Softbank Group Corp (OTCMKTS:SFTBF) CEO Masayoshi Son is known for sudden, seemingly impulsive, game-changing business moves, and taking over Arm Holdings plc (ADR) (NASDAQ:ARMH) certainly qualifies.
For $32 billion (a 43% premium to ARMH’s closing price Friday), Softbank gets the premium mobile-chip design house in the world.
Arm designs the processor chips used in the Apple Inc. (NASDAQ:AAPL) iPhone and many other devices, and has been a thorn in the side of Intel Corporation (NASDAQ:INTC) for years. The deal could close as early as next month because it represents a huge premium for ARMH shareholders, making an overbid unlikely.
And while the British government could protest the capture of its biggest tech asset over the pound’s post-Brexit weakness, it is unlikely to stop it. Softbank is promising to increase U.K. employment after the deal is done.
Arm can use new investments to expand beyond its niche in mobile processor design to the larger market known as the Internet of Things, in which wireless processors are embedded in all sorts of industrial and consumer products. This brings a host of new potential customers, with new relationships to both design and production.
What Is Softbank’s Game?
As the majority owner of Sprint Corp (NYSE:S) and Softbank Mobile, Softbank has networks through which it can do deals that involve far more than mere chip sales, and the expertise acquired in making that happen should bring it deals in other geographies. On the conference call, Son said Sprint is becoming self-sufficient, and Sprint shares fell on the news.
While Softbank will have to reduce its financial stake in Alibaba Group Holding ltd (NASDAQ:BABA) over time to make this deal work, it retains enormous goodwill within that market, and China’s government is heavily invested in making IoT work in both consumer and business markets.
On the conference call announcing the deal, which he called the most important event in Softbank’s history, Son predicted that 1,000 IoT processors will be working for every person in the world 30 years from now.
Those connections can now redound to Arm’s benefit.
ARMH does now own a fabrication plant. It sells designs that other companies then customize and have produced as-needed. Softbank can now do deals for Chinese production, and distribution, of Arm designs that consume very little power. In short it has opportunities, but needs capital to take advantage.
The deal has to represent a transformation in Softbank, and it made the first move in that direction last year selling its stake in Supercell, a Finnish designer of social games like Clash of Clans, to China’s Tencent Holdings Ltd (OTCMKTS:TCEHY). It is also possible that stakes in Softbank Mobile and Sprint could come to market as Softbank focuses capital on ARMH stock.
The deal represents a great payday for those who have seen Arm settle into a trading range from $40 to $50/share since 2013, and the possibility of future deals could bring Sprint new bids over time, although the initial reaction of that stock was negative.
Softbank is down 30% from its early 2014 high, but if you buy Son’s new vision, now may be the time to get in. If I were 30 years younger, I would be a buyer, but the vision will take time to prove out.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being ‘The Reluctant Detective Travels in Time’. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, Dana owned shares of INTC stock.