Nvidia is reported to be in talks to purchase Arm Holdings Plc. If true, the move would…
Nvidia Corp. is reported to be in talks to purchase Arm Holdings Plc. If true, the move would be beyond stupid. It would be reckless and would ignite a firestorm of negative reactions from current and potential Arm licenses and be, on a long-term basis, counter productive for Nvidia and its shareholders.
Why Nvidia could be considering such a move is obvious. The company’s market value has rocketed to its highest level since it went public in January 1999, climbing above the capitalization of Intel Corp., the global No. 1 semiconductor supplier by revenue. Leveraging the lofty stock price, low borrowing rates and strong cash position to make a major, market-defining acquisition, would seem to make sense.
Sky-high market valuation
Nvidia holds a commanding position in the graphics processing unit (GPU) segment and is a darling of OEMs in the gaming and visual computing market, artificial intelligence, automotive, cloud and data services, software developments, design engineering, autonomous machines and other intense applications. It has more than 1.6 million registered developers and is favorably viewed by many.
It may be about to gamble away that enormous goodwill. The acquisition of Arm from Softbank would add critical CPU intelligence and ownership to Nvidia’s product base but it is difficult imagining any other major benefits. Even the CPU technology is available under license from Arm without direction ownership and the negative pressure that would immediately follow such a deal.
Nvidia succeeded as brilliantly as it has by flying under the radar of many competitors. It grew rapidly from a low sales base and clocked $11 billion in sales for the fiscal year ended January 26, 2020. Sales are forecast to surge to $14.7 billion in fiscal 2021, up an industry-leading 35 percent, from the preceding year, justifying the massive increase in the company’s market capitalization. The company’s strong cash position — about $15.5 billion at the end of the last quarter — combined with a low long-term debt of approximately $2 billion has also made it a darling of the investment community and endeared it to suppliers and OEM partners.
Why would anyone want to mess up that recipe? I personally hope whoever is leading the campaign for Nvidia to purchase Arm — if true — would step back and reconsider the action. It will lead to major problems in future. Here is why:
It may not seem so but Nvidia has major competitors that have so far ignored its encroachment on their turf, contented with the multiple other technology segments where they have commanding positions and don’t feel threatened by the GPU champion. Many of these, including Intel, Advanced Micro Devices and Xilinx, are already beginning to consider Nvidia a potentially bigger headache than they have so far assumed.
With the speculated discussion to purchase Arm, Santa Clara-Calif.-based Nvidia has jumped to the top of the competition roster. These companies all license technologies from Arm and would have to pay royalty to Nvidia if the acquisition is successfully concluded. More such firms, in fact tens of big and small semiconductor companies, software vendors, design houses and OEMs, including Apple Inc., HP and Google may find themselves locked into a new world dominated by Nvidia. Is Nvidia ready to take on these companies?
Arm won’t be cheap
That is not all. Nvidia is loaded with cash but Arm will not be cheap. Softbank paid $32 billion for the U.K. company in 2016 but it will command a much higher figure today; Some speculators are bandying about estimates that are well above $50 billion. It is unlikely Nvidia would be able to raise the $30 billion or more in extra funding an all-cash deal would require. This implies a combination of cash and stock, or an all-shares deal, which SoftBank may welcome in the hope of cashing in later continued rise in Nvidia’s valuation. Considering that SoftBank is trying to raise funds for other requirements, this is an unlikely scenario. Is Nvidia, a conservatively managed enterprise — so far — willing to create this financial puddle?
Jen-Hsun Huang, Nvidia’s president and CEO, may indeed be looking to make such a splash. At 56, Huang could be looking for a major testimonial, one that would dwarf other M&A deals that have been conducted so far in the semiconductor market. A successful $50 billion to $60 billion purchase of Arm would qualify as the biggest consummated transaction in the industry. It does not fit Huang’s profile, though. He has changed jobs a few times in his career but has kept a steady handle on Nvidia since it was founded in 1993. A chest-thumping deal does not sound much like him.
Of course, Huang and Nvidia’s board of directors could have other things on their minds. They may have a vision for a Nvidia-Arm combo that is not open currently to everyone. First, though, they will have to wade through a thicket of regulatory hurdles, including likely opposition from certain regions. While the United States may be quick to give its okay, Nvidia should not expect a warm response from Chinese regulators. Even the British may be skittish about letting Arm go across the Atlantic.
This could result in a multi-year regulatory review that could hurt both Arm and Nvidia, scare away customers and depress Nvidia’s market capitalization. This is one idea that needs to be throttled before growing wings beyond the ongoing speculation.