Investing — Technology

NVIDIA, rising tech leader of the tech with this stunning acquisition

RTX2080 graphics cards
Photo by Nana Dua on Unsplash

NVIDIA announced the acquisition of Arm, the well-known semiconductor company, in a transaction valued at $40 billion. This deal will create a leader in various technologies such as AI, data centers, GPUs, and CPUs. In this article, we propose an overview of this milestone in recent IT history.

First, we will examine the actors involved in this mega-deal. Then, we will focus on the financial details behind the Arm acquisition and why this could be a once-in-a-lifetime opportunity for NVIDIA’s future… As long as the regulatory authorities agree on this $40 billion deal.

The participants

NVIDIA

If you are a bit interested in informatics and gaming, you should already know one of the deal makers: NVIDIA. These years, the company developed its range of graphic processing units (GPUs) incorporated in amazing but costly video cards. Earlier this month, they presented their brand new RTX 3000 series, with prices reaching up to $1499 for some models. Pricey! But, despite although they cost an arm, these products remained NVIDIA core business during the fiscal year 2020 (ended on January 26, 2020): gaming. After all, is not the NVIDIA slogan “The way it’s meant to be played”? Sure it is, and this way is creating cash!

In recent years, the company also unexpectedly benefited from the rise of cryptocurrencies, through Bitcoin mining, which initially relied on the use of graphics processors. And as NVIDIA products are top of the class in calculation processes, well, they were heavily chosen by all these shady crypto mining farms.

However, reducing NVIDIA to GPU and video cards would be a mistake, as the company has diversified its activities to become a leader in computing. These days, the company continues to create new GPU designs, which are then resold to graphics card manufacturers for computers and consoles manufacturing through a fabless model. But NVIDIA is also active in mobile processors (the one in your smartphone, for example), supercomputers, data centers, artificial intelligence (AI), self-driving cars, etc.

Business mix of NVIDIA for the fiscal year 2020. Gaming segment remains an important cash maker, but data centers are growing
NVIDIA business mix can no longer be viewed only from the gaming side. Data centers, for example, tend to be a fast-growing segment.
NVIDIA's annual revenue over time, from 2005 to 2020. The growth was strong between 2016 and 2019, with a peak last year
NVIDIA’s revenue grows steadily over time, as the company keeps pushing graphics performance and technological limits even further.

Arm

Arm is a more confidential player in the microprocessor field. Its business is quite hidden from the general public but we will shed some light on it.

Like NVIDIA, Arm is a fabless semiconductor company, but they pushed the concept way further. Indeed, unlike NVIDIA, Arm is a 100% intellectual property (IP) supplier. The company only creates and licenses its technology rather than manufacturing and selling it. Simply said, Arm only produces and sells one thing: designs, based on its ARM architecture. Arm’s client companies then develop and manufacture their chips, based on these designs.

And this is a flourishing business! You are probably surrounded by Arm-based products as you read this article. Indeed ARM architecture is very good for one thing: allowing very low electric consumption. They are therefore used in the manufacture of a wide range of mobile devices, from smartphones to laptops, biometric systems, smart TVs, smartwatches, and other Internet of Things (IoT) devices. When someone talks about Qualcomm Snapdragon on OnePlus Nord 765G or Apple A12 chip in your iPhone XS, it is all based on Arm’s technology.

A microchip
Photo by Brian Kostiuk on Unsplash

Arm’s client companies are all giants in their fields: Samsung, Qualcomm, Huawei, Amazon AWS (the ARM architecture is also good for servers), Apple … As well as NVIDIA. According to the IPnest 2020 report, Arm design IP market share was above 40%, far ahead of its direct competitors.

SoftBank Group

Last but not least, let me introduce you to the SoftBank Group. If you follow stock market news, you have probably read some news about them in recent weeks.

This Japanese holding company owns stakes in numerous technology, energy, and financial companies. It also manages Vision Fund, the world’s largest technology-driven venture capital fund, with over $ 100 billion invested in IoT, AI, robotics, software, mobile, biotechnology, fintech, and data. Those are all buzzy words, right? But they pay well.

SoftBank Group is also active in acquisitions. For example, in July 2016, its CEO Masayoshi Son announced the purchase of Arm for more than $32 billion. Since Arm was viewed as one of SoftBank Group’s gems.

Financial details about the acquisition of Arm by NVIDIA

An even more brilliant one considering the acquisition price offered by NVIDIA: $40 billion, much more than the cost of the initial acquisition by SoftBank Group. The Japanese firm, therefore, achieves a great deal through this sale, whose main characteristics are:

  • Price: $40 billion. NVIDIA will pay to SoftBank a total of $21.5 billion in NVIDIA common stock and $ 12 billion in cash, of which $2 billion can be paid at the deal signature. The cash will come from NVIDIA’s liquidity (no debt creation planned). Also, SoftBank may receive up to $5 billion in cash or common stock as an earn-out, depending on the achievement of specific financial performance goals for Arm. Finally, NVIDIA will issue $1.5 billion in equity to Arm employees.
  • Accretive: the acquisition is expected to be non-dilutive on NVIDIA’s non-GAAP gross margin and earnings per share (EPS). However, as NVIDIA plans to partially pay SoftBank with common stocks, a slight equity dilution is inevitable.
  • R&D investment: NVIDIA commits to invest in Cambridge, Arm’s stronghold, to create a world-class AI research and education center in various fields such as healthcare, life sciences, robotics, or self-driving cars. NVIDIA also commits building an AI supercomputer based on NVIDIA/Arm technology, for research purposes.
  • SoftBank remains on board: the Japanese holding company will keep an ownership stake of 10% in the new NVIDIA/Arm entity.
A US dollar
Photo by NeONBRAND on Unsplash

NVIDIA is the perfect partner for Arm,” said Masayoshi Son, chairman and CEO of SoftBank Group. “Since acquiring Arm, we have honored our commitments and invested heavily in people, technology and R&D, thereby expanding the business into new areas with high growth potential [ …] We look forward to supporting the continued success of the combined business.

A world of opportunities for NVIDIA?

But you could ask: practically, why acquiring Arm? What can be the strategy behind all of this? Simply put, NVIDIA will now have a foothold in all areas that matter in information technology.

Indeed, the new NVIDIA/Arm entity will embark or be increasingly involved in business such as servers, data centers, personal computers, smartphones, and mobile technologies. The promises in AI and autonomous mobility are also incredible. Note that Arm’s IoT activity is not concerned by the deal.

Simply put, NVIDIA will now have a foothold in all areas that matter in information technology.

NVIDIA makes no secret of it: thanks to its growing success in the server market, its interest in Arm grew up, the former finally acquiring the latter. With its market capitalization exceeding $ 300 billion, it is “quite easy” for NVIDIA to buy Arm. The next step should be the integration of this new division into its development plans, especially in servers and data centers. NVIDIA expects this segment to remain a high growth opportunity.

Improved energy efficiency, CPU/GPU synergies, more powerful data centers, Arm’s commercial portfolio: advantages were and remain numerous. Arm could become the last piece to the puzzle that will allow NVIDIA to create integrated, more efficient, and smarter architectures. All of this being in line with the vision of Jensen Huang, co-founder and CEO of NVIDIA, about the future of computing.

The big loser of this acquisition will be Intel. Already declining in market shares because of AMD, the old company will now be attacked head-on by the NVIDIA/Arm team.

Pay attention to the authorities’ decision

It all sounds wonderful, the boards of directors of the various parties have endorsed the buyout, cash will flow. But some people are warning about a potential dominance that could be harmful to the semiconductor market. And when we talk about a dominant position, the authorities are never far away.

A stop board
Photo by Jose Aragones on Unsplash

There is indeed a last but not least battle that NVIDIA needs to win on the regulatory front. Given the scale of the acquisition, the deal is likely to attract special attention from antitrust authorities around the world, primarily those in the United Kingdom, China, the European Union, and the United States. And it is unclear if all Arm’s client companies will remain in the room after the deal finalization. Preserving Arm’s portfolio richness will be crucial to maintain NVIDIA as a trendsetter in the market.

Final words

The deal will close in about 18 months, according to NVIDIA. Until then, keep an eye on the regulatory developments, which constitute the ultimate obstacle to this large-scale acquisition.

If it is completed, it should be a technological and economic milestone in computing. Either way, NVIDIA is already making history, as the $40 billion acquisition is the biggest deal ever made in the semiconductor industry.

Raphaël is the founder of Investiforum.fr, a financial website for French-speaking private investors. He owns shares of NVIDIA. This article was originally issued on Investiforum, the financial website for French-speaking private investors. Read the original article (in French).

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This article is for educational and entertainment purposes only and should not be considered as financial or legal advice. Not all information will be accurate but all the data is sourced. Consult a professional before making any significant financial decisions. This article should not be seen as an incentive to buy or sell any of the securities mentioned therein.

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