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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