An Arm IPO would be the largest chip IPO ever.
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‘s agreement to buy the microprocessor design house Arm appears dead. While both sides have continued to publicly support the transaction, the Federal Trade Commission’s opposition to the transaction as anti-competitive makes closing the proposed deal highly unlikely.
With few obvious alternative buyers once you weed out others with similar or worse competitive hurdles — it’s hard to see Intel (ticker: INTC), Advanced Micro Devices (AMD) Broadcom (AVGO) or Qualcomm (QCOM) getting a regulatory thumbs up — there is growing suspicion on the Street that Arm parent SoftBank Group (SFTBY) will decide to spin off the company in an initial public offering.
If that happens, an Arm IPO would be a blockbuster – the largest chip IPO ever.
SoftBank bought Arm — it was then a public company — for $31.4 billion in 2016. Nvidia (NVDA) in September 2020 agreed to buy Arm for $12 billion in cash and 219 million Nvidia shares. Originally worth $38.5 billion, the value of the proposed transaction is now about $65 billion, given appreciation in Nvidia’s stock price.
NewStreet Research analyst Pierre Ferragu thinks Arm could be an attractive IPO candidate. He says that Arm has “a near monopoly” on the market for processor designs in systems on a chip, or SOCs, a design used in mobile phones, data center servers, autonomous vehicles and the internet of things.
The analyst says Arm’s royalty revenue — it doesn’t actually make chips, it collects fees from chip designs — can grow in the mid-teens range on an average annual basis over the next five years, “as they benefit from underlying semi growth, increased penetration and pricing power.”
Some of Arm’s financial data is included in SoftBank’s earnings reports. For the six months through Sept. 30, 2021, Arm had sales of 161.4 trillion yen ($1.46 billion), up 61% from the year-earlier period. Royalty revenue in the period was up 24%, to $749 million, while non-royalty license revenue was $714 million, up 115.6%, reflecting demand for Arm-based processors in automotive, server and AI applications.
In the period, SoftBank said, partners shipped 13.7 billion Arm-based chips, bringing the cumulative total to more than 200 billion.
Ferragu notes that before being acquired by SoftBank, Arm traded for about 21 times forward revenue. Given subsequent modest multiple expansion in the chip sector, he thinks it would be fair to assume Arm can traded for 23 times revenue going forward as a public company. He models revenue at $2.6 billion for 2025, a level he thinks would support a $60 billion valuation in 2024, and about a $45 billion valuation in an IPO this year.
SoftBank could provide an update on the status of the Arm deal when the company reports earnings next week.
SoftBank’s American depositary receipts fell 0.3% on Tuesday. The S&P 500 was flat, and the Dow Jones Industrial Average fell 0.2%.
Write to Eric J. Savitz at [email protected]
