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Commentary On Softbank Takeover Offer To ARM Holdings

Published 18/07/2016, 11:27
Updated 18/05/2020, 13:00

Chip designer ARM Holdings (LON:ARM) has agreed to be bought by Japan’s SoftBank (T:9984) for about $32bn.

The offer in sterling equates to £17, in cash, per share—a premium of 43% to ARM’s closing price on Friday.

The news sent the stock as much as 47.3% higher on Monday, signalling that most investors see a good chance that the deal will take place.

Reports this morning have been incrementally removing the most obvious remaining potential impediments, such as public interest grounds.

We do not think it likely that the offer will invoke more than routine scrutiny from the Competition and Markets Authority (CMA).

The latest ‘public interest’ guidance to Parliament backed by the CMA (January 2015) defines strategic, competition, and security concerns clearly.

There is little public evidence that ARM can be deemed to be a ‘sensitive’ company in any of the above ways.

We note Prime Minister Theresa May and Chancellor of the Exchequer Philip Hammond were briefed about the offer over the weekend.

That leaves the main risk to the deal a potential counterbid, by a more integrated chip sector player such as Intel (NASDAQ:INTC) and Samsung (LON:0593xq).

Both firms are in more favourable positions in their cash flow cycles than acquisitive Softbank. It is the most leveraged with c. $63bn net debt after purchasing loss-making Sprint for $22.2bn in 2013.

Intel might be motivated to make a counter offer by its notable failure to penetrate deeply into the mobile components space.

Samsung might spy an opportunity to synergise and expand its own chip manufacturing business.

Both would, like SoftBank, be mindful of how rare the current steep discount on British companies will turn out to be, following the pound’s fall to 30-year lows.

However Samsung (LON:0593xq), Intel (NASDAQ:INTC) and even slightly lesser rivals like Qualcomm (NASDAQ:QCOM), would also face tougher global competition scrutiny than SoftBank.

Outside of the larger players we note traders have scarcely needed much reason to bid up prices of smaller semiconductor designer and licensors, namely Imagination Technologies (LON:IMG).

A confirmed bid in the same space has pushed Imagination up 10% and lifted chip-related stocks across Europe this morning.

Without company-specific follow-through, such stock price surges are unsustainable.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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