Nvidia’s acquisition of UK chip design company Arm from SoftBank has provoked serious opposition on both sides of the Atlantic.
The deal, first announced in September 2020, has been bogged down in regulatory reviews around the world, and is set to miss its initial timeframe to close by March 2022. This week, Nvidia’s financial results were overshadowed by the deal after the UK government ordered an in-depth investigation on competition and national security grounds, which could take several months.
Why do the regulators seem to dislike this deal so much?
Arm holds an unusual position in the global tech industry. It doesn’t make chips itself, but its designs formed the basic blueprints for 25bn chips made by other companies last year. Some competitors have complained that after a takeover, Nvidia would be able to limit their access to Arm’s designs in favour of its own products.
The deal also landed at a moment when competition regulators globally had become far more concerned about the emergence of a new generation of powerful tech monopolies.
Announcing an in-depth EU investigation into the deal in late October, Margrethe Vestager, the bloc’s competition commissioner, warned it “could lead to restricted or degraded access to Arm’s IP”, distorting many different chip markets. Arm’s fortunes rest on near-total dominance in smartphone processors, but it is the risk of Nvidia using the deal to corner newer markets like data centre servers and automobiles that has worried regulators.
This week, the UK also launched a deeper investigation of the deal and Nvidia said regulators in Europe had raised “numerous concerns”. It also revealed that the US Federal Trade Commission had its own worries. China, meanwhile, is waiting in the wings, with a formal review there yet to even begin.
Why is the UK in particular so against it?
While other regulators have focused exclusively on competition issues, the UK has added national security to its list of worries. It’s not clear exactly what lies behind this, but Arm’s headquarters and much of its research activities are in the UK, potentially making it an important part of any future industrial strategy to build a stronger national technology base.
Post-Brexit politics have also come into play. SoftBank stepped in to buy Arm less than a month after the Brexit vote in 2016, taking advantage of an 11 per cent downturn in the pound against the US dollar. The deal was depicted at the time as a vote of confidence in Britain’s future industrial competitiveness, and SoftBank made a five-year commitment — now expired — to maintain Arm’s UK presence and boost its local hiring.
The potential sale to a US company comes at a time when other significant UK companies have fallen to foreign takeovers, and has added to worries about waning corporate influence — though Nvidia has made promises of its own to back Arm’s UK operations and to keep investing in the country.
Do Nvidia and SoftBank have any answers to these worries?
Nvidia has tried to win over the rest of the tech industry with promises to inject cash and some of its own technology into Arm. That could give Arm a stronger foothold in new markets like AI and make technology developed inside Nvidia more widely available to the rest of the industry.
The US company has also offered a guarantee that it won’t block any other companies from licensing Arm’s designs. The offer has fallen on deaf ears, with both the EU and UK ruling it inadequate before embarking on their latest investigations. The UK’s Competition and Markets Authority has said “behavioural” remedies like this, which are designed to limit a company’s future conduct, are hard to police and enforce, and it doubted that any guarantees Nvidia offered about its future conduct would be adequate.
This scrutiny shows how far Nvidia’s chief executive, Jensen Huang, underestimated the potential resistance to the deal. He argued at the outset that Nvidia’s own economic self-interest in maintaining Arm’s existing licensing business should provide reassurance enough that it wouldn’t try to block rivals from using Arm’s designs. He also tried to sound magnanimous about leaving plenty of room for competitors, asserting “there are so many different segments to the marketplace, there is no way one company can address it all”. That hasn’t stopped rivals worrying that Nvidia will try to grab the juiciest parts of the market for itself.
Is there any way the deal can still get done?
Yes, though the odds are lengthening. Nvidia could try to offer stronger guarantees to reduce the risk it will hamper competition, though the CMA’s aversion to behavioural remedies will be hard to overcome. The alternative — structural remedies that would involve carving out parts of Arm’s IP and ringfencing it from Nvidia’s control — would be hard to devise without undermining the value of buying the company in the first place.
It is possible that the sabre-rattling from regulators will stop short of actually trying to block the deal. For the UK’s Competition and Markets Authority, in particular, the stakes are high. A big win soon after Brexit would burnish its authority as a new power on the global antitrust stage, though a big loss would be devastating.
At what point might Nvidia and SoftBank call it a day?
Nvidia first said it could take 18 months, until next March, to complete the deal, and has since warned that things are likely to take even longer. As long as both companies believe they have a case that could sway regulators — something both have claimed in recent days — then they could stretch things out for many more months.
SoftBank, meanwhile, has a strong incentive to push for the deal until the very last moment. It stands to make a huge windfall profit, thanks to a leap in Nvidia’s share price since the deal was announced. The cash-and-stock offer, worth up to $38.5bn to SoftBank at the outset, is currently worth $82bn.
One reason to throw in the towel earlier would be if Arm’s business started to suffer from the uncertainty, particularly if it started to lose important staff. Nvidia last year earmarked $1.5bn to use as stock awards for Arm’s staff once a deal is completed, but mounting opposition to the deal has made that pot of gold look increasingly remote. Arm put up some of its own money to try to keep its employees from quitting, a significant factor behind the $200m loss it suffered in its last fiscal year.
What happens to Arm if the deal is scrapped?
SoftBank revealed its interest in selling Arm when it approached Nvidia about a possible deal. That makes an alternative exit seem likely if the current deal falls through.
The deal has shone a spotlight on the unique position Arm plays in the chip industry. Arm may also be about to see a take-off in its business, after a period of heavy investment under SoftBank to extend its reach into new markets beyond smartphones. After rising at a compound rate of only around 5 per cent a year since 2016, revenue jumped 61 per cent in the first six months of this year.
Other chipmakers would be likely to stir up the same regulatory backlash as Nvidia did if they tried to buy Arm. That makes a stock market listing the most likely alternative, with the UK a favoured venue among those who see Arm as an important national technology champion. But a return to the London listing it had before the SoftBank deal might not be the preferred outcome for its current owners: after all, Wall Street puts much higher valuations on tech companies.