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SoftBank’s sale of a stake in Arm is likely to raise less money than originally expected, due in part to the several uncertainties the British chip IP company continues to face, industry observers told EE Times.
ARM’s IPO roadshow, which began on Sept. 5 with potential investors, will conclude with the public stock listing around Sept. 13, according to an analyst who requested anonymity.
“The company won’t meet with us during the IPO process—it’s all behind closed doors,” the analyst said.
The new investors in Arm won’t enjoy voting rights, a seat on the board, or dividends from their stake, according to a source close to Arm who spoke on the condition of anonymity. While the money raised from the IPO will help Softbank reallocate its investment portfolio, no funding from the IPO will go to Arm, the source added.
Japanese tech conglomerate SoftBank, which owns 100% of Arm, is likely to sell a 10% stake to Arm customers that include Apple, AMD, Nvidia and Intel—each of which wants to ensure that it has access to Arm IP over the long term. SoftBank aims to raise $5 to $7 billion from the IPO, lagging the $10 billion it originally targeted, according to Bloomberg News. The lower amount would give an overall value of $50 to $60 billion to Arm, instead of the previous target of as much as $70 billion.
SoftBank originally aimed for the IPO after an attempt to sell Arm for $40 billion to Nvidia last year, which failed as a result of U.S. and European regulators citing antitrust concerns. Even a valuation of $50 billion for Arm may be too optimistic, according to the source close to Arm.
“In 2016, SoftBank paid $32 billion for Arm. Although it has grown in some respects, I actually think it is in a much worse position today than then,” the anonymous source said. “There is now serious competition possible—the smartphone market has topped out and is commoditized, the China operation is now looking very uncontrollable, and the big customers have become much more self-sufficient.”
The Arm partnership is fragmented with various lawsuits underway with the biggest customers, the source added. That view was supported by the tech industry analyst.
“There is obviously Qualcomm litigation to consider here. That’s a long story around Qualcomm’s acquisition of Nuvia,” the analyst said. “This is likely to go to trial in the second half of 2024—we’ve never seen ARM litigate with strategic licensors before.”
Last year, Arm filed a lawsuit against Qualcomm and Nuvia, alleging that the two companies broke licensing pacts and, as a result, infringed on Arm’s trademarks by using them in conjunction with unlicensed products.
Growth prospects
It’s hard to see where meaningful sustainable growth is going to come from, according to the source close to Arm. R&D at the company has recently been hollowed out to make profits possible, they added.
Still, Arm’s v9 architecture first introduced in 2021 is tapping new sources of revenue in the AI space that show potential, the analyst said.
“ARM will be looking to raise royalty rates with the ramp of v9. We are heading into the chip rollouts now. There is a lot of new product announcements coming with v9: [Amazon’s] Graviton 4, Nvidia’s Grace CPUs, and the Mediatek Dimensity 9200+.”
There’s also been some discussion around how Arm might benefit from AI, the analyst added.
“Keep in mind, this is a CPU-licensing company, and we have not yet seen an AI-licensing offering that is scaling from ARM.”
Arm is signaling a shift in their licensing model towards subscriptions—something the software industry has been doing for a long time, the analyst said. “Will that lead to better growth? Not sure yet.”
Negative factors
Other factors will weigh on the market price for the Arm IPO, according to the industry observers interviewed.
“From a financials perspective, they obviously used to produce over 50% operating margins, and when Softbank bought them, they went into a big investment cycle,” the analyst said. “They need to build back their margins to where they were when Arm was last a public company.”
Arm may lose about a quarter of its sales after splitting from its Arm China subsidiary, the analyst added. Arm’s filing with the U.S. Securities and Exchange Commission is an indication, they said. “If you read the F1 filing, you’ll see the backstory around how Arm [has] sold out most of their stake in Arm China—this is 24% of sales last year for Arm.”
Arm has few big wins to convince investors that the outlook for the company is positive, according to the source close to Arm.
“In the past seven years, they have wasted billions of dollars pursuing IoT, which was never going to make any money and are not a lot further on in conquering the server space. There is still a lot of work to do.”
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