After announcing $40 billion acquisition, Nvidia and Arm must now start campaign to convince regulators and industry...
After several weeks-long rumor mill, Nvidia finally made official its agreement to acquire Arm for $40 billion in stock and cash. Having listened this morning to Jensen Huang, founder and CEO of Nvidia, and Simon Segars, CEO of Arm on the media and analyst call, it was clear that Huang was really fired up by the opportunity, but that the campaign to convince regulators was going to take time – probably at least a year, if not more.
Huang said, “This transaction is very important for the technology sector and the U.K. Together we’re going to create the world’s premier computing company for the age of AI [artificial intelligence].” Throughout the call, Huang was extremely enthusiastic while Segars’ tone was cautiously optimistic – maybe because of a British trait that prevents Brits from being too bullish until the deal actually concludes. There was certainly a stark contrast between the two styles of the American CEO and the British CEO.
The deal is certainly big. As a result SoftBank will become one of the largest investors in Nvidia, because the transaction involves Nvidia selling $21.5 billion of its stock to SoftBank. The remainder of the $40 billion is made up of $12 billion in cash to SoftBank (of which $2 billion is payable on signing), $1.5 billion in equity to Arm employees, and up to $5 billion in cash or stock under an earn-out construct, dependent on Arm meeting specific financial targets.
Addressing concerns from both UK and existing licensees
There have been two key concerns about the deal. One is about the U.K. losing its crown jewel of the technology industry to the United States, and the other about concerns among Arm licensees who are also Nvidia competitors.
On the first issue, Nvidia has made a big promise of investing in a new world-class AI research and education center and establishing an Arm/Nvidia powered AI supercomputer for groundbreaking research, all in Cambridge, U.K, where Arm was originally founded 30 years ago.
On the second issue, more concerning for the industry, Nvidia said that Arm will trade as an independent unit within Nvidia and hence it will be allowed to continue Arm’s open-licensing model and customer neutrality; it also added that it will expand Arm’s IP licensing portfolio with Nvidia technology.
No doubt the second issue, on customer neutrality, will be debated for weeks and months to come as Nvidia and Arm begin their campaign of convincing customers, partners and country regulators of the value of the combined force to all concerned. On the media call, Segars responded to a question challenging him about a statement he made four years ago, in which he said that its partners and customers valued Arm’s independence. So how has that changed now. Segars said, “Our value is in the technology we have created. The intent is to operate with a level of independence that maintains this model.” He added that he’d already had dialog with various customers in recent weeks since the rumors were going around.
Huang indicated that even after these conversations, the fact they are going forward with the transaction speaks volumes about how customers are responding. “The virtues of independence are openness and fairness,” he said. Huang also said they’ve started discussions with the U.K. government, and they were open-minded to creating a constructive framework agreeable to all. “There’s an AI race all over the world, every nation is chasing a core of critical mass to develop that AI research. U.K. researchers won’t need to leave the country to work on AI. Cambridge will be Nvidia’s largest site in Europe. We have some of the finest computer scientists in the world in Cambridge.”
Turning to China, he said the proposal they have is also very pro-China and that they’re going to “love this deal”. The structure of the joint venture won’t change. Segars added, “That is the route we’ve set for China and that will continue [under Nvidia].”
Enthusiastic users of both Arm and RISC-V
Some in the industry have wondered if the acquisition of Arm would push some competitors towards other instruction set architectures, especially RISC-V. In August, Geoff Blaber, vice president research, Americas, for analyst firm CCS Insight, wrote, “Arm is facing growing competition from RISC-V, an open-source architecture. If its partners believed that Arm’s integrity and independence was compromised, it would accelerate the growth of RISC-V and in the process devalue Arm.” He added, “A long line of Arm licensees are also part of the RISC-V community and steadily upping their investment. There’s a scenario in which Nvidia pays a rich premium for Arm, the very act of which sparks an erosion in its value as focus shifts to a more independent alternative.”
That was several weeks ago, and fast forward to today, and Bob O’Donnell, president and chief analyst at TECHnalysis Research, commented many have argued that this purchase could push Arm licensees toward RISC-V, an open source IP chip architecture that many see as a potential challenger to Arm. But, he said, “The truth is most of RISC-V’s success has been at the low-power microcontroller end of Arm’s business, and it really does not pose any significant threat to the higher-power Arm designs used for smartphones, PCs, and servers. Over time, the threat could grow, but it’s likely a long way off.”
I have often been challenged by Arm in the past about the “either-or” argument that media commentators have implied over the last two years or so (myself included): in other words, that RISC-V posed a threat to Arm. But the reality is that many chips can have multiple architectures sitting side by side for different functions, and such heterogeneous chips allow for co-existence, with the right tools and support. So, there is no real threat as such.
And the argument is strong, as Huang commented on the media call today. He said, “We are enthusiastic users of both Arm and RISC-V. They’re very different. One is a computing platform with rich ecosystem. This distinguishes it from RISC-V. We use RISC-V internally in products like controllers. There are people satisfied with Mali and we will continue with that.”
Is there a plan B if deal falls through?
So, what would happen if the transaction doesn’t happen because of some regulatory roadblock, whatever that might be? Huang was asked, “Is there a ‘plan B’?” He responded, “Plan B is to continue as we are. However, this is a once-in-a-lifetime opportunity for the two companies to create the most energy-efficient computing capability in the world. That’s the reason I was the highest bidder. And I have every confidence that plan A is going to be realized. This combination is very pro-customer. The regulators are going to be supportive.” However, he acknowledged that it could take some time, probably more than a year, to clear all regulatory approvals.
Realizing the AI computing vision
Both Huang and Segars posited that they will be able to realize SoftBank founder and CEO Masayoshi Son’s vision of addressing the new wave of AI computing, company when he acquired Arm for $32 billion four years ago. Segars said, “SoftBank has been an incredible supporter of Arm. We have much wider portfolio than we did four years ago. Under Nvidia, we can continue that vision.”
Huang added, “I think the strategy of taking Arm private and then investing in three different areas was genius. It would have been challenging for a public company [to make that level of long-term investment]. Nvidia is a great benefactor of that investment, and I’m delighted to have Masa as a major investor.”
The wider opportunity for both Nvidia and Arm is much bigger than the component parts. As TECHnalysis Research’s O’Donnell said, “The biggest issues will likely come down to the competitive threats and strategic concerns that the combination of Nvidia and Arm will create. The truth is, this acquisition would be a brilliant move for Nvidia, because it would extend the company’s level of influence and exposure to many areas of the tech market that it has never been able to reach.”
As I wrote recently, the acquisition makes sense for both companies with the data center clearly a key part of their synergy, with Nvidia then owning the whole stack – the GPU, CPU, networking and software. Though it is potentially disruptive for some Arm competitors and partners, the two CEOs’ assertion on today’s call seems to suggest they have already sounded out some of these key customers and that there didn’t seem to be objection (though this wasn’t explicitly stated so they were just relying on media and analysts inferring this).
From Nvidia’s point of view, the company gets access to Arm’s vast ecosystem of partners and customers. Huang said, “SoCs [systems on chip] really don’t have the benefit of the GPUs we make. With Arm, we can reach a whole lot more customers and a lot more markets. We love the business model, the reach, the vastness of Arm’s ecosystem.” For Arm, Segars said, “We have very complementary organizations, we do different things and we are going to be continuing with our research and development work.”
The call was certainly very bullish. But that’s because they have a potentially tough campaign ahead to get over all the potential hurdles – both regulatory and customers. There are of course many questions unanswered – such as how will Arm maintain its independence, will there be Chinese walls (no pun intended) to protect competitors’ interests, will the U.K. be convinced with its plans to build Nvidia’s AI center for Europe, what exactly will the investment in Cambridge involve, and will the country regulators be satisfied?
Nvidia already has some experience in clearing these hurdles having just gone through it with its acquisition of Mellanox. Maybe that’s why Jensen Huang is so confident. He doesn’t even want to contemplate a plan B.