SoftBank acquires ARM Holdings: Analysts debate the merit of the purchase

Speaking to tech2 Shiv Putcha, Associate Director, Consumer, Mobility and Telecom for IDC, said that there are two ways to look at the acquisition for SoftBank.

This week has started with a major announcement in the technology world – SoftBank acquiring chip designer ARM Holdings for $32 bn. For SoftBank, this is a huge investment and $32 bn makes it the largest ever acquisition deal in Europe from an Asian country.

SoftBank chairman Masayoshi Son has been known to make smart investments which give back great returns. He is calling the ARM acquisition his company's most important one yet. SoftBank had invested $20mn in Alibaba in 2000, an investment that’s worth $65bn today. Also the $15bn acquisition of Vodafone’s Japanese arm has made SoftBank the third largest telecom player in Japan. SoftBank is also a majority investor in Sprint, which is the fourth largest telco in the US.

So what does this acquisition signify for SoftBank? That a Japanese firm has bought out a British technology company which is globally renowned for its IP, has certainly got everyone's attention apart from the huge asking price of $32 bn.

Speaking to tech2 Shiv Putcha, Associate Director, Consumer, Mobility and Telecom for IDC, said that there are two ways to look at the acquisition for SoftBank. "As a telecom player, it doesn't make much sense. It would have made sense if they acquired a hardware maker. But if you look at it from an investment firm's perspective, it makes perfect sense. The smartphone wave has peaked and we are looking at the next wave of devices," he said.

Internet of Things (IoT) is the category is already becoming mainstream. A look at the technology conferences of the last few years and you will realise that IoT was a major theme everywhere. ARM Holdings' chip designs apart from being used in smartphones are also being used in these IoT devices such as wearables, trackers, devices for smart city implementations and so on.

"Internet of Things, Connected Cars are future growth areas. With ARM designs being used in this larger addressable market, investing in a company that stands to have a much bigger install base makes perfect sense for SoftBank from an investment perspective," said Putcha.

ARM Holdings has been speculated in the past to be acquired by Apple, one of its biggest customers. Intel, the leader when it comes to making desktop and server chips, ceded the smartphone ground to ARM when it opted out of making chipsets for smartphones earlier this year. With a backer such as SoftBank behind ARM, should Intel worry? According to Putscha, Intel is a strong enough company and there is no immediate worry for it yet.

SoftBank has made it clear that ARM will continue to operate out of its Cambridge headquarters in the UK, and that its team strength will be doubled in the next 5 years. Masayoshi Son has said that he does not want to make any major changes in the way ARM functions.

A lot of publications have commented how Son got a good deal thanks to the weakening Pound Sterling after Brexit. Putcha says that it may have been a factor, after the fact. "Deals of this magnitude do not happen overnight. I am sure talks about the acquisition would have been on from much before," he said. According to Reuters, Son said he sealed the deal in just two weeks with a handful of advisers. These include Jeffrey Sine, co-founder of niche US merchant bank Raine, who has advised Son for years.

According to Putcha, the buyout should not have any major impact on the chip industry as such, specially in the short term. One of the reasons can be the fact that it has been bought by a player who does not have immediate gains to be had from the acquisition. As Son has already stated, the work culture and business models will pretty much remain as they are. Putcha also dismissed any fears about rise in chip prices or royalties, since there will have been long term agreements which prevent random decisions.

However, some analysts in Japan have expressed concern over the amount SoftBank has paid for the ARM Holdings acquisition, specially when SoftBank is itself in a $112 bn debt.

"To us, the ARM acquisition announced yesterday appears largely inconsistent with Softbank's investment strategy," said analyst Atul Goyal at Jefferies, adding it was unclear how ARM, already trading at a premium, would benefit SoftBank investors. "It does not inspire much confidence and requires deeper review." SoftBank share prices fell after the news of the buyout emerged.

Son, on the other hand, is quite upbeat about the deal. According to him since he is the biggest share holder in SoftBank, he shares the interests as other shareholders. Going by some of his past acquisitions such as Alibaba, Vodafone Japan and many more and with the apparent promise that IoT offers, the investment does seem like SoftBank is onto something big with ARM. But how soon the investment will see returns and break even, that is anybody's guess right now.