By Stu Woo in London, Rick Carew in Hong Kong, and Eva Dou in Beijing
The global semiconductor industry has a new Asian power player,
forged in a flurry of talks that took place over just two
weeks.
Japanese internet and telecommunications conglomerate SoftBank
Group Corp. caught the global chip industry by surprise Monday with
a $32 billion deal to acquire ARM Holdings PLC, the U.K.-based
designer of the microprocessors that power more than 95% of the
world's smartphones. It is SoftBank's largest-ever investment,
according to data from Dealogic.
SoftBank Chief Executive Masayoshi Son said the acquisition
marks a "paradigm shift" at the company to invest in the Internet
of Things, as he bets on demand for internet connectivity across
everyday devices as diverse as automobiles and refrigerators. Mr.
Son recently took back the reins of the company's investment
strategy from his former deputy and designated successor, Nikesh
Arora, who resigned in June.
Mr. Son also said the ARM deal reflects his confidence that the
fortunes of unprofitable U.S. wireless carrier Sprint Corp., which
SoftBank bought in 2013, were turning around. SoftBank has been
cutting expenses to revive the No. 4 U.S. mobile carrier.
SoftBank shares were down about 10% in Tokyo on Tuesday, the
first trading after the deal was announced because the Tokyo market
was closed Monday.
"It's difficult to see any near-term synergy between
telecommunication and Internet of Things," said Yoshinori Ogawa,
strategist at Okasan Securities. "There also is a conglomerate
discount" added to SoftBank.
The U.K. government hailed the deal -- the largest takeover of a
British company by an Asian company -- as a sign of confidence in
the country after Britons voted last month to leave the European
Union.
ARM Chief Executive Simon Segars, who said ARM wasn't soliciting
bids, was initially skeptical when the SoftBank board made its
formal offer two weeks ago.
"We always thought of ourselves as an independent company," he
said.
Mr. Segars said SoftBank's Mr. Son assured him that ARM would
continue to operate as it does today. "There's no intention for
SoftBank to change our culture, our team," Mr. Segars said.
Mr. Segars added that he gathered his employees in the atrium of
ARM's headquarters Monday and told them that the acquisition would
allow the company to grow. ARM, based in Cambridge, England, has
about 4,000 employees, including 1,600 in Britain. SoftBank said it
planned to double the size of the U.K. team over the next five
years.
Twenty-six-year-old ARM is little known to most consumers. The
company designs but doesn't manufacture microprocessors for Apple
Inc. and Samsung Electronics Co. smartphones and other devices. It
licenses the blueprints to chip makers such as Qualcomm Inc. For
2015, ARM reported revenue of $1.5 billion and profit of GBP340
million ($448.4 million).
While less-vibrant demand for smartphones has weighed on ARM's
recent results, it has been focusing on designing more chips for
routers and other devices in the networking industry, where it
currently has about a 15% market share. It expects that to increase
to a 45% share by 2020. At the same time, it is mounting a
challenge to Intel Corp.'s near-monopoly in designing chips for
giant servers.
It has recently devoted more of its resources to designing chips
for the Internet of Things, such as lightbulbs that will have small
chips in them that store information about energy use and then
transmit that data to the internet.
Industry watchers say it is rare for a telecom operator such as
SoftBank to jump so far upstream -- to acquire a supplier to chip
makers -- but it reflects a renewed focus on technology
fundamentals by Mr. Son. SoftBank's main investments have been in
online startups from India to China, and it owns mobile carriers in
Japan as well as Sprint in the U.S.
"It's a pretty big statement," said Kirk Boodry, a technology
analyst at New Street Research. "We are seeing a pivot from
internet to infrastructure."
The rapid-fire negotiations were primarily between Mr. Son and
Stuart Chambers, the chairman of ARM, although Mr. Son has also
built a strong relationship with Mr. Segars, ARM's chief executive,
according to a person familiar with the situation.
ARM hasn't held talks with other potential bidders, said a
person familiar with the matter. Mr. Son said ARM's bankers didn't
shop the company to other potential buyers.
Despite the recent drop in the value of the British pound after
Britons' decision to exit the EU, Mr. Son said that didn't affect
his decision. The deal doesn't actually bring a so-called Brexit
discount, because ARM's shares have traded higher over the past
month, more than offsetting the drop in the pound since the Brexit
vote.
SoftBank started detailed analysis on the U.K. company in 2014,
according to a person familiar with the situation. After the
initial bid, SoftBank raised its bid three times before striking
the final deal price with ARM's board, according to people familiar
with the situation.
The all-cash deal for ARM follows recent SoftBank moves to raise
about $17 billion, by divesting itself of stakes in Chinese
internet company Alibaba Group Holding Ltd. and Finnish mobile-game
developer Supercell Oy. SoftBank is seeking to pay down debt of
roughly $80 billion.
Mr. Son has a history of heading in surprising new directions.
SoftBank began in 1984 as a software distributor and at one time
owned a magazine publisher and operated trade shows. In the 2000s,
Mr. Son used acquisitions to turn SoftBank into one of Japan's
three major telecom companies, and its Japanese mobile-phone
operator remains the company's cash cow.
He added to his telecom holdings by taking a controlling stake
in U.S.-based Sprint, then veered into internet services with
investments in Asian e-commerce companies and ride-sharing
apps.
Now, Mr. Son has once again jumped into a different business.
SoftBank said in a written statement Monday that its global
connections could help boost client adoption of ARM's
intellectual-property licenses.
Roger Sheng, a research director for semiconductors at Gartner,
said that while SoftBank is indeed making a big push into the
Internet of Things, including with its anthropomorphic robot
Pepper, such futuristic technologies alone don't justify a $32
billion price tag for ARM.
Mr. Sheng said ARM traditionally has charged low royalties --
one reason its technology is widely used -- and that SoftBank could
boost profit by raising these fees. Smartphone makers would have
little alternative in the short term, and SoftBank would gain
leverage in negotiations of smartphone sales through SoftBank's
channels, he said.
"It's like a cake baker who doesn't buy flour suppliers, but
skips over them and buys the main producer of flour-making
equipment," Mr. Sheng said.
The acquisition is part of a wave of tech deals. Tech mergers
and acquisitions are up 18% year-to-year in value terms so far in
2016, with transactions totaling $342.8 billion, according to
Dealogic. That sum ranks No. 2 in the 2000s, after the comparable
2000 year-to-date total.
Chip-sector valuations have been boosted in part by China's push
to acquire semiconductor technology, although industry watchers say
a deal like SoftBank's acquisition of ARM isn't currently on the
table for China because of regulatory hurdles. Support from the
U.K. government for the deal Monday suggests there will be few
hurdles to SoftBank completing the ARM deal.
Shares in ARM rose 41% in London on Monday. Japanese markets
were closed for a holiday.
Raine Group LLC, Robey Warshaw LLP and Mizuho Securities Co.
advised SoftBank on the deal. Goldman Sachs Group Inc. and Lazard
Ltd. advised ARM.
--Megumi Fujikawa and Kosaku Narioka in Tokyo and Yang Jie in
Beijing contributed to this article.
Write to Stu Woo at Stu.Woo@wsj.com, Rick Carew at
rick.carew@wsj.com and Eva Dou at eva.dou@wsj.com
(END) Dow Jones Newswires
July 19, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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