Arm Ltd. Decides To List In New York, Not London: Here Is Why And Why This Matters.
In truth, we were originally planning on writing on a different topic for this section but early on Friday it was announced that owner SoftBank was seeking to publicly list UK chip designer Arm Ltd. in New York rather than London.
This immediately changed our Friday plans and we were likely not alone....
This is because such a move would be a severe blow to the United Kingdom and especially their determination to be a hip, high tech, low regulation place that would be attractive to the likes of Arm Ltd. It also further reinforced the idea that London's status as a premier finance destination and city of commerce has deteriorated. It added further fuel to a fire of decline that was likely begun during the Great Financial Crisis and hugely accelerated by Brexit and the political turmoil ever since.
As a result, it likely caused both consternation in the British government and London's (financial) City and launched a new round of lobbying SoftBank to rethink their plans. That effort will likely be accompanied by some serious grandstanding in the British press and Westminster's Parliament to keep the company's stock listing in its home country.
This gives us an opportunity to both revisit and refresh some of our previous arguments.
For new subscribers, we have written about Arm twice in the past:
The first time was to discuss where the company might end up if the then-proposed merger with US semiconductor wunderkind, Nvidia, fell through. We strongly suggested the US seemed most likely and made a broader point about why this matters for US and UK investors.
The second time centered on the debates in some countries, especially in Europe, about the value of the state owning stakes in certain strategic companies and why that had typically not been a good idea historically and why it would be worse now.
On the latter, we were able to introduce a great German term - Spezielaktie or state owned shares - and why and how they were not wise in the case of Arm or other technology companies. These are innovative firms and require as little state control or involvement as possible.
In many ways these arguments foreshadowed our 2023 posts about Protectionism......
More relevantly for today, we were trying to make two important points with these arguments that we can now repeat, once more, with feeling:
First, indexing matters!
Second, the drive to "protect" or "save" strategic assets is a very thorny one and there are often no obvious good paths to take.
You are either in favor of free enterprise or you are not. If you say one thing and do another you may never have the likes of Arm to list anyway.
However, we are getting ahead of ourselves, let us deal with each in turn:
On the first, we argued that it was very likely that Softbank would choose to list in the US for many obvious and rather tough-to-overcome reasons.
This would be disappointing for the United Kingdom and British savers and investors and it underlines a point not discussed enough:
Owning a cheap stock index is important for retail investors but even more important might be answering the question: which index?
We have previously discussed the virtue of Jack Bogle's passive indexing approach but what gets a little missed in his story is that he was making the case for buying a broad based American index.
Those indices and those underlying companies have had a fabulous 40+ years - on an absolute AND a relative basis. There have been brief periods of underperformance versus other developed markets but in general, regardless of whether you are American or not, owning US-based indices such as the S&P 500 has been a very good approach to investing.
This isn't necessarily the case elsewhere in the world, even in large and well run markets like London. As we argued above, the Bogle story is a very American tale. It is very unlikely he could have succeeded in another country, let alone been lionized in the way that he is for disrupting an entire industry and saving investors so much money.
We will save the specific issues with the London stock market and the UK market for another time but the basic takeaway is very obvious:
The United Kingdom investor and stock market is losing an iconic company and the US is gaining one. That is great for the US but it will sort of be lost in what is already a very rich and very diverse capital market and publicly traded stock ecosystem.
This leaves us with an uncomfortable fact: most passive American investors won't notice or care about Arm's listing but British ones should and will.
And that is the first critical lesson to remember:
There is a power law distribution to where globally dynamic companies want to list. That means they want to cluster together rather than spread out evenly
So, once again, what index you own matter. Over the last two decades, the stock performance of the S&P 500 has easily eclipsed other markets.
On the second point, it is highly likely that the United Kingdom will do its best to fight to retain Arm somehow. We are hardly experts in the ins and outs of public stock listing let alone UK financial law but it is nonetheless very unlikely that they will succeed.
Nor should they. In fact, they might do far damage trying to reverse a mostly fait accompli.
The United Kingdom is supposedly in finally the midst of a rebrand and relaunch as a sort of low barrier to entry, open for business "Singapore-on-Thames" after the complicated and slow moving disaster that was Brexit and the last 7 (!) years of fun. Time flies....
How can they attract hyper fluid capital and companies when they are in the midst of interfering with the destiny of a company that they let be sold only a few years ago? What type of endorsement is that?
The irony is that they should have probably never let SoftBank buy Arm Ltd. in the first place but it is of course far too late for that now. To borrow a British expression, there is little point in crying over spilt milk.....
No, what the British should do is REMEMBER this unhappy little situation the next time they get cute with windfall taxes or taking state-owned stakes in "strategic" industries or playing with populism or many other tried-and-terrible strategies that we have collectively tried in the past and discovered that they don't work again and again.
That is the second crucial lesson to recall:
We borrowed from economist Tyler Cowen in our last piece to call our present time the "Great Forgetting" and we would repeat it here:
Life is hard enough without intentionally going back and trying out strategies and ideas that we have proven don't work.
Arm Ltd. will list in New York and the damage is largely already done. Almost regardless of that outcome, highly desirable UK technology companies will likely follow it, at least over the short term.
"Take that loss" as the kids say and remember it keenly as you try and launch the United Kingdom on a path to prosperity and economic dynamism once again. No one thought it would happen in the 1980s and yet it did so we know it is possible with the right conditions, the right policies, a little luck and no Great Forgetting and they can likely do it again.
We will be cheering for it and we will also be watching very keenly. The British stock exchange looks, as it did in the late 1970s, very cheap.
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