Antitrust regulators have killed off Nvidia’s $66bn takeover of UK-based chip designer Arm. Masayoshi Son, who runs thwarted vendor SoftBank, wants investors to see the positive side — a historic listing is in the making, he claims. But the pep talk, undercut by a 97 per cent plunge in quarterly profits at the Japanese technology group, cannot compensate for the collapse of the purchase by the US chipmaker.
British politicians want Arm to relist on the London stock market, which cheerfully sold the business to SoftBank for $32bn in 2016. Son should ignore them. The US, with its big tech universe and deep capital pool, is the best place to get the best value from a float. Son, who is hoping for an initial public offering in the fiscal year ending in March 2023, may have to be patient, though. The grinding adjustment to rising rates is unsettling Nasdaq.
The tech rout is a broader issue for SoftBank. Quarterly net profit was just ¥29bn ($251mn) in the quarter to December. The Vision Fund recorded an investment gain of just ¥111.5bn compared with ¥1.4tn a year earlier.
SoftBank’s NAV dropped sharply to $168bn at the end of December. The current enterprise value of the business, using SoftBank’s own estimate of net debt, is only $125bn. The shares have dropped 50 per cent from their March peak About 54 per cent of SoftBank’s net asset value is in the US and China, where the government has been clamping down on large tech groups. Alibaba Group on its own accounts for 24 per cent of the total.
SoftBank will be able to recognise a $1.25bn break-up fee from Nvidia as profit in the current quarter. But that pales in comparison to what it is losing out on. Valued at an industry multiple of 12 times trailing sales, Arm might float at a valuation of about $30bn. That is less than half Nvidia’s cash-and-stock offer following a surge in the bidder’s shares. The likely ratio is also lower than the 17 times Arm traded at just before the SoftBank takeover.
Despite soaring semiconductor sales Arm’s adjusted ebitda of $596mm in fiscal year 2020 is about 30 per cent lower than what it was four years ago. Research and development costs are steep. Son complains that SoftBank shares are significantly and persistently undervalued. He is likely to feel the same about Arm when it relists.
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