Nvidia’s takeover of ARM Ltd. from Softbank isn’t going so well. Ever since the deal was first announced in September of 2020, the mega merger has run into a series of roadblocks, lawsuits, and disapproval from industry giants that has company insiders reportedly ready to throw up their hands and move on.
According to Bloomberg, Nvidia executives can see the writing on the wall, and has told its partners it does not expect the deal to be successful. With the deal in shambles, Softbank has reportedly begun preparing for an Initial Public Offering (IPO) as an alternative to merging with Nvidia. For anyone who has been following the drama produced by this tentative arrangement, news of its impending failure is certainly not a surprise since every bit of “news” that has come out of the deal has been bad news, a lack of progress, and new regulatory hurdles.
Back in December of 2021, the Federal Trade Commission announced it was suing Nvidia over the deal, claiming it would harm competition in a critical market. The FTC’s Bureau of Competition Director Holly Vedova stated, “Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets. This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.” Bloomberg notes that many of Nvidia’s rivals are also working with the FTC to bolster its case, including Amazon, Microsoft, Qualcomm, and Intel. These companies’ primary complaint is that as ARM customers they have equal access to the company’s technology, and they fear that would no longer be the case once it is under Nvidia’s control.
Another big roadblock is due to ARM’s global operations, the merger needs approval in the US, UK, European Union, and in China. If ARM falls under Nvidia’s control, the likelihood of China gaining access to its latest technology for its semiconductor industry is low since that’s something the US has long been attempting to prevent. This makes it likely the Chinese government will never approve of the deal.
Across the pond, UK regulators have also announced they are intervening to investigate the merger’s details a bit further, citing National Security as the reason for their inquiry. The European Union has also opened an inquiry into the sale as well, citing the same reasons previously mentioned: A fear that ARM licensees would lose their access to the company’s IP once it was under Nvidia’s control. Nvidia has offered concessions to combat industry fears, pledging to maintain the ecosystem that ARM has fostered over the past few decades during its rise to power. However, the EU is also concerned that ARM licensees might be less willing to share data with Nvidia, or that Nvidia might refocus ARM R&D towards business segments that are more profitable for itself and less useful to its licensees.
ARM has formally responded with its own argument in favor of the merger. In a 29-page UK regulatory filing, the company writes that the alternative to an Nvidia purchase is a stagnant, less-effective mobile CPU market. Its critics, ARM writes, “equate Arm’s popularity with a high market valuation and success, but the public markets are unsentimental. The capital markets demand profitability and performance.”
According to ARM, Softbank avoided an IPO because it did not believe it would earn a profitable return on investment. The filing states that while ARM’s customers have enjoyed robust revenue growth and strong product adoption, ARM itself has not benefited nearly as much financially. This is not all that surprising. One of the arguments in favor of the ARM architecture over x86 has been the fact that ARM takes a much smaller slice of the proverbial licensing pie than an x86 CPU built by Intel or AMD.
According to ARM, its original mobile market is saturated and mature. The spaces it wants to break into, like PC and data center, are an uphill challenge against entrenched competitors. ARM believes itself to be at a major disadvantage in terms of revenue. As a stand-alone company, ARM expects it would have to “narrow its investments and enhance profitability.”
The report claims that SoftBank approached Nvidia regarding an ARM acquisition, not the other way around, and that the deal represents the best way for ARM to remain competitive in the future. The recent success of RISC-V is provided as one reason for why the merger should go forward. This is an interesting argument for ARM to make. According to several analysts ET has spoken to, multiple companies have been exploring RISC-V out of fear that Nvidia will successfully buy ARM. The company also notes that it has suffered brain drain as some of its customers have recruited individuals from ARM’s own engineering teams. An ARM architectural license and a hard IP license for a specific core are not the same thing. ARM points out, however, that as more companies opt for custom architectures, the “openness” of ARM decreases. Unlike ARM, which licenses Cortex to anyone who wants one, Apple will not be similarly licensing the M1. Qualcomm will not license its future Nuvia-designed chips in the same fashion ARM does, either.
It’s possible that both sides of the discussion are right. ARM may be correct that it needs additional capital and investment to flourish and compete optimally. Those who are aligned against the merger may be right that it represents a threat to the long-term competitiveness of the market, despite Nvidia’s reassurances. There are no other companies known to be considering an ARM purchase other than Nvidia, however, and it’s not clear if anyone else would buy the company in the event the Nvidia deal falls through. Most of the potential suspects would face similar questions to those lobbed at Nvidia. Even if Intel, AMD, IBM, or Qualcomm wanted to buy ARM, a purchase by any of these companies would still represent a further concentration of market power in the hands of a current ARM customer.
The deal will be two years old in September of this year, and initially Nvidia said the agreement would be complete by March of 2022, which is clearly not going to happen. The FTC lawsuit alone will probably last throughout 2022, not to mention the other parallel inquires by foreign governments. All that said, it’s too early to call the deal completely dead. The future is always uncertain, especially in the ever-changing semiconductor industry. However, given the constant stream of pushback the company has received and the amount of patience (and money) that will be required from Nvidia’s legal team to get this deal across the finish line, both companies may decide to go their separate ways.