Nvidia Can Afford to Lose an Arm. But SoftBank Needs to Slim Down. - The Wall Street Journal

https://ift.tt/6ZA85bu

Brawny chip company Nvidia can afford to lose Arm. Keeping the high-tech appendage fully attached a while longer may prove a headache for SoftBank.

The derailment of graphics-chip company Nvidia’s planned purchase of chip designer Arm from SoftBank isn’t exactly a surprise. The transaction—which would have been the largest-ever deal in the semiconductor industry—was fighting an uphill battle since the beginning because of antitrust concerns. Arm’s chip-design architecture powers almost every mobile device on the planet, and the company counts many of Nvidia’s rivals among its customers. The cash-and-stock deal was valued at around $40 billion at its unveiling and would have been valued at more than $60 billion at current prices as Nvidia’s shares have doubled since then.

Nvidia’s move always seemed opportunistic, and analysts had never been very sanguine on the odds of completing the deal. The company has also been doing well on its own: Its revenue has soared because its chips are in great demand for gaming and artificial-intelligence applications. With a market value of $618 billion, it is now the world’s most valuable chip company. And Nvidia may do even better without the regulatory scrutiny it would have attracted from owning Arm.

On the other hand SoftBank, which bought Arm for $32 billion in 2016, will receive a $1.25 billion break fee but will also need to find another way to raise cash from the British chip designer. The Japanese company says it will pursue an initial public offering in the fiscal year ending March 2023. It may need to move fast to cash in on the chip boom. The PHLX Semiconductor index has doubled in the past two years but the recent selloff in high-growth stocks has hit the sector too: It’s down 13% so far this year. Arm’s revenue for the nine months ended December grew 47% year on year, but getting a better price than Nvidia was willing to pay will still be challenging.

In contrast to Nvidia, SoftBank’s share price has halved since March. The technology crackdown in China, which hit big SoftBank investments like Alibaba particularly hard, has been a main culprit. The dip in U.S. tech stocks is now rubbing more salt into the wound. SoftBank’s net asset value was just $168 billion in December, down from $187 billion three months earlier, the company said Tuesday.

An $8.8 billion buyback unveiled in November failed to lift the share price for long. Listing Arm could help SoftBank raise cash as it continues to pour money into startups and give a clearer picture of how much the company is actually worth. Alibaba’s shares fell 6% Monday in New York on fear that SoftBank may cut its stake to fund buybacks and other investments.

SoftBank needs to find another place to put its Arm. If it waits too long and the Fed keeps sending hawkish signals, it may find the asking price heading down in tandem with investors’ appetite for tech stocks in general.