From the Beginning, Arm IPO was Plan A

Article By : Sally Ward-Foxton

Having previously argued to regulators that an IPO would be a disaster, Arm and SoftBank must now convince investors that an IPO makes sense.

After SoftBank’s deal to sell Arm to Nvidia collapsed last week, the Japanese conglomerate was seemingly forced to resort to Plan B: relisting Arm as a public company. According to SoftBank CEO Masayoshi Son, however, an IPO was its Plan A all along.

Having previously argued to regulators that an IPO would be a disaster, Arm and SoftBank are now faced with convincing investors that an IPO is, in fact, a good idea. The companies are floating arguments that a public Arm will thrive in new markets that include data centers and automotive.

In documents submitted to U.K. regulators in December 2021, you’ll recall, Arm detailed the potential pitfalls of an IPO. Its arguments against an IPO revolved around a publicly-traded Arm lacking the financial resources to take on powerful incumbents in the data center market. Moreover, impatient capital markets would demand a focus on short-term revenue growth and profitability. That would necessitate slashing costs to maximize value, inhibiting Arm’s ability to invest, expand and innovate.

“SoftBank considered and rejected an IPO in 2019 and again in early 2020 because the markets would not give SoftBank the necessary return on its investment,” the U.K. filing states. “While Arm’s licensees such as Apple, Qualcomm and Amazon have enjoyed skyrocketing revenue growth and profits, as well as soaring market valuations, Arm has lately endured comparably flat revenues, rising costs and lower profits that would likely present challenges for a 30-year-old public company.”

SoftBank acquired Arm in 2016 for $32 billion in a move seen at the time as audacious. Son said then he was making a “long-term investment in the U.K. and U.K. engineering” while enabling private Arm to invest more aggressively in new technologies.

Flipping the script

During SoftBank’s most recent earnings call on Feb. 10, however, Son changed his tune, calling the Arm stock offering “the most significant IPO in the history of the semiconductor industry.”

SoftBank’s chief expressed surprise that international regulators and industry rivals were dead set against the deal. “I [didn’t] imagine that so many key players in the industry and respective regulators are against this transaction idea,” he said. “I believe that Nvidia feels the same way… we didn’t imagine such a big objection.”

Usually, he added, antitrust violations would be alleged if two companies with similar offerings merged to create a monopoly. Nvidia’s deal for Arm would have been a form of vertical integration, he argued. “This could be the first case to claim the antitrust violations of the two different kinds of companies’ merger.”

Before Nvidia emerged as an Arm suitor, SoftBank had expected to take Arm public again in four to five years. The original plan involved spending up to three years developing products, then another year transitioning to licensing those offerings. “That’s something that we’d been discussing from the beginning of the acquisition of [Arm],” Son said, acknowledging that an Arm IPO was, in fact, Plan A all along.

Son was mum on the potential value of an Arm IPO, or SoftBank’s potential stake in the public company. “We don’t want to sell too much,” he said, adding that SoftBank’s stake would need to be balanced with potential returns for early investors (Vision Fund 1 holds 25 percent of Arm while SoftBank controls 75 percent). Son also cited payouts to Vision Fund 1 as a reason Arm must go public. Compensating Arm employees and the need for greater transparency were also cited.

Arm will list in the U.S., “most likely Nasdaq,” Son said. Arm was previously listed in both New York and London. Son noted that many Arm customers and potential investors are in Silicon Valley. U.S. exchanges also generally offer higher valuations.

Arm financials

The chart below shows Arm’s revenues since its acquisition by SoftBank. Initial revenues came mainly from the saturated smartphone and mobile sectors. Forecasted revenues for fiscal 2021 show striking growth – a phenomenon Son dubbed Arm’s “second growth stage.” Reaching this “golden stage” is the perfect time for an IPO, he argued.

Arm IPO Revenue Ebitda
Arm revenues and EBITDA between FY2016 and FY2021 (forecast). (Source: SoftBank/Arm)

Arm CFO Inder Singh cited Arm’s leading position in the smartphone and mobile segments, with revenues growing 29 percent on an annual basis. Singh ascribed this to a combination of migration to 5G and, with it, migration to Arm v9 along with increasing AI deployments. The data center and server segment grew 65 percent year-on-year while automotive grew 139 percent.

“The momentum that we’ve built by gaining share, by entering new markets, by rolling out new products, gives us the confidence to say… we’re forecasting that our revenues will grow 26 percent year-on-year in FY ’21,” Singh said. “We are now forecasting both record revenues and record profits for this year.”

Arm was self-funding during SoftBank’s five years of ownership, Singh added. “We’re actually back around the margins we were at before,” he said. “Being a public company actually gives us access to capital. And should we need it, we have more degrees of freedom.”

Growth markets

New Arm CEO Rene Haas claimed the IP vendor is gaining customers in the IT infrastructure and automotive markets. He also claimed Arm is becoming a de facto standard in automotive, with some models using as many as 40 Arm chips. “That number will only increase and grow in the future,” he predicted. “The common software that people will write for these applications [and] the very power-efficient architecture” create opportunities in areas like battery-constrained EVs.

Arm IPO. Customers 2016-2022
Arm customers by market segment. (Source: SoftBank/Arm)

Recent regulatory filings supporting its acquisition by Nvidia argued that an independent Arm would struggle to compete with incumbent x86 vendors in data centers without the GPU leader’s resources. The filings also cited “limited inroads in data center[s], mainly licensing to Amazon [AWS], which makes custom chips for its own use, and startup Ampere Computing, the only entity that offers merchant Arm CPUs for data center[s].”

Haas said Arm is gaining traction, pointing to Amazon Web Service’s Graviton chip, a data center CPU entering its third iteration. He added, “48 of the top 50 customers on AWS EC2 use Graviton2.

Arm hopes Graviton will encourage other hyper-scalers to use its cores in their SoC designs, perhaps prompting a domino effect along the lines of Alibaba’s Yitian 710 128-Armv9-core server chip, announced in October, or Huawei Kunpeng, or Nvidia Grace.

Arm China

Arm also acknowledged the status of its Chinese joint venture could complicate its planned IPO. Arm has been seeking majority control since 2020. The JV dispute is ongoing. Nevertheless, “our strategies around hyper-scale, cloud, infrastructure and automotive [are] paying dividends in China,” said Haas. “There has been a lot of growth in the Chinese semiconductor market [and] independent of the management issue that we have there, the business in itself has been outstanding.”

As it embarks on an IPO, it will be important for Arm to retain the right to audit the China JV’s books, Singh added. “That’s something we’re working hard to make sure we’ll have, in readiness for IPO.”

This article was originally published on EE Times.

Sally Ward-Foxton covers AI technology and related issues for and all aspects of the European industry for EE Times Europe magazine. Sally has spent more than 15 years writing about the electronics industry from London, UK. She has written for Electronic Design, ECN, Electronic Specifier: Design, Components in Electronics, and many more. She holds a Masters’ degree in Electrical and Electronic Engineering from the University of Cambridge.


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