Nvidia acquires Arm from SoftBank for $40 billion

Nvidia confirmed that it is acquiring processor architecture firm Arm from Softbank for $40 billion. The deal has been confirmed after weeks of speculation, following a report yesterday by the Wall Street Journal.

Santa Clara, California-based Nvidia, a maker of graphics and AI chips, said the deal consolidates its expertise in artificial intelligence with Arm’s vast computing ecosystem. Cambridge, England-based Arm has more than 6,000 employees, while Nvidia has over 13,000.

SoftBank took Arm private in 2016 for $32 billion. At the time, SoftBank CEO Masayoshi Son said he was preparing for the Singularity, the predicted day when AI collectively becomes more intelligent than human beings. But SoftBank has run into a cash crunch after losing billions of dollars due to the pandemic and bad bets on Uber and WeWork.

Nvidia said it will expand Arm’s presence in the U.K. by establishing a world-class AI research and education center there and will build an Arm/Nvidia-powered AI supercomputer for research. Nvidia also said it would continue Arm’s open-licensing policy with its customers, who shipped more than 22 billion chips last year for everything from smartphones to tablet computers and internet of things sensors. Nvidia, by comparison, ships around 100 million chips.

In a letter to employees, Nvidia CEO Jensen Huang said, “Arm’s business model is brilliant. We will maintain its open-licensing model and customer neutrality, serving customers in any industry, across the world, and further expand Arm’s IP licensing portfolio with Nvidia’s world-leading GPU and AI technology.”

He said the deal will expand Nvidia’s reach to programmers from the current 2 million to more than 15 million.

In a conference call, Huang repeated the promise to retain the open-licensing policy and described Nvidia and Arm as complementary. As a result, Huang said he does not expect to run into regulatory restrictions. He noted that Nvidia doesn’t participate in the smartphone market, while Arm is very focused on it.

Apple plans to use ARM-based processors to replace Intel processors in upcoming models of its Mac computers. Huang said he believes Nvidia will be able to accelerate Arm’s business plans. In the conference call, Arm CEO Simon Segars said Arm’s value is in providing chip designs to everyone and that to do otherwise would be “hugely destructive.”

Segars added, “We’ll prove it over time. We are being very clear about our intention today.”

Arm doesn’t make chips itself. It is the steward of the ARM processor architecture and creates designs other companies license and use in their own chips for just about everything electronic. Earlier this year, Arm said its licensees had shipped more than 180 billion chips using ARM designs.

Nvidia has been a fierce competitor to rivals such as Intel and AMD. Apple has used tech from Imagination Technologies to create the graphics processing components in its iOS devices, and it hasn’t been a huge customer for Nvidia’s graphics on the Mac side. Nvidia has competed to become a behemoth in the PC industry, with $13 billion in sales (on a trailing 12-month basis) and a market value of $330 billion. The latter is higher than Intel’s value of $144 billion.

If the deal is approved, these big rivals would become Nvidia’s customers. It would make sense for Nvidia to treat Arm as an independent subsidiary and continue its open customer relationships with rivals in the processor business. Arm still has rivals such as the royalty-free RISC-V architecture, which is enjoying increasing support from companies that had tired of Arm’s licensing fees.

The deal would secure Nvidia’s future access to processor technology. If Arm fell into the hands of rivals, Nvidia could get shut out. Owning Arm is a kind of insurance policy for Nvidia, particularly if it doesn’t trust any entity that has control over key intellectual property for its AI and mobile processor efforts.

“The Nvidia-Arm deal is not only the largest semiconductor deal by dollar volume at $40 billion but I believe the one with the most significant impact,” Moor Insights & Strategy analyst Patrick Moorhead said. “The deal fits like a glove, in that Arm plays in areas that Nvidia does not or isn’t that successful, while Nvidia plays in many places Arm doesn’t or isn’t that successful. Nvidia brings incredible capitalization to Arm. As we have seen since its SoftBank acquisition, Arm has increased its market presence and competitiveness. SoftBank’s investment has enabled Arm’s thrusts in the datacenter, automotive, IoT, and network processing markets. I believe Nvidia can only make it stronger as long as it sticks with its commitment to let Arm do what they do best, which is creating and licensing IP in a globally neutral way.”

The transaction is expected to be accretive to Nvidia’s bottom line, meaning Arm is profitable and should start contributing profits to Nvidia’s own net income immediately. SoftBank will retain a share of Arm, but the holding is expected to be under 10%.

In a statement, Huang said trillions of computers running AI will create a new internet of things that is thousands of times larger than today’s internet of people. This deal will position Nvidia for that age, he said.

“This is a great way for us to reach thousands of developers who are shipping billions of chips and who eventually will ship trillions of chips,” Huang said.

Segars said the companies share a vision of using energy-efficient computing to address issues ranging from climate change to health care and delivering on this vision requires new approaches to hardware and software. Nvidia said it will keep the Arm brand identity and name will remain in the United Kingdom as a corporate entity.

Under the terms of the transaction — which has been approved by the boards of directors of Nvidia, SoftBank, and Arm — Nvidia will pay SoftBank a total of $21.5 billion in Nvidia common stock and $12 billion in cash, which includes $2 billion payable at signing. The number of Nvidia shares to be issued at closing is 44.3 million, determined using the average closing price of Nvidia common stock for the last 30 trading days. Additionally, SoftBank may receive up to $5 billion in cash or common stock under an earn-out construct, subject to satisfaction of specific financial performance targets by Arm.

Nvidia will also issue $1.5 billion in equity to Arm employees. Nvidia intends to finance the cash portion of the transaction with balance sheet cash. The transaction does not include Arm’s IoT Services Group. Huang said the IoT business is a data-oriented investment business and wasn’t focused on the core computing part of the Arm business. He added that the IoT business had about $100 million in revenues. Segars said the company will progress with plans to spin that part of the business off.

Arm hired thousands of engineers under SoftBank, and Segars said that growth would continue. He also noted that China is an important part of Arm’s business and that he expects it to remain so. Huang said he expects Chinese regulators to review the deal, just as they reviewed Nvidia’s acquisition of Mellanox.

When asked why the deal took time to complete, Huang said, “For something this complex, it does take several months.”