NVIDIA to acquire ARM from SoftBank in $40 Billion Deal.
SoftBank Group has agreed to sell Arm, its U.K. semiconductor business, to NVIDIA for up to $40 billion, SoftBank initially acquired Arm in July 2016 for £24.3 billion ($32.5 billion at the time). SoftBank will retain an ownership stake in NVIDIA that is expected to be below 10%. Under the terms of the transaction, which has been approved by the Board of Directors of NVIDIA, SoftBank and Arm, NVIDIA will pay to SoftBank a total of $21.5 billion in NVIDIA common stock and $12 billion in cash, which includes $2 billion payable at the time of 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 Internet of Things (IOT) Services Group. The proposed transaction is subject to customary closing conditions, including the receipt of regulatory approvals for the U.K., China, the European Union and the United States. Completion of the transaction is expected to take place in approximately 18 months. Morrison & Foerster LLP is advising SoftBank, Latham & Watkins LLP is advising NVIDIA, Cleary Gottlieb Steen & Hamilton LLP is advising NVIDIA in the merger filings in Europe while Hogan Lovells team is advising Arm.
NVIDIA
NVIDIA engages in the design and manufacture of computer graphics processors, chipsets, and related multimedia software. The GPU segment comprises of product brands, which aims at specialized markets including GeForce GTX & RTX for gaming; Quadro RTX for designing & visualization; Tesla and DGX for AI data science and big data research, GRID for cloud-based visual computing, Drive AGX for Self-Driving Cars, Tegra SoC (System on Chip) for smartphones and mobile internet devices, NVIDIA shield range is for gaming hardware and Jetson for Accelerated computing capabilities for Autonomous Machine application.
ARM
ARM is not a chipmaker, it’s a chip designer, or a “fabless” (fabrication less) chip company meaning that it does not have its own Semiconductor foundry and does not fabricate or produce its own chips. It neither manufactures nor sells its own physical CPUs, GPUs Or SoCs based on its own designs, but rather develops the processor architecture and licenses its technology as IP to other companies who design their own products that implement one of those architectures. This means ARM clients can choose any of the number of different licensing plans and start making their own designs.
ARM’s importance in the mobile SoC (system on a chip) market cannot be understated. Its CORTEX CPUs & MALI GPUs are used by most mobile devices due to its better power efficiency compared to x86 architecture used by Intel/AMD. The Apple A Series, Samsung Exynos, Qualcomm Snapdragon and Huawei Kirin SoCs are all based on ARM architecture. There are Almost 180 billion ARM-based devices worldwide and 70% of the world’s population uses ARM Technology. In short, almost the entire mobile market runs on ARM IPs – both its CPUs and GPUs.
ARM offers a variety of licensing terms, varying in cost and deliverables. To all licensees, ARM provides an integrable hardware description of the ARM core, as well as a complete software development toolset, and the right to sell manufactured silicon containing the ARM CPU. ARM also gives free access to the ARM GPU IP, so there is almost always a Mali GPU accompanying an ARM CPU in an SoC’s specs.
Importance of the Deal
NVIDIA could simply refuse to provide ARM licenses to companies it deems to be in direct competition like AMD which has developed custom Radeon GPUs for the Exynos SoCs to be Used in the next Generation Samsung smartphones.
SoftBank only barely made back its investment on its purchase of ARM via its licensing fees which remains its primary revenue stream, but for NVIDIA, these licensing fees are just a part of the bigger picture. NVIDIA’s competitors like AMD will have to pay these licensing fees which will inevitably flow back to NVIDIA essentially funding its biggest competitor.
AMD’s reliance on ARM technology now puts a sizeable portion of its licensing spending flowing back to its direct competitor in the GPU market NVIDIA, essentially partially funding its opposition.
NVIDIA can produce ARM-based CPUs on the cheap in the near future, effectively entering the ARM CPU market to compete with AMD and Intel on two fronts. NVIDIA would not need to pay for ARM licensing, giving it an edge. NVIDIA can enter new markets like the datacentre market, in which it can undercut its competitors.
NVIDIA could break into the mobile market by pushing its own GPU instead of ARMs Mali GPU. Graphics has always been NVIDIA’s core industry and its GeForce GTX & RTX GPUs are far ahead of its competitor- AMD’s Radeon Line.
NVIDIA can enter the server and datacentre market with ARM based products and pit these in direct competition to Intel and AMDs server offerings. ARM based processors have better performance per watt and lesser power draw while having lower TDP (Thermal Design Power) Ratings, hence requiring less cooling. As Servers run around the clock these efficiency gains, due to reduced power consumption by the processors itself and decreased thermal output of ARM processors, will result in a decrease in cooling requirements. This will eventually lower the running cost by cutting the electricity bill of the server farms.
ARM based chips are cheap to design, produce and deploy. They are potentially more efficient (performance per dollar, performance per Watt). They have potential for more competition and product diversity than x86 based processors.
Apple has recently announced that it will be switching from x86 based processors to its own ARM based Silicon for the next generation of Mac, iMac and MacBooks and will be using a variation of its A Series SoC which is at the core of its iPhone and iPad product Line. In 2006 Apple switched from powerPC processors supplied by Freescale (formerly Motorola) and IBM to Intel x86 processors after using powerPC for almost 11 years in its product line due to power consumption, performance and TDP issues. Apple licences ARM technology for its A Series Chips and when Apple moves to a new technology its competitors inevitably follow and more Laptops & Desktop OEMs will start using ARM instead of x86 based processors. This move will translate into more licensing fees for NVIDIA via ARM Licensing deal with Apple for the new Mac.
Datacentres consume about 3 per cent of the global electricity supply and account for about 2 per cent of total greenhouse gas emissions Giving them the same carbon footprint as the airline industry. To put things in perspective datacentres consume more power than the entire United Kingdom in a year. Hence ARM based energy-efficient computing will help address the world’s most pressing issues like global warming and climate change.
NVIDIA also competes with Intel in the integrated GPU (iGPU) and with AMD in Discreet GPU (dGPU) market Segments. With ARMs IP and R&D NVIDIA will become more competitive in these segments.
ARM will also benefit from NVIDIA’s R&D capabilities and its IP portfolio will expand further with NVIDIA’s world-leading GPU and AI technology.
In conclusion quoting the founder and CEO of NVIDIA, Jensen Huang “In the years, trillions of computers running AI will create a new internet-of-things that is thousands of times larger that today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI.
Hence, it will be mutually beneficial to NVIDIA and ARM to come together and their strengths in their respective fields, will be synergistic and make them even better for the age of artificial intelligence.
Dr. Prashant Pratap is a Mergers & Acquisitions enthusiast.