SoftBank/ARM Deal: Political Hurdles Ahead?

The deal could also face hard scrutiny by the European Commission, which is now becoming more critical about consolidation in the technology sector.

This week’s biggest business news is the £24.3 billion ($32b) proposed acquisition of ARM technologies by the Japanese group SoftBank. While the UK government initially praised the deal as an indication of the strength of Britain’s technology sector after the Brexit vote, some public officials are now raising concerns that it could be the beginning of “cheap” takeovers of the UK’s most valuable companies.

In fact, just before taking office last week, Prime Minister Theresa May said the British government would be keeping a close eye on foreign takeovers, arguing that foreign buyers should not have an unfettered right to acquire U.K. companies in “strategic” industries, as the lower price of the pound and the uncertainty about Britain’s relationship with the European Union after the Brexit vote could affect the valuation of many lucrative businesses in the country.

Britain’s new Chancellor of the Exchequer (Treasury Secretary), Philip Hammond, however, said the deal is a strong indication that the UK is very attractive to foreign investors after Brexit. (See ARM’s chairman was appointed to UK takeover committee.)

ARM is one of the crown jewels of the UK technology sector. The 25-year-old company, a spinoff from the now defunct Acorn Computers, rose from a small startup of 20 people to be the leader in mobile processor technology employing over 4,000. The company has no factories nor inventory, instead it licenses its technology to hundreds of companies worldwide, including household names such as Apple, Samsung, and Qualcomm.

The Financial Times reported: “The fall in sterling following the June 23 referendum has left the UK currency nearly 30 per cent lower against the Japanese yen over the past year, making ARM an attractive target.”

(Image: Pixabay + ARM logo)

However, since most of ARM’s revenue comes from licensing royalties outside the UK, the price of the company in the international markets rose 16.7 percent after the Brexit vote. The company stock rose over 45% on Monday (July 18) in early trading after the announcement.

It is interesting to note that the negotiations did not start until two weeks ago, when the Japanese billionaire and SoftBank’s CEO Masayoshi Son approached ARM to discuss the deal. Although Son states that Brexit had nothing to do with his decision, the timing would suggest otherwise. It is also possible that the referendum outcome influenced ARM executives to look more intensely for a buyer.

Just one month ago, when Masayosi Son took back the control of SoftBank from his former deputy and designated successor, Nikesh Arora, he told shareholders that he “will work on a few more crazy ideas.” Brexit could have influenced Son to look for opportunities in the British technology sector, undoubtedly affected by the referendum result.

The deal could also face hard scrutiny by the European Commission, which is now becoming more critical about consolidation in the technology sector. Although SoftBank and ARM are not competitors, the fact that ARM technology is present in about 95 percent of smartphones and tablets poses questions about the direction of the company, and how it may impact competition in the semiconductor market.

The recent decision of Intel to pull out of the mobile market to concentrate on IoT and communications left ARM in a de facto monopoly position, something that troubles European regulators.

ARM has been diversifying its product offerings to other areas such as vehicle communications, sensors, IoT, and cloud server farms. Their technology offers significant advantages in power consumption and small footprint, making it suitable for many applications in direct competition with Intel, AMD and other processor vendors.

The SoftBank-ARM deal could also face competition, since some other companies, especially smartphone vendors such as Apple and Samsung, could start a bidding war. Being already ARM customers, however, a deal with any of them would probably face more regulatory challenges from antitrust authorities.

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