There is a lot about ARM Holdings, the UK chip designer, to be admired. It turns out that among its admirers is Japanese company SoftBank, which is going to fork out £24 billion, or $32 billion, for the company. Recent falls in the pound helped. Will other British companies follow the ARM lead?
In some ways you could say ARM symbolises all that is best about the UK. The company is quite small, at least it is small next to the giant US techs, it is certainly small next to its biggest rival, Intel. But its smart. Overheads are low relative to profits. This is a company that has a business model that should make the firm almost impervious to disruptive technology, and it’s beautifully poised for the next big thing in tech. Its shares also trade in sterling, which helps. The again, profits in Q2 of this year were $137.5 million, so the price that SoftBank is paying is quite a multiple to profits.
ARM, which grew out of the old Acorn computers the company behind the BBC Micro doesn’t make chips, it designs them. And it is rather good at designing chips that are highly energy efficient, making them ideal for the age of mobile computers, smart phones and tablets. And maybe even more ideal for the age of the Internet of Things.
Intel, by contrast, makes the chips it designs. This means it is a much bigger company than ARM, employs an order of magnitude more people, but is perhaps less nimble as a result. Imagine what might happen if graphene takes over from silicon in integrated circuits, imagine what might happen if quantum computers start fulfilling potential. Intel may well be able to adjust, but the corporate graveyards are full of companies that had a business model that was configured in such a way that implementing new disruptive technologies was just too difficult. ARM by contrast, because it designs and does not make, should be able to adjust more easily.
ARM designs sit in 95% of smart phones, but then there is the Internet of Things. Gartner predicts that by the end of this year there will be 6.4 billion connected devises, and by the end of the decade there be 20.8 billion connected devises, what an opportunity for ARM.
So you can see why SoftBank wanted to own the company.
But SoftBank has a high level of gearing – around $106 billion of debt – and is buying ARM in a straight cash deal. Recent falls in sterling, caused by the recent Brexit vote, made the company more affordable for SoftBank, constrained by its own balance sheet.
Recent rises in the yen also helped.
The deal will look especially good if the pound rises in due course.
Is it sad to a see a UK company fall into foreign ownership. Recently, Theresa May said: “Two years ago the Government almost allowed AstraZeneca to be sold to Pfizer, the U.S. company, with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax... A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.
But then again, SoftBank says that the ARM headquarters will stay in Cambridge, its management team will stay in place, and the total head count at the company will double.
A spokesperson for Theresa May said: “This is good news for British workers, it's good news for the British economy, it shows that, as the prime minister has been saying, we can make a success of leaving the EU.”
So with the pound so cheap, might other UK companies fall onto the bid target radar? The answer to that is surely yes, but ARM may well be the most attractive of the lot.
By Michael Baxter, economics writer, author and entrepreneur