, as Taiwan’s TSMC has already done under US pressure. But there would be the complexity of unravelling how intellectual property and other assets are divided between ARM and its arm’s-length ARM China operation.

Acquisition by either a US or Chinese company would, in the current climate, lead to prolonged approval processes, with either side concerned about its companies losing access to ARM’s IP. If Softbank does want to sell, and especially if it wants a quick sale, it would do better to turn to the investment community.