The starting gun has been fired on one of the most eagerly anticipated stock market flotations of this – or, indeed, any – year.
Arm Holdings, the UK-based chip designer, has filed for an Initial Public Offering (IPO) next month on the Nasdaq.
It is expected to be the biggest IPO this year and the largest since Rivian, the electric vehicle maker, came to market in November 2021 with a valuation of $70bn.
The filing contains plenty of information about how Cambridge-based Arm, which employs 2,800 people in the UK, has been trading of late.
But the single most important element in the filing sought by investors was the valuation put on the company when its owner, the Japanese tech investor SoftBank, bought back a 25% stake in Arm earlier this month from Vision Fund 1, the vehicle it manages for investors including Saudi Arabia’s public investment fund.
This figure – which effectively aims to set a floor on the valuation Arm achieves at its IPO – came in at $64bn.
That was less than the valuation of $70bn that some had speculated SoftBank is hoping to achieve in the IPO – but was well ahead of the price that some of Arm’s customers, who have been looking to take a stake in the business, were prepared to pay.
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Nvidia, which saw its own attempt to buy Arm thwarted by regulators 18 months ago had reportedly sought to invest at a price which valued Arm at just $45bn.
That $64bn sum, if replicated in the IPO, would mean SoftBank has doubled its money. The company paid £24.3bn (around $32bn at the time) when it controversially agreed a takeover of Arm back in 2016.
The deal was announced weeks after the UK voted to leave the EU and the new Prime Minister at the time, Theresa May, was anxious to show the world that the UK remained ‘open for business’. There is little doubt, though, that Softbank got itself a bargain – not least because the slump in the pound following the Brexit vote made it a very good time to buy sterling-denominated assets.
Since then, governments everywhere – including in the UK – have tightened the rules governing foreign takeovers of domestic businesses, making it highly unlikely that a takeover of Arm, whose designs are found in the chips used in 99% of the world’s smartphones, would be allowed today.
So what of Arm’s current trading and its expectations for future growth?
The picture in the filing is mixed. Arm’s sales during the year to the end of March came in at $2.68bn, down 1% on the previous year, reflecting lower smartphone shipments globally. That meant net profits fell by 5% to $524m.
Meanwhile, during the most recent quarter, the sales decline accelerated. During the three months to the end of June, sales came in at $675m, down 2.5% on the same period a year ago.
Falling revenues from Arm’s core product – its designs in the chips that power smartphones – presents a challenge to SoftBank as it seeks to persuade investors to stump up.
Accordingly, SoftBank and its advisers have wheeled out some pretty spectacular growth projections.
Arm’s addressable market – chips found not just in smartphones but also in other devices – personal computers, digital TVs, servers, vehicles and networking equipment – is put in the filing at $200bn as of the end of last year but, by the end of 2025, is expected to grow to around $247bn.
That reflects growing confidence in the so-called ‘internet of things’ – the way in which physical objects will be embedded in future with sensors and software that enable them to connect, communicate and exchange data with each other, transforming just about every facet of life.
It is something in which Arm has been investing heavily. The prospectus suggests chips designed by Arm were already in 64.5% of IoT-enabled goods, such as washing machines, thermostats, digital cameras, drones, sensors, surveillance cameras, manufacturing equipment, robotics, electric motor controllers and city infrastructure and building management equipment, at the end of last year.
Arm’s argument is that, as chip designs become more advanced and complex, its investments in extra functionality, higher performance and efficiency and more specialised designs will help it to deliver more value to its customers.
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SoftBank has added sizzle to the IPO by talking up the potential of artificial intelligence to support its growth prospects.
The phrase ‘AI’ appears no fewer than 44 times in the prospectus.
That prospectus also, though, highlights a number of risks faced by Arm. These include a rise in tensions between China – which now accounts for a quarter of Arm’s sales – and the US or UK. Another is that Arm’s sales come mainly from what it admits is a “limited number of end markets”, with more than half coming from smartphones and consumer electronics, potentially exposing the business to “changes in consumer behaviour”.
It also has a limited customer base: its top five customers accounted for 57% of Arm’s sales during the year to the end of March.
Another major risk outlined is that Arm’s chip designs face growing competition from free open-source rivals, most notably RISC-V (pronounced ‘risk five’), which is already being used by Arm customers such as Apple.
Other Arm customers are also getting behind the technology. A clutch of them, including Infineon Technologies, NXP Semiconductor and Qualcomm, teamed up with the German engineering titan Bosch earlier this month to invest in a company aimed at advancing the global adoption of RISC-V.
The filing notes: “If RISC-V-related technology continues to be developed and market support for RISC-V increases, our customers may choose to utilise this free, open-source architecture instead of our products.”
In all, of the 228 pages in the filing, some 57 are taken up by the ‘risk factors’ sector.
That may explain why no fewer than 28 banks – led by Barclays, Goldman Sachs, JP Morgan and Mizuho – have been lined up by SoftBank to advise on the flotation.
It will be very difficult to find any critical – or even independent – analysis of Arm’s prospects ahead of the IPO as so many company followers will be ‘conflicted out’, in the jargon, due to their bank’s involvement.
Arm is a superb business, a genuine British success story, albeit one that was able to fall into the clutches of SoftBank because its UK shareholders did not value it sufficiently (one reason why it is now listing in New York and not London).
However, as the filing makes clear, it is a business with significant challenges in future.
SoftBank and its advisers may have their work cut out to achieve the valuation they are seeking.
