Nvidia Acquires Chip Designer Arm for $40 Billion

Nvidia Acquires Chip Designer Arm for $40 Billion
September 16, 2020


Chipmaker NVIDIA Corp (Nasdaq: NVDA) is acquiring Arm Holdings, which designs mobile phone chips, from SoftBank in a cash and stock deal valued at $40 billion. The sale will enable Nvidia to position itself as a formidable player in AI (artificial intelligence) computing. Both Nvidia and Arm foresee ample opportunities for growth by paving the way for AI software running on Arm’s semiconductor chips installed on smartphones and servers. The stock closed at $519.64, almost flat from the prior close.

The acquisition deal will involve $21.50 billion worth Nvidia stock and $12 billion in cash, including $2 billion to be paid at the time of inking the agreement.

In 2016, SoftBank took over Arm for $31.40 billion, representing one of its largest takeovers ever. The investment was made considering the growth prospects of IoT (Internet of Things) based devices. At that time, Chairman of SoftBank, Masayoshi Son said, “This is a company I always admired for the last 10 years…This is the company I wanted to make part of SoftBank. I am so happy.”

Arm is an industry leader in creating architecture used in almost all mobile phone chips, including Qualcomm chips used in Android phones and Apple’s iPhone. Apple also intends to move away from Intel-based chips to Arm-based chips for its Mac computers. Notably, Microsoft is already using Arm designed chips for its Surface. Since the acquisition by SoftBank, Arm has appreciated in value. Other than mobile phones, Arm’s chip design is used by a range of products, including home appliances and super-computers.

Nvidia, which coined the word GPU (Graphic Processing Unit), stated that it anticipates concluding the deal in a year. Nvidia, which manufactures chips for graphics and AI-related applications, for example, autonomous driving vehicles, guaranteed that it would “continue Arm’s open-licensing model and customer neutrality.” Furthermore, Arm will continue to operate from the United Kingdom.

Regarding the acquisition, Nvidia CEO Jensen Huang stated as follows: “This combination makes financial sense, and it’s a great deal for SoftBank and us.”

To a certain extent, we can say that SoftBank’s deteriorating financial situation was one of the main reasons for the stake sale. The company lost a huge amount of money on investments in firms such as Uber and WeWork. The tech rout that happened in the recent past was also a reason for the sale of Arm to Nvidia. SoftBank also needs cash for Vision Fund in order to assist start-ups in which it had earlier invested as they are facing a tough time due to the outbreak of coronavirus disease and lockdown thereafter.

There is no clarity on the quantum of profit SoftBank will realize with this stake sale as the investment banking firm had poured in a lot of money in Arm since the takeover. Earlier in June, the company divested its stake in T-Mobile for $21 billion.

In the meantime, Nvidia is witnessing huge demand for its products, primarily due to a surge in video gaming caused by the pandemic. This week, Nvidia will launch a new graphics card that guarantees improved performance for personal computers. While announcing its second-quarter earnings, the company projected roughly 46% growth in revenue in the current quarter.

In addition to GPUs, Nvidia also manufactures the Tegra series of mobile chipsets, which are used in gadgets such as the Nintendo Switch. However, the company is not involved in mobile hardware or CPU layout.

Following the acquisition, Arm will remain headquartered in Cambridge, UK. It seems like an effort by Nvidia to convey that Arm will remain as an unbiased provider of technology.

Years before, Nvidia tried to venture into the development of CPUs for phones but did not succeed. The acquisition could enable the company to realize its long-term ambition. However, the initial focus will be on data centers.

Huang says, “What will change is the rate of our roadmap. We know for sure that data centers and clouds are clamoring for the Arm microprocessor, the Arm CPU. Energy efficiency directly translates to computing capacity, computing throughput, and the cost of provisioning service.”

The deal could face some regulatory issues as both Arm and Nvidia have a business relationship with AMD and Apple.

The acquisition news is expected to keep the stock range-bound with bullish bias in the short-term.

Technically the stock has bounced off the support at 450. The stock is also trading above its 50-day moving average. Furthermore, the stochastic oscillator is near the oversold region. Therefore, we are anticipating the stock to move up in the short-term.

nvd - technical analysis - 16th September 2020

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Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world

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