What does NVIDIA's massive acquisition of ARM mean?

Introduction: If the acquisition is completed, NVIDIA is very likely to restrict ARM’s product and technology licensing, which would impact potential clients such as Apple, Samsung, and Qualcomm.

According to the latest reports from multiple authoritative media outlets, several informed sources said on Saturday that SoftBank Group is about to sell the British IC design firm ARM to NVIDIA. This deal will allow SoftBank to recoup a large amount of cash and create a new powerhouse in the semiconductor industry.

The sources revealed that both parties will reach an agreement through a cash-plus-stock acquisition, with the purchase price potentially exceeding $40 billion. However, the final details of the acquisition are still pending, and negotiations may still fall apart.

If the transaction goes through smoothly, it will become the largest deal in the chip industry, and this transaction could also raise concerns among global antitrust regulators and ARM’s chip design clients.

Notably, since NVIDIA is an American company, it could abuse its monopoly for political or commercial purposes, using licensing as leverage for unfair competition. If this happens, IC design firms like Apple, MediaTek, and Qualcomm might lose architecture licenses and be unable to produce their own products.

ARM-based processors have the advantage of low power consumption and are widely used in smartphones and tablets worldwide. They are also starting to make inroads into laptops and servers. This acquisition will have a significant impact on the entire tech industry. According to reports, ARM chip manufacturers such as Apple, Qualcomm, and Samsung might oppose this acquisition.

NVIDIA is one of the world's largest computer chip companies, specializing in chips for computer graphics, data centers, automobiles, and artificial intelligence. As of Friday, its total market value exceeded $300 billion, nearly $100 billion more than long-time chip technology leader Intel, and NVIDIA is also one of the best-performing tech stocks this year.

The acquisition will change NVIDIA's business model

ARM's business model is very unique: it does not sell semiconductors themselves but only provides chip design solutions, charging licensing and royalty fees.

In 2019, the company collected technology licensing fees from more than 22 billion devices sold, with key clients including Apple, Samsung, and Qualcomm. Relying on technology and patent licensing, these clients have significantly lowered design barriers, making ARM chips increasingly widespread.

For NVIDIA, although it is also an IC design firm, NVIDIA designs chips, participates in manufacturing adjustments, and sells the final product, making its business model heavier than ARM’s.

This naturally results in NVIDIA’s profit margins being much lower than ARM’s, as the former also bears part of the manufacturing and sales costs.

The merger of the two companies will lead NVIDIA to fundamentally rebuild its operating model, affecting the interests of tech companies worldwide.

Will increase NVIDIA's revenue streams

The benefit of this acquisition for NVIDIA is that it will significantly expand NVIDIA's revenue sources and strengthen its monopolistic position.

Through the acquisition of ARM, NVIDIA will transition from a company providing only high-performance computer graphics equipment to a full-platform company covering both computers and mobile devices.

Moreover, if the agreement is reached, NVIDIA is likely to bundle its products with ARM’s solutions, forcing NVIDIA's customers and users to pay higher fees to NVIDIA.

In addition, the acquisition will significantly improve NVIDIA's cash flow. Due to the cyclical nature of graphics card revenue, the ARM product line will help NVIDIA smooth out cash flow by selling chips for smartphones, IoT, and smart healthcare, maintaining financial health.

Technologically speaking, this acquisition will allow ARM to provide more support for the X86 platform, giving NVIDIA an opportunity to pair its CUDA platform with ARM's CPU platform.

However, this move requires customer support, as integrating the two systems will incur significant costs, part of which will need to be borne by customers.

If NVIDIA’s vision succeeds, it will effectively integrate its existing products into the ARM ecosystem, thereby diversifying its revenue streams and market presence.

SoftBank also made a huge profit.

It is estimated that if both parties reach an agreement, SoftBank will gain $8 billion in net profit.

In 2016, SoftBank spent $32 billion to acquire ARM, a bold bet by Masayoshi Son on the rise of global Internet-connected devices. However, SoftBank later encountered difficulties due to the pandemic and failed bets on Uber and WeWork, prompting it to start selling assets to address operational challenges.

When acquiring ARM, Son described the Internet of Things (IoT) as 'the biggest paradigm shift in human history,' placing big bets on this field and paying a hefty 43% premium for ARM. Son was fascinated by the concept of the 'singularity,' the prophesied day when artificial intelligence surpasses human intelligence.

What are the challenges of the deal?

The question is, if the acquisition succeeds, how NVIDIA will maintain the openness of the ARM ecosystem is an unavoidable issue.

NVIDIA has always been a fierce competitor to rivals such as Intel and AMD. If the deal goes through, these major competitors could become NVIDIA's potential customers.

Therefore, for NVIDIA, it is significant to treat ARM as an independent subsidiary and maintain open customer relationships with competitors in the processor business.

Even if the acquisition succeeds, ARM will still have competitors, such as the royalty-free RISC-V architecture, which is gaining increasing support from companies looking to eliminate ARM licensing fees.

Some analysts have pointed out that NVIDIA’s customers and government regulators may require NVIDIA to continue allowing ARM to provide product and technology licenses. Otherwise, these large customers might gradually shift to alternative technologies, threatening NVIDIA’s potential revenue.

Moreover, Apple, which has a strained relationship with NVIDIA, might strongly oppose this acquisition and intervene in the bidding for ARM. However, Apple is already facing numerous antitrust investigations, and its actions may attract more scrutiny from the government. But given Apple’s current ambition to develop ARM-based chips for Macs, Apple might take a big risk.

From a regulatory perspective, UK authorities do not want their key technology companies to be acquired by American firms across the Atlantic, while domestic companies are concerned about the sustainability of technology usage rights.

After all, once ARM is acquired by NVIDIA, manufacturers will have to act according to NVIDIA's preferences, including ARM itself becoming quite passive. Moreover, NVIDIA, as a U.S. company, could abuse its monopoly for political and commercial purposes, using licensing as leverage for unfair competition. If this happens, IC design firms like Apple, MediaTek, and Qualcomm would lose their architectural licenses and be unable to produce their own products.

Additionally, NVIDIA currently does not have enough cash to acquire ARM. At the end of the second fiscal quarter in July, the company had only about $30 billion in cash, a decrease of $120 billion from the previous quarter. Therefore, to acquire ARM for $40 billion, NVIDIA will have to consider various options, including cash and stock swaps, with the final choice to be decided by SoftBank Group.

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