What the IPO Market Means for SoftBank

Billionaire Masayoshi Son, chairman and chief executive of SoftBank Group Corp., speaks in front of a screen displaying the ARM Holdings logo during a news conference on July 28, 2016 in Tokyo.

Tomohiro Ohsumi | Bloomberg | Getty Images

SoftBank-owned Arm is expected to file for an initial public offering on Monday, according to reports. The firm’s stock market debut will be a major test for the IPO market, which has been more or less closed to new listings in the past year due to rising interest rates that have fueled appetite for risky assets.

Arm is one of the most important companies in technology. Its chip designs are found in almost every smartphone around the world, including the Apple iPhone and most Android devices. Its debut will be a big deal for the IPO market, which has been struggling since 2022, but the company’s listing also has big implications for SoftBank.

SoftBank is trying to bounce back from a tough tech market by reining in its growth-oriented investments and focusing on artificial intelligence, the hot topic of the hour in tech.

What is Arm?

Arm, headquartered in Cambridge, England, developed the architecture of the chips found in 99% of all smartphones.

The company traces its history back to an early computing company known as Acorn Computers. In 1990, Acorn formed a new company called Advanced RISC Machines, which was formed as a joint venture between Acorn. apple and US chipmaker VLSI Technology.

Arm itself is not a chip maker. Rather, the company is responsible for developing the “architecture,” or overall designs, including the components and programming language instructions that other companies use to build the chips. Its original value was the design of chips with extremely low power consumption compared to the X86 chips common in personal computers at the time. It is seen as a neutral party or “Switzerland” in technology, as its designs are used in almost all smartphone processors, including those manufactured by Apple, and increasingly in server and laptop processors.

It is also often considered the crown jewel of the UK’s technology sector.

Speaking at a developer conference with CNBC in October 2022, Arm CEO Rene Haas said that given that its technology is embedded in almost every device, companies cannot afford to work with the company.

SoftBank's Arm is set to file for IPO status today

“Given that we license the technology to all the major players in the industry, no one can really afford to miss a product cycle or expand R&D or not do a product,” Haas said.

Arm’s business model is to license the intellectual property for these architectures so they can build systems around them. In recent years, ARM has tried to sell its designs for processors, which is a more profitable business than licensing the underlying architecture technology.

SoftBank agreed to buy Arm in 2016 for $32 billion, the largest acquisition of a European technology company at the time. SoftBank said at the time that it was acquiring the business to gain a foothold in the growing Internet of Things sector. IoT is a small part of the firm’s business, but at the time it was a very common part of the technology.

Not just for wearables or smart home appliances, Arm is expanding its semiconductors to other uses, such as connected cars.

In the quarter ended June 30, the company earned 88.5 billion Japanese yen ($605.5 million), according to SoftBank’s earnings report.

But the company also faces headwinds from declining demand for products such as smartphones, which is hitting all chip firms. Armun’s net sales fell 4.6% year over year in the second quarter.

The division also posted a loss of 9.5 billion yen, compared to a profit of 29.8 billion yen in the same period a year ago.

Rush sale to Nvidia

SoftBank initially tried to sell Arm to giant Nvidia, but the deal faced pushback from regulators, raising competition and national security concerns. Nvidia is a behemoth in the semiconductor world, and the company is now benefiting greatly from a boom in artificial intelligence applications as demand for its GPUs grows.

Since then, SoftBank has chosen to list Arm as an independent company. The Japanese tech investment giant is reportedly looking to buy the remaining 25% stake in Arm it doesn’t currently own from the $100 billion Vision Fund.

Arm is just one part of SoftBank's entire investment universe, says the portfolio manager

Arm is considered strategically important in the U.K., which is seeking to develop the domestic chip industry through investments of up to 1 billion pounds ($1.3 billion).

The transfer of company ownership to foreign hands is seen as a difficult subject for the local tech industry, not least because of concerns that it undermines the UK’s “technological sovereignty”, an issue emerging across Europe as officials seek to reduce dependence. About the technology of the United States and other nations.

The government pushed aggressively for Arm to list in London, but the company opted to go with New York for its debut and hit the London Stock Exchange.

Testing the fast-paced IPO market

SoftBank is moving ahead with its Arm listing even as US markets remain volatile. Tech prices have fallen sharply from the peak of the 2021 tech boom.

That year, shares of newly minted public companies such as Palantir and UiPath rose to seismic levels as investors were excited by the prospect of boom-time growth.

Arm filed confidentially for a listing in the US earlier this year. It’s not yet clear what valuation SoftBank is seeking for Arm, but reports put the prospective market value at between $60 billion and $70 billion.

As a bellwether for the chip industry, Arm is playing a role in the field of artificial intelligence and is increasingly positioning itself as an AI company. Investors will watch the company’s S-1 filings to see how the technology benefits its business over time.

In May, Arm introduced two new chipsets aimed at machine learning applications. According to Arm, the new CPU, called Cortex-4, is a chipset that provides faster machine learning performance and consumes 40% less power than its predecessor. Another GPU, the G720, offers better performance and uses 22% less memory than its predecessor, Arm said.

“Arm remains committed to developing and testing our GPUs against new applications for machine learning (ML),” the company said in a May 29 blog post announcing the products.

High-powered chips like those offered by Nvidia and AMD are crucial for AI applications that require a lot of computing power to run smoothly. Earlier this month, Nvidia introduced its new Grace Hopper chip for generative artificial intelligence applications based on the Arm architecture.

SoftBank is using the growth in artificial intelligence to boost the prospects of the Vision Fund, which is acting in tandem with increased bets on firms such as WeWork, Chinese giant Didi Global and Uber, which the Vision Fund has since owned. lost possessions.

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SoftBank CFO Yoshimitsu Goto said during the company’s June quarter earnings that the company is “cautiously and slowly returning to investment activity,” focusing on AI investments.

SoftBank said the Vision Fund posted an investment profit of 159.8 billion yen, the first of five consecutive quarters. SoftBank said the fund mainly benefited from investments in its subsidiaries, including Arm.

This still came after SoftBank’s Vision Fund reported a record 4.3 trillion yen loss in the fiscal year ended March 31.

The Japanese tech giant has recently started talking about its investments in artificial intelligence. In July, the company invested $65 million in UK insurance technology company Tractable.

– CNBC’s Kif Leswing contributed to this story.

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