Lex Letter from London: Arm wrestling

Dear readers,

The sale of Arm, the little British chip designer that most definitely could, is shuffling ahead. Would-be buyer Nvidia has filed for regulatory clearance in China, a big market with big ambitions in all things chips.

Arm, a rare jewel in the UK’s rather threadbare tech landscape, has already passed through several owners. Apple took a 43 per cent stake in 1990. It was listed later that decade and in 2016 passed to SoftBank. So keen was the Japanese tech investor to lay hands on Arm — which designs chips in everything from smartphones to cars — it offered £24.3bn, or 24 times revenues, and sought to allay domestic angst about the sale of a British gem.

That was July 2016. Britain had just voted to leave the EU and ushered in Theresa May as prime minister. Funnily enough, May and her chancellor, Philip Hammond, wanted to increase scrutiny of foreign takeovers. Yet they hailed the deal as “a great vote of confidence” in Britain and waved it through. This is a nation that wept when Cadbury’s Creme Eggs were sold to a foreign interloper and insisted the buyer’s boss be grilled in parliament.

Nvidia’s bid for Arm, made last September, came at a very different time. The pandemic had shut much of the world and globalisation was unravelling as fast as supply chains. Self-sufficiency and protectionism were on the rise. The proliferation of the Internet of Things — a mantra used by SoftBank boss and self-proclaimed visionary Masayoshi Son to justify his purchase of Arm four years back — never happened.

Things had changed at Arm too. For one, the China operation has proved a problem as Arm battles it out with the head of its joint venture, Allen Wu. Efforts by Arm and its joint venture partners to oust Wu have been in vain. Wu — who went so far as to seize company “chops” (document stamps) required for registering and signing documents — remains in legal control of the business.

US and European regulators jumped on the Arm deal this time round. Earlier this year, the UK’s Competition and Markets Authority announced its probe over concerns that Nvidia’s rivals could find themselves having to pay more or accept poorer quality. Rivals such as Qualcomm are flagging similar concerns.

Oliver Dowden, the UK’s digital secretary, has gone a step further by flagging national security concerns that could scupper the deal.

Others have joined the chorus of dissent. Hermann Hauser, who co-founded Arm back in 1990, reckons the sale to Nvidia would be a disaster. “The one saving grace about SoftBank was that it wasn’t a chip company, and retained Arm’s neutrality,” he told the BBC.

Of course, client ownership does not render neutrality impossible — Samsung Electronics pulls it off. But an Nvidia-owned Arm is more likely to dance to Nvidia’s tune, designing chips it requires or at least giving it first peek at the drawing board.

One solution would be to scratch the sale and list Arm shares instead — ideally back in London. A truly independent Arm, beholden only to public shareholders, would sit more easily with clients and regulators. It would be more politically palatable too, and potentially even a flag bearer for other Silicon Fen wannabes.

True, SoftBank could be a loser. Public markets may be unwilling to accord as high a valuation to Arm as Nvidia has, and it could well end up making a loss on the deal. Then again, Arm has underperformed under SoftBank’s stewardship and the Japanese group is not exactly a stranger to taking hits on deals.

Enjoy the rest of your week,

Louise Lucas
Lex writer