Softbank’s ARM bid may spur M&A ideas

Softbank has made a $31.6 billion offer for British semiconductor designer ARM. It is the Japanese firm’s biggest acquisition attempt yet but looks unlikely to be its last.

Masayoshi Son, chairman and chief executive of SoftBank, is clearly fond of making deals.

SoftBank bought Vodafone’s Japanese operation for around $17 billion in 2006 and gobbled up US wireless internet provider Sprint Corp for more than $20 billion three years ago. And since 2014 it has closed a further eight acquisitions totaling more than $10 billion, data from Dealogic shows.

But Son’s latest acquisition attempt is his biggest yet — and perhaps his boldest.

Son, who recently firmed up his control of SoftBank after the exit of heir-apparent Nikesh Arora, has bid for a British technology company that has few synergies with SoftBank, according to one senior Hong Kong-based technology analyst, who declined to be quoted by name.

ARM Holdings designs semiconductor chips used in mobile phones, industrial machines and intelligent vehicles. It is a major player in the so-called internet of things. SoftBank’s business is diverse but it is primarily a telecommunications service provider.

Despite this difference, the acquisition appears to make some sense for a company that has long shown an acquisitive spirit. After all, ARM may give SoftBank a hint of which other companies to buy in the future.

“ARM gives you access to very upstream industry thinking,” said the Hong Kong-based analyst. “When ARM designs a chip, it gets used in a real product. But ARM is five years ahead of these product lines. It gives a potential window to the future.”

SoftBank appears prepared for a merger that is not going to see the two companies wedded together into one. In a statement, Son said that ARM will remain an independent business “within SoftBank” and would continue to be headquartered in Cambridge, England.

Brexit didn’t help price

SoftBank bid £17 per share for the company, valuing ARM at just over £24 billion ($31.6 billion). The bid offered a premium of 43% to ARM’s closing price on Friday and a 69.3% premium over the three-month volume weighted average price.

The timing of the deal, coming less than a month after the British public voted to leave the European Union, caused Philip Hammond, the UK’s new chancellor, to boast that Britain was “open for business — and open to foreign investment,” despite the Brexit vote.

Indeed, Brexit made the acquisition no cheaper for Softbank.

ARM’s stock price ended last week at £11.89, some 17% above where it closed on June 23, the day of the British EU referendum. That rise more than offsets the 10% fall in the British pound against the Japanese yen over the same period, based on where the FX pair traded late Monday. 

SoftBank is planning to pay for the company with a mix of cash on balance sheet — helped by the recent sale of part its stake in Alibaba — and a ¥1 trillion ($9.53 billion) two-year bridge loan from Mizuho Bank. The company says it will refinance the loan with long-term financing.

The announcement pushed up ARM’s shares by over 40% in London trading, close to Softbank's bid price. The impact on SoftBank’s shares, however, is still to be seen. The Tokyo Stock Exchange was closed on Monday due to a public holiday.

It is unclear whether a rival suitor will emerge, given the potential regulatory obstacles should a counter-bid come from one of ARM's customers or rivals.

SoftBank already owns 1.42% of ARM’s shares. But it still needs to win the consent of some major outside investors before the deal can go through. Baillie Gifford & Co owns 10% of the company, Blackrock holds 5.3%, and Thornburg Investment Management has a 5% stake.

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