Nvidia and Arm: The World’s Premier Computing Company for the Age of AI

INTRODUCTION

COVID-19 has been by far the most significant theme affecting the technology industry in 2020 and as global tech companies navigate through the pandemic, they have been steering the wheels of their strategies looking for a spot in the post-pandemic global outlook.

In the chaos of the year, several companies in the sector have made acquisitions and among these, the Nvidia-Arm deal stands above all.

On the 13th of September, Nvidia confirmed its decision to buy Arm, the UK-based computer chip giant, from SoftBank in a transaction worth $40 billion. The structure of the deal included $21.5 billion in common stock and $12 billion in cash, including $2 billion payable at signing. According to the details, SoftBank may receive up to $5 billion in cash or common stock under an earn-out construct, subject to the satisfaction of Arm’s specific financial performance targets.

ABOUT THE PARTIES

About Nvidia
NVIDIA Corporation (NASDAQ: NVDA) is an American tech giant founded in 1993 by Jensen Huang. The company found its place among the leaders of the sector in 1999 with the invention of the GPU. This innovation marked the history of the industry and spurred a significant growth in the PC gaming market. More recently, the development of GPU deep learning ignited the next era of computing for all of the world’s largest industries.

About Arm and SoftBank
Arm Holdings is a UK-based semiconductor company and leading provider of processors. Founded in 1990, Arm technology has recently been at the heart of the computing and data revolution. Arm is a unique chip company currently licensing its designs to over 500 licensees such as Huawei Technologies, Qualcomm Inc and Broadcom Inc among others.  The company and its technology partners have shipped more than 180 billion processors, which are currently powering  approximately 90% of the world’s smartphones. Arm Holdings was acquired for $32 billion in July 2016 by the Japanese telecom group SoftBank. The Japanese group is a multinational conglomerate based in Minato, Tokyo and founded in 1981. The group is composed of SoftBank Group Corp., the holding company, Arm Limited and the SoftBank Vision Fund, one of the largest technology-focused venture capital fund holding a capital of over $100 billion. SoftBank bought Arm as an investment for the development of the Internet-of-Things (IoT), however the company has faced a hard time in the past months losing bets on investments in WeWork and Uber and ultimately losing stock market value in September[1].

REASONS FOR ACQUISITION

In August 2020, Softbank hired Goldman Sachs as an advisor to discuss the future of Arm.  The options evaluated where selling or listing. With a proposition of $40 billion offer, Nvidia set itself as the most interested party. The acquisition of Arm sets the beginning of a bright future for Nvidia under many perspectives.

A New Competitive Edge
The deal allows Nvidia to obtain a new competitive lever against its historical competitors Intel and AMD. Up until now, the company’s competitive position relied on its graphics chips. Following Nvidia’s acquisition of Arm and its architecture, the company could become the first real challenge to the two leading developers of microprocessors and servers. The battle with Intel will be fought across a wide range of mobile, edge computing, embedded, and gaming platforms. To this end, it’s important to remark that Apple is among the over 500 Arm licensees, to whom the company provides the basic architectures for low-power central processor chips. It is easy to assume that through  Apple, Arm-based processors will replace Intel processors in the next generation of Mac computers, giving Nvidia a new edge.

A Boost in Market Position
Nvidia’s success was foreseeable even before the Arm acquisition, as the company overtook Intel as the most valuable U.S. semiconductor company by seeing its share price double during the year. Following the Arm acquisition, Nvidia will rapidly boost its position in the smartphones market, embedded, IoT, and even other edge devices traditionally out of Nvidia’s reach. As a matter of fact, Arm holds a near-monopoly position, licensing designs for microprocessors that power almost 90% of the world’s smartphones.

Extending The Market Reach and Scale
By acquiring Arm, Nvidia is acquiring a company having a much greater market reach and scale than its own. The objective of the GPU renowned company is to build upon Arm’s presence in the UK and consequently establish a center of excellence in AI in Europe. The deal is said to expand Nvidia’s reach from currently 2 million chips to more than 15 million. More significantly, while Nvidia only shipped about 100 million chips in the past year, Arm’s 22 billion shipped chips bring the American company to a whole new level.

TRANSACTION DETAILS

The deal value amounts to $40 billion and it comprises both cash and stock: $21.5 billion in stock, $12 billion in cash, and an additional $5 billion earned by SoftBank in only case in which Arm can reach specific execution targets.

Nvidia’s valuation has grown steeply throughout the last five years. At the beginning of the month, it was valued approximately $322 billion, compared to five years ago when it was priced at about $12.3 billion.

In addition, during the FY 2020, Nvidia’s revenues amounted to $10.92 billion, which decreased by 7% from FY 2019.

In FY 2019, Arm produced revenues amounting to more than $1.7 billion through the sale of software and property licenses.

In 2016, Arm was purchased by SoftBank for $32 billion. Arm´’s equity is detained at 75% by SoftBank Group and at 25% by the SoftBank Vision Fund.

Nvidia’s shares are already up more than 110% this year, suggesting investors have a lot to like from the deal.

Authors: Alessandra Santi, Paolo Cerciello

Sources:

[1] cnbc.com/2020/09/14/nvidia-to-buy-arm-holdings-from-softbank-for-40-billion.html

https://www.marketwatch.com/story/nvidias-deal-for-arm-could-mean-a-real-challenge-to-intel-and-amd-but-is-likely-to-face-opposition-2020-09-14#

https://www.infoworld.com/article/3575396/how-nvidias-arm-acquisition-will-drive-ai-to-every-edge.html

https://www.ft.com/content/235b1af4-4c7f-11e6-8172-e39ecd3b86fc

https://www.cnbc.com/2020/08/11/softbank-confirms-arm-could-be-sold-or-listed.html

https://www.bbc.com/news/technology-54142567

https://www.arm.com/#:~:text=Arm%20is%20the%20leading%20technology,%2C%20Neoverse%2C%20Ethos%20and%20SecurCore.

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