Nvidia to SoftBank: Give me your Arm

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Last week, Nvidia announced that it is acquiring Arm from SoftBank for $40 billion. Under the terms of the transaction, Nvidia will pay SoftBank $21.5 billion in stock and $12 billion in cash. SoftBank may also receive up to $5 billion in cash or common stock if Arm meets certain financial targets. Finally, Nvidia will issue $1.5 billion in equity to Arm employees. 

Let’s meet the two main parties involved in the biggest chip deal in history and evaluate who got the better deal: 
  • SoftBank is a Japanese conglomerate famous for its big bets on the tech sector. Some have worked (e.g. Alibaba) while many have flopped (e.g. WeWork). Arm will join the second group and SoftBank is a loser in this deal. Selling Arm for $32 billion - not including $5 billion in potential add-ons- means that Arm was yet another flop investment. Had SoftBank bought Nvidia shares or, for that matter, an ETF tracking the S&P 500 - which is up 55% since then- it would have gotten a much higher ROI than the ~5% SoftBank earned from Arm.
  • Nvidia is the most valuable chipmaker in the US. Nvidia's claim to fame is its graphics chips for video games, but the company is building a bigger presence in other markets (e.g. data centers). Nvidia is clearly a winner in this deal. I know it sounds too rash to declare Nvidia a winner so early in the process because so many things could go wrong during the integration of Arm, including the possibility of it not living up to expectations. However, the way the deal is structured as a majority-stock acquisition makes Nvidia a winner no matter what happens in the future. Let’s imagine the worst: Arm turns out to be a massive flop for Nvidia. Nvidia would still have acquired Arm on the cheap. Under the current terms of the deal, Nvidia is only spending $12 billion in cash to acquire a company that was its marketpeer when it was acquired by SoftBank four years ago. This is a massive bargain. 
Nvidia’s stock is the single most important factor in this deal and it makes Nvidia the clear winner. Nvidia’s stock may not stay at its current heights but that’s precisely why a majority stock acquisition is so smart on Nvidia’s behalf. The stock may retreat but Arm will still belong to Nvidia. In fact if the stock is overpriced, then Nvidia is buying Arm for an even bigger discount. The deal is a free bet for Nvidia. Sorry SoftBank.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.

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