Updated Sept. 1, 2023
By guest authors Corrie Driebusch and Ben Dummett from the Wall Street Journal.
Arm plans to start meeting with prospective investors as early as Tuesday
British chip designer Arm Ltd. is eyeing a target valuation between USD 50 billion and USD 55 billion for what is shaping up to be the year’s largest initial public offering.
Arm plans to start meeting with prospective investors as early as Tuesday ahead of its stock-market debut on the Nasdaq exchange the following week, people familiar with the matter said.
SoftBank Group 9984 -0.69%decrease; red down pointing triangle, Arm’s owner, is expected to sell about 10% of total shares outstanding in the offering, the people said. The blockbuster deal will test the IPO market’s recent revival, following the successful, but smaller, public debuts of restaurant chain Cava Group and Oddity Tech, a direct-to-consumer seller of makeup brands.
SoftBank acquired Arm, whose chips are used in most smartphones and mobile devices, for roughly USD 32 billion in 2016. It later sold a quarter of the business for USD 8 billion to the Vision Fund, a unit of the Japanese tech investor.
Still, Arm’s targeted price range is well below the $64 billion value implied by SoftBank Group’s recent deal to buy the remaining 25 % stake in Arm from its Vision Fund unit.
People close to the deal say the lower target valuation isn’t set in stone. They expect strong demand on the chip designer’s roadshow to push the price higher. In many highly anticipated IPOs, companies and their underwriters start with a lower target valuation and go on to price far higher.
Arm’s IPO gives SoftBank a way to sell down its position in the chip designer over time. If the stock goes up in coming months it could provide a bigger return.
The Japanese investor could use a win. Led by its billionaire founder Masayoshi Son, SoftBank has spent much of the past two years selling off years-old investments to pay down debt.
The Arm IPO would give SoftBank fresh capital to restart its wide-ranging investments in tech startups. The company recently said it wants to renew its push for large-scale investments in artificial intelligence.
SoftBank earlier tried to sell Arm for $40 billion to Nvidia, an artificial intelligence and graphics-chip maker, but regulatory opposition doomed the deal.
Arm is a key player in the world’s semiconductor industry, with companies including Apple, Qualcomm and Advanced Micro Devices relying on it for some of their chips. It prides itself on being a neutral party in the chip industry, selling its designs to everyone without favouring any one manufacturer.
In its IPO filing with the Securities and Exchange Commission, Arm said profit fell by more than 50% in the most recent quarter, hurt by slowing smartphone sales.
The company has extended its footprint into other, more powerful chips in recent years and is getting an added boost from recent excitement about artificial intelligence, which could bring new sales opportunities. More than 30 billion Arm-based chips were shipped in the company’s last fiscal year, up 70 % from seven years ago, Arm said in the SEC filing.
Arm’s exposure to China is a key risk that may weigh on the company’s ultimate valuation in the offering because of the mistrust between the U.S. and its rival superpower.
About 25% of Arm’s revenue came from China in its latest fiscal year, according to the SEC filing, making it “particularly susceptible to economic and political risks” affecting that country. Arm said it expects declining royalty revenue from China, adding that such revenue already has been slowing because of economic issues and export controls imposed on the country.
China demonstrated its ability to intervene in the development of the U.S. chip industry last month, after Chinese regulators failed to approve Intel’s more-than-USD 5 billion offer to buy Israeli contract chip maker Tower Semiconductor. That inaction led the two companies to abandon their deal.
Arm has held talks with some of its partners and customers for the sale of small stakes in the IPO each worth up to USD 100 million, according to people familiar with the matter. It couldn’t be learned which, if any, of these investors plan to participate.
Companies sometimes invite strategic and big-name financial investors to invest in their IPO because of existing relationships or to help gain credibility with the market to boost demand for the issue.
The deal is good news for the Wall Street bankers who muddled through the IPO market’s recent downturn. Barclays, Goldman Sachs, JPMorgan and Mizuho are among the banks underwriting the offering.
Arm’s exposure to China is a key risk that may weigh on the company’s ultimate valuation in the offering because of the mistrust between the U.S. and its rival superpower.
About 25 % of Arm’s revenue came from China in its latest fiscal year, according to the SEC filing, making it “particularly susceptible to economic and political risks” affecting that country. Arm said it expects declining royalty revenue from China, adding that such revenue already has been slowing because of economic issues and export controls imposed on the country.
China demonstrated its ability to intervene in the development of the U.S. chip industry last month, after Chinese regulators failed to approve Intel’s more-than-$5 billion offer to buy Israeli contract chip maker Tower Semiconductor. That inaction led the two companies to abandon their deal.
Arm has held talks with some of its partners and customers for the sale of small stakes in the IPO each worth up to USD 100 million, according to people familiar with the matter. It couldn’t be learned which, if any, of these investors plan to participate.
Companies sometimes invite strategic and big-name financial investors to invest in their IPO because of existing relationships or to help gain credibility with the market to boost demand for the issue.
The deal is good news for the Wall Street bankers who muddled through the IPO market’s recent downturn.
Appeared in the September 2, 2023, print edition as ‘Chip-Maker Arm Looks to Target Over USD 50 Billion Valuation at IPO’.