SoftBank to buy UK’s Arm for £24.3bn
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Japan’s SoftBank has agreed to acquire Arm Holdings, the UK’s pre-eminent technology company, for £24.3bn in an enormous bet by the Japanese telecoms group that the smartphone chip designer will make it a leader in one of the next big tech markets, the internet of things.
The takeover of Cambridge-based Arm, which was founded 25 years ago and now employs 4,000 people, will be the largest acquisition of a European technology business. SoftBank will pay £17 in cash for each share in Arm, a 43 per cent premium to its closing price last week.
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The deal, announced on Monday morning, comes just weeks after the UK elected to exit the EU, a decision that raised questions over the attractiveness of the country’s business community. But Arm, as a global force in chip design, is better insulated from the vote for Brexit than many other UK companies by its leadership role in a key segment of the chip industry and the fact that it earns in US dollars.
The fall in sterling following the Brexit vote has left the UK currency nearly 30 per cent lower against the Japanese yen over the past year, making Arm an attractive target. Shares in Arm were essentially flat over the past 12 months.
Philip Hammond, the UK’s new Chancellor of the Exchequer, said Softbank’s investment would be the largest ever from Asia into the UK. The deal would “guarantee to double the number of jobs in Arm in the UK over the next five years and turn this great British company into a global phenomenon”.
“Just three weeks after the referendum decision, it shows that Britain has lost none of its allure to international investors.”
After taking into account £1bn of cash held by Arm, the deal gives an enterprise value for the business of around £23.3bn. This is 24.4 times Arm’s 2015 revenues of £968.3m and approximately 56.8 times adjusted profit after tax of £428.9m.
Only weeks ago, Masayoshi Son, the charismatic 58-year-old chairman of the Japanese group, abruptly parted ways with his chief dealmaker and heir apparent Nikesh Arora, a former Google executive.
Mr Son has built SoftBank into a sprawling global telecoms and media conglomerate, worth $68bn and comprising holdings that range from a majority stake in Sprint, the fourth-largest US mobile carrier, to Yahoo Japan, the country’s most popular internet search engine.
With a fondness for big “crazy ideas”, Mr Son has been looking to deploy a huge war chest of cash he has accumulated from successful investments.
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Some of his previous deals include a $20m investment in ecommerce company Alibaba in 2000 that is now worth $65bn, and the $15bn acquisition of Vodafone’s lossmaking Japanese arm in 2006 that has positioned SoftBank as the number three carrier in the market.
Over the past decade SoftBank has participated in more than 140 deals worth about $82bn, according to Dealogic data. Nearly all of them were executed in the last four years by Mr Arora, who made a range of transactions, from buying small stakes worth a few million dollars in little known start-ups to multibillion-dollar investments in fast-growing companies such as Didi Chuxing, the Chinese ride-hailing mobile app and competitor to Uber.
Arm has often been talked about as a potential acquisition target for Intel, the world’s largest chipmaker, which failed to capitalise on the smartphone boom. Intel’s chip architecture, known as x86, was developed for PCs and has been ill-suited to battery-powered devices for which efficient power consumption is key.
Its position as the only UK tech company of note has also made Arm a frequent subject of speculation as US companies have sought to put to use their large overseas cash piles. The interest in UK acquisitions intensified after the collapse in sterling that followed the Brexit vote, though targets were scarce with Arm the only company with global significance.
The FTSE 100 company has also targeted one of Intel’s most successful businesses, in making chips for servers.
Arm’s technology was originally developed in the 1980s at Acorn, a British computer maker. It was spun off into a separate company, with significant backing from Apple, and its technology was used in the first generation of mobile devices including Apple’s handheld Newton.
Arm’s business model has relied on licensing its technology to other hardware makers including Apple and Samsung Electronics, making it a near-ubiquitous feature of mobile devices. It reaps a small royalty amount for each device, relying on very large volumes. Last year, 15bn chips based on its technology were shipped, nearly 3bn more than the year before. Nearly half of those were in mobile devices, though Arm is seeing faster growth in chips for networking equipment and the internet of things.
As purely a designer of chips rather a manufacturer, Arm’s intellectual property model leaves it with a high profit margin. However, its revenues of around £1bn last year made it a minnow by global chip standards. The purchase price is equivalent to 70 times its net income last year, and more than 50 times earnings before interest, taxes, depreciation and amortisation.
The Raine Group, Robey Warshaw and Mizuho Securities are advising SoftBank on the deal. Arm is advised by Goldman, Lazard, UBS and Barclays.
The New York Times earlier on Sunday reported that SoftBank was nearing a deal, without providing any financial details.