Arm Semiconductor - Who Gets The Prize?
Last week, we discussed the rather amusing situation created by BHP's efforts to leave one index for another and how and why stock indices are actually changing all the time and why this matters!
You can find it here if you missed it.
That particular narrative is sort of tragi-comic in the sense of the difficulty of BHP's position and the futility of a company trying to do something that, no matter how well intentioned, is going to bring them a lot of grief.
However, in an effort to stay positive and keep the good vibes flowing during a volatile week in the markets we wanted to write about a rather different and potentially lucrative scenario: the case of UK chip design company, Arm Ltd.
ARM is a cool company. The Cambridge founded-and-based chip designer is one of the few British (or European) companies that can claim an indisputable position globally and one with an impressive technological edge. For example, the company’s energy-efficient chip architectures are installed in 95% of the world’s smartphones and 95% of the chips designed in China.
There are just not many companies like it. Maybe only a handful and even fewer in Europe or the UK. Pension fund managers and investors will be more than just hopeful.
In this respect Arm is like a particularly unique and valuable jewel (or the Maltese Falcon if you remember that classic movie): something that is coveted by everyone and can't be really replicated or imitated and so has particular resonance for its users, tech aficionados everywhere, other competitive tech firms and also, of course, for its home country that is justifiably proud of its position, prominence and profits.
In other words, Arm is already worth a lot financially but it's also possibly worth a lot strategically and even symbolically.
This makes it both valuable and also possibly a very problematic asset. The Maltese Falcon famously spread violence and disloyalty among and around those who became obsessed over it.
This has meant that the news that Arm's current owner, SoftBank's recent decision to sell the company to American chip wunderkind Nvidia for $40 billion has garnered a lot of attention and also a lot of the wrong kind of political scrutiny.
Just about everyone is having their say but the biggest headline is that no fewer than four (!) regulatory bodies - in the US, the UK, Europe and China - are scrutinizing the sale.
This does not bode well for Nvidia (or Arm perhaps).
We won't bore our readers with how the regulatory cookie could crumble. The strong likelihood is that one or more of these authorities will decide that this proposed sale is anti-competitive, or will harm the strategic goals or national security of their state or perhaps all three.
Instead, let us look at a few other alternatives:
SoftBank could keep the company (unlikely it needs the cash).
SoftBank could find another suitor (possible but challenging for similar reasons).
SoftBank could IPO the company (intriguing).
But the most important question to ask might be: Where would and should Arm IPO?
UK investors (and UK politicians) would obviously prefer that Arm IPO's be on the main UK index: London's FTSE 100.
But IPO'ing is a competitive market and it is very likely that other indices, including especially the US-based NASDAQ will fight hard for the right to list the company on the public markets. A global chip giant is quite the prize and many investors - some of whom are constrained by their mandates or regulations - will want Arm to be something they can buy and invest in. Qualcomm, another chip giant, has said it would like to invest in Arm as well. One chip company would be buying shares in another chip money. It is all sort of weird!
Similar to the BHP struggle, in a highly technological and winner-take-all world, what index you choose and what index gains the dominant hard- and software players will far outperform the others.
The struggle has begun but it is by no means over. One takeaway is very clear: Indexing matters.
If Nvidia loses Arm its stock will likely sell off and if Nasdaq (or the FTSE 100) gains the company through an IPO (or other means - SPAC!?) investors will rush to buy it.
Where will Arm land?
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