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Nvidia buys shares from SoftBank in the biggest chip deal ever



Nvidia

agreed to buy Arm Holdings, a UK-based chip design company

SoftBank Group

for approximately $ 40 billion in cash, stock and future considerations.

It is the largest acquisition in the history of the semiconductor industry and a significant victory for SoftBank and its founder and CEO Masayoushi Son, who bought Arm for $ 32 billion in 2016.

Under the terms of the agreement, Nvidia (ticker: NVDA) will pay SoftBank (9984.Japan) $ 1

2 billion in cash, including $ 2 billion payable on signing, and 44.3 million shares of Nvidia with an estimated value of $ 21. , 5 billion. SoftBank may also receive up to $ 5 billion in cash or common stock under an earn-out arrangement, subject to Arm’s meeting specific financial performance targets. Nvidia will also issue $ 1.5 billion in stock to Arm’s employees.

SoftBank’s shares were up 8.3% early Monday in Tokyo.

“Artificial intelligence is the most powerful technological force of our time and has launched a new wave of computing,” Nvidia CEO Jensen Huang said in a statement on Sunday. “In the years to come, trillions of artificial intelligence computers will create a new Internet of Things that is thousands of times larger than the current Internet of People. Our combination will create a company fabulously positioned for the age of AI.”

Nvidia will finance the cash portion of the deal from its balance sheet. Nvidia said SoftBank’s stake in the company after the deal is closed will be less than 10%. The deal does not include Arm’s Internet of Things Services Group, according to the announcement.

In an interview with Barron’s, ARM IP Products Group President Rene Haas confirmed that the deal does not include Treasure Data, a software platform for managing data generated by IoT applications. In July, there were reports that SoftBank had hired Goldman Sachs to find a buyer for the unit with a target price of $ 1 billion.

Nvidia said the deal will immediately increase its non-GAAP gross margin and non-GAAP earnings per share. Nvidia CFO Colette Kress said in an interview with Barron’s that SoftBank will not have a seat on Nvidia’s board of directors.

“The Nvdia-Arm deal is not only the largest semiconductor deal by dollar volume at $ 40 billion, but I believe the one with the most significant impact,” says Patrick Moorhead, of chip research firm Moor Insights & Strategy. . “I think the deal fits like a glove as Arm plays in areas where Nvidia isn’t or isn’t as successful, while Nvidia plays in many places Arm isn’t or isn’t as successful.”

Assuming the eventual exercise of performance-based elements of the agreement, the transaction would eclipse the $ 37 billion acquisition of

Broadcom

from Avago (which later took the name of Broadcom) in 2016. SoftBank acquired Arm for $ 32 billion in 2016. The current capital of Arm is held 75% by SoftBank Group and 25% by the SoftBank Vision Fund , the company’s $ 100 billion venture capital portfolio.

Nvidia said Arm will remain based in Cambridge in the UK.

Nvidia said it will maintain Arm’s open licensing model “while maintaining the global customer neutrality that has been critical to its success, with 180 billion chips shipped to date by its licensees.” Arm will retain its name and its intellectual property will remain registered in the UK.

SoftBank’s son said in a statement that “Nvidia is the perfect match for Arm”.

Asked about reports that some UK officials were against the deal, Arm’s Haas said he believes some of the negative comments came from people unaware that Nvidia intends to keep both its business model and strategy. Note that Nvidia plans to build a large supercomputer on the Arm Cambridge campus.

As for the lengthy shutdown process – which is expected to take around 18 months – Nvidia’s Kress said it primarily reflects the time it takes to receive the required regulatory approvals. Note that Nvidia recently received a number of similar approvals in the US, Europe and China for the acquisition of Mellanox Technologies. “We have a good understanding of how it works,” he says, “and we’re ready to get back on the road.”

Meanwhile, both Bloomberg and the Financial Times reported over the weekend that SoftBank could use the proceeds from recent transactions along with other cash to deprive the company: SoftBank’s recent market capitalization of around $ 105 billion is less than half the underlying net asset value of the company.

Arm designs chips, licenses designs to companies like Broadcom, Apple, Marvell, and Nvidia, and collects royalties when companies sell ARM-based chips. ARM’s largest market has long been mobile devices – ARM-based processors power over 95% of the world’s smartphones and tablets.

When the acquisition of Softbank’s Arm was announced four years ago, Masayoshi Son said he expected Arm to become a key driver of the emerging Internet of Things, which has become a major focus of his $ 100 billion Vision Fund. a venture capital portfolio launched the same year SoftBank bought ARM.

Since July, it has been speculated that SoftBank was considering options for a sale or spin-off of Arm, and Masa confirmed in the company’s most recent earnings call with the media that it was negotiating with an unspecified potential bidder. , which was widely believed to be Nvidia.

Still, the deal is astounding, following a series of transactions over the past six months aimed at strengthening both SoftBank’s share price and Masa’s reputation, which was tarnished last year by the company’s troubled investment in the rental company. WeWork short-term real estate. The Nvidia / Arm combination is likely to face opposition from Arm’s licensees who see Nvidia as a rival and is also receiving a political push in the UK, although the company would simply trade a Japan-based owner for one based in. California. .

In March, under pressure from active investment firm Elliott Management, SoftBank announced a plan to raise $ 41 billion in cash through asset sales, with proceeds earmarked for debt repayments and share repurchases. The company nearly completed that program, via the sale of most of its stake in

T-Mobile

(which it received through the acquisition of its majority stake in Sprint) and parts of its holdings in both Alibaba (BABA) and SoftBank Corp., a Japanese-owned, majority-owned wireless operator. In addition to that program, the company recently announced plans to sell about a third of its remaining position in SoftBank Corp. for $ 13.5 billion, in an offer that will reduce its stake to about 40% from 62%. .

In announcing earnings for the June quarter, SoftBank said it has already spent about 1 trillion yen, or about $ 9.4 billion, to buy back stock using proceeds from recent asset sales, and has reduced its position as net debt of approximately $ 14 billion in the last quarter. SoftBank said at the time of the earnings announcement that it plans to buy back at least another 1.5 trillion yen worth of shares.

In announcing the earnings, SoftBank also said it was changing the way it reports financial results to reflect the fact that the company is actually an investment company and not an operating company. SoftBank demonstrated this change recently with some active moves in the public equity and derivatives markets.

The company announced the creation of an investment management subsidiary with a capital of $ 555 million, with liquidity two-thirds from the company and one-third from Masa. In announcing the unit, SoftBank specifically stated that it would invest in highly liquid publicly traded stocks, both through direct investments and derivative transactions.

Such as Barron’s reported last month, the company posted a profit of $ 611.5 million in the June quarter after investing $ 10 billion in cash from its recent asset sales in large-cap technology companies. That investment is unrelated to the new tech equity fund. By the end of the June quarter, the position had been reduced to $ 3.4 billion.

In a subsequent SEC filing, the company disclosed $ 3.8 billion in technology holdings as of June 30, positions that appear to reflect both the new fund’s holdings and after-sales technology investments in assets.

SoftBank positioned included a $ 1 billion stake in

Amazon.com

(AMZN), plus $ 475 million from Alphabet (GOOGL) and nearly $ 250 million

Adobe

(ADBE) shares. Other great bets included

Netflix

(NFLX),

Microsoft

(MSFT) and Nvidia (NVDA), all ranging between $ 180 million and $ 190 million, with nine other holdings of approximately $ 100 million.

According to several media reports, the company has invested billions of dollars in call options on US equities in recent weeks in a move that appears to have contributed to the recent rally in tech stocks and could increase volatility in recent trading sessions.

Write to Eric J. Savitz at eric.savitz@barrons.com


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