SoftBank Needs a Backup Plan for Nvidia Deal

The clock is ticking for SoftBank

We’re fast approaching the one-year anniversary of Nvidia’s $40 billion bid for Arm from SoftBank. There’s been a lot of talk from Nvidia, Arm and their ecosystem about the merits and concerns of the proposed deal. However, any big developments have been limited, putting the original 18-month timeline into considerable doubt. With Broadcom, MediaTek and Marvell Technology recently pledging their support for the takeover and making headlines for doing so, it’s worth a deeper look at the status of proceedings and what happens next.

As we’ve emphasized before, this is a highly complex deal with many factors determining whether or not the transaction goes ahead. It will be scrutinized by relevant authorities on a local and regional basis, with different bodies at various early stages of assessment. The important question is, of course, whether the deal is in the best interests of Arm’s partners and consumers, and if it could be viewed as anticompetitive. We have explored this debate further in Opposition Mounts to Nvidia’s Bid to Arm and Arm and Nvidia. Heads or Tails.

In the US, the Federal Trade Commission (FTC) issued a second request for internal documents relating to the acquisition back in December 2020. This is unusual in a vertical acquisition involving two companies with different functions in the supply chain. This review is ongoing, but there’s a fair chance that the FTC will issue a challenge, given the regulatory heat in Washington and growing scrutiny of large acquisitions. Documentation found as part of the investigation will also be made available to all relevant regulatory bodies.

In the UK, the Competition and Markets Authority is due to complete its review at the end of July 2021. CCS Insight believes that the heightened concern in Arm’s home market makes a phase-two review highly likely.

In the EU, progress appears to have stalled, with Nvidia yet to file an application to clear the deal. The European Commission is now in a prolonged period of summer holiday, making it unlikely that the filing will take place until September, a full year after the deal’s announcement. Although Nvidia could file before the relevant parties in the commission have given their approval, this would be highly unconventional and would strain relations with a body they need to keep on side.

This leaves China. The application has been filed but not yet accepted, with the deal under the spotlight from the Ministry of Commerce and the State Administration for Market Regulation. There’s a precedent in such cases of China being the last regulatory body to grant clearance, so a concern for other jurisdictions is the concessions that China will seek before giving the green light.

It’s impossible to ignore the major obstacles still ahead. The support of Broadcom, Marvell Technology and MediaTek was a much-needed boost for the acquisition but the timing and significance of this support should be considered. With the deal unlikely to see any real progress before September, a full 12 months after proceedings began, it badly needed a shot in the arm (pun partly intended).

Support from these names is welcome but it’s questionable if this will do anything to influence the thinking of regulators. Several other Arm licensees have been equally vocal in their opposition, and authorities will make their own decisions based on the evidence before them. In our view, reports of momentum pushing a conclusion in favour of the Arm deal are premature and don’t fully reflect the reality and intensity of the regulatory process.

Given this context, SoftBank should be nervous. Nvidia can afford to play the long game, particularly as its status as an Arm licensee means it can forge ahead with development of products like Grace, an Arm-based server CPU, regardless of the status of the transaction (see Instant Insight: Nvidia GPU Technology Conference 2021). It’s also notable that Nvidia has positioned the $2 billion it paid at signing as a down payment on the $12 billion of cash owed. Although this should be viewed as a breakup fee should the transaction not take place, the company has also emphasized that it includes an Arm licence fee, suggesting that the breakup component is actually smaller than $2 billion.

Given the time it could take — which could be more than two years — before the deal is either approved or collapses, the breakup fee will be of limited comfort to SoftBank and Arm. The challenge for SoftBank has always been the lack of alternative options that are valued anywhere near the $40 billion that Nvidia is prepared to pay. However, as the clock ticks down, SoftBank will become increasingly nervous. More importantly, the delay and uncertainty is detrimental to Arm and its licensees, only opening the window of opportunity wider for alternatives, albeit limited, such as RISC-V (see A Shot in the Arm for RISC-V). SoftBank badly needs a backup plan.

A version of this blog was first published by FierceElectronics on 27 July 2021