Last week, reports circulated that Nvidia (NASDAQ:NVDA) was considering an acquisition of Softbank (OTCMKTS:SFTBY) unit Arm Ltd. So far, at least, the news has done little for NVDA stock, which actually has slipped modestly since the report.
The relative shrug from the market likely is a response to the fact that such a deal isn’t necessarily likely. It’s far from guaranteed that Nvidia will make an offer, and Softbank may not accept the proposal. Even assuming an agreement is reached, regulators will have their say as well.
A Nvidia-Arm tie-up makes some sense and would create a chip giant. And it probably would be good news for NVDA stock if such a deal could be struck. At the moment, however, there seem to be too many obstacles in the way.
The Deal Makes Sense
It was Bloomberg that reported on Thursday that Nvidia was interested in Arm. For both sides, the deal has some positive aspects.
Softbank, under pressure from an activist investor, has been looking to divest assets. Most recently, it began to sell down its stake in Alibaba (NYSE:BABA). Arm, for which Softbank paid $32 billion in 2016, would bring in even more cash.
For Nvidia, an Arm acquisition would make the company a major player across the chip industry, in addition to its dominance in GPUs (graphics processing units). Arm licenses its architecture to many companies worldwide, including Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM).
And Nvidia should have the firepower to execute a deal. The company closed its most recent quarter with over $16 billion in cash. It could probably raise incremental debt (Nvidia currently has roughly $7 billion in borrowings), and round out the offer with NVDA stock.
Again, there’s logic to the deal. Softbank can raise cash and Nvidia can expand its reach. But looking more closely, there are reasons for skepticism.
Will Softbank Sell Arm?
There are reasons to believe that Softbank simply won’t be interested in selling Arm. Softbank is facing pressure from activist Elliott Management. But founder and CEO Masayoshi Son still makes all the final decisions, and Son has said repeatedly that he sees ARM as his company’s prized possession.
Indeed, as Bloomberg noted, Son has said Arm will be at “the center of the center of SoftBank.” And for a founder who has said a 300-year vision will guide his decisions, Arm indeed is a perfect building block.
Meanwhile, after the sale of its Alibaba stake, Softbank doesn’t necessarily need cash. It still has dry powder in its Vision Funds. The WeWork debacle should be in the company’s rearview mirror (and that business reportedly, is amazingly on track to become profitable next year).
Certainly, Son will listen to a potential offer from Nvidia for Arm. But for now, there’s not much evidence to suggest he will go much further than that.
Will Nvidia Make a Real Offer?
It makes sense that Nvidia is thinking about buying Arm, but getting to the finish line seems like another story.
The biggest impediment is on the regulatory front. Arm’s reach is so vast that such a deal would raise significant antitrust concerns. If Nvidia owned Arm, it could exert significant pressure on rivals like Intel and Advanced Micro Devices (NASDAQ:AMD).
To get the deal approved — if it gets approved at all — Nvidia would have to accept significant stipulations. And those stipulations likely would negate at least some of the logic of the deal from Nvidia’s standpoint.
There’s also the fact that Nvidia might need to issue quite a bit of stock to get the transaction done. Bloomberg cited a valuation estimate that neared $50 billion, rising to $68 billion by 2025.
Nvidia probably can only raise about $15 billion of debt, since its trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization) was just over $4 billion. Even that would leave the company with debt of about five times its EBITDA, which may be too much for lenders or for Nvidia itself.
In this scenario, Nvidia still would have to offer about $30 billion of stock. That may be too much for the company. It may also be too much for SoftBank, which is looking to raise cash and may not be interested in owning a 10%-plus stake in Nvidia.
To acquire Softbank, Nvidia would need to really, really love this deal.
The Case for NVDA Stock
Again, it seems like the market isn’t pricing in much likelihood of a deal. It is worth noting, however, that Nvidia’s shares hvesn’t bounced much in the wake of Intel’s ongoing execution problems. That could suggest that some investors think that Nvidia could buy Arm, and consequently sold their Nvidia stock.
That aside, however, the case for NVDA stock, which has some merit, centers on its current business. With the stock trading near its all-time high, its valuation is questionable, but the growth potential of its business is obvious.
And Nvidia may make another deal at some point, after its acquisition of Mellanox closed earlier this year. But Arm seems like a bit too much, in multiple senses. Investors probably need another reason to own NVDA stock. Fortunately, there are a few.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.
