Never say never says Nvidia

"It ain’t over till it’s over"—Yogi Berra, 1973

Jon Peddie

If you are the one person who hasn’t heard the U.S. FTC may block San Jose-based Nvidia’s intention to acquire UK-based Arm from Japan-based Softbank, then let me be the one to bring you up to date.

On Thursday, the Federal Trade Commission moved to block Nvidia’s planned $40 billion purchase of SoftBank’s semiconductor business Arm Ltd., saying the deal would allow the combined outfit to stifle competing next-generation technologies.

“The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” said FTC Bureau of Competition director Holly Vedova in a statement. “Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets.”

The deal has faced scrutiny from regulators in the U.K., China, and elsewhere since being announced last year. The U.S. action is the biggest hurdle it has faced yet and threatens whether the deal will be completed.

It is not a decision. The FTC has filed a suit; the FTC doesn’t make decrees. An administrative law judge must review the matter and make his findings, with a lot of input from interested parties. Some people think anytime the FTC files a suit to block a transaction some judge will just rubber-stamp it. They don’t; not yet. But the FTC doesn’t take such actions lightly or without a lot of investigation, interviews, and evaluation of unsolicited petitions. So, if the FTC brings a complaint, the FTC believes it’s got some weight behind it.

Nvidia says as they move into this next step in the FTC process, they will continue to work with the FTC to resolve their concerns and demonstrate that this transaction will benefit the industry and promote competition.

And, of course, they would, but that is going to burn time. The possibility of a 2022 closure, if it should go through, is not likely. It’s doubtful the judge will render an opinion before 2023. (The agreement expires in September 2022)

Nvidia says it will invest in Arm’s R&D, accelerate its roadmaps, and expand its offerings in ways that boost competition, create more opportunities “for all Arm licensees and expand the Arm ecosystem. Nvidia is committed to preserving Arm’s open licensing model and ensuring that its I.P. is available to all interested licensees, current and future.”

If the deal gets canceled, either due to the courts or Nvidia decides the benefits of the deal aren’t worth the hassle, Softbank gets to keep the $1.25 billion Nvidia paid at signing. That’s a lot of GPUs. BUT…. When Softbank and Nvidia struck their deal in September 2020, it was based on Nvidia’s share price then. Under the transaction terms, which the boards of directors of Nvidia, SBG, and Arm, have approved Nvidia will pay SoftBank a total of $21.5 billion in Nvidia common stock and $12 billion in cash. That September 2020, $21.5 billion of stock was at $128 a share then—168k shares. As of this date, Nvidia’s share price is $300 ± $6, let’s say $300. Today 168k shares of Nvidia are worth $50.4 billion. So Nvidia effectively puts over $39 billion-plus the $12 billion the company has in escrow back in their company, after the $1.25B payoff to Softbank.

Arm customers see several threats in Nvidia taking over a neutral company that sells I.P. including the fear that Nvidia would get advanced information about competitors’ plans. U.K. regulators received objections from vendors who fear Nvidia could withhold access to Arm technology for its benefit. And still, others think Nvidia could take the first benefit of new R&D and then later release new designs to the community. Those are all reasonable fears, and Nvidia promises to enter into binding deals with various governments to prevent that, although that surely would be a case of the devil being in the details and keeping lawyers fully employed for quite some time.

China hasn’t spoken openly about the situation yet. When a big powerful agency like the FTC jumps in, people take it seriously, and a pilling on begins. Other countries get the courage to stand up and make their own pronouncements. The situation with Arm in China is unique. Arm has a joint-venture with Arm China. Arm China is like a distributor for Arm I.P. within China, not R&D or engineering. Nvidia has said that the Arm distribution system is an important strategic aspect of the deal for Nvidia to sell its CPU IP into China. No mention of Nvidia GPU IP, but the possibility is certainly there.

What do we think?

Who knows? As Ms. Vedova of the FTC said, this is the biggest chip merger in history. Obviously, it’s not going to go down fast or easily. It makes the drama of Imagination Technologies and its skirmishes with China Inc. look mild (although it certainly wasn’t mild to folks at Imagination, some who are no longer there).

Strategically it makes a lot of sense for Nvidia and its expansion. Get big or get out. If Nvidia wants to compete with the likes of Intel, NXT, and Qualcomm, (even though Nvidia’s market cap is bigger than all three combined) it must add important tech and footprint to its base. The question is, how long will Nvidia put up with blockage and delays to get it done? How much is it willing to compromise and sacrifice to get Arm? And while Nvidia battles the opponents, RISC-V and Imagination whittle away at Arm’s stranglehold on the industry, potentially devaluating the Arm deal.

By any accounting, Arm is going to be a big gulp to swallow. Winning Arm in 2024 could turn out to be a case of being careful what you wish for, besides, the deal lapses in Sept 2022.