Contact: Scott Denne
SoftBank Group digs deep into its treasury for a bet that won’t pay off for several years. The company will spend $32.4bn to acquire ARM Holdings, a provider of chip designs for the mobile ecosystem. SoftBank will hand over $22bn of its own cash and fund the remainder of the all-cash deal with a bridge loan that it expects to repay with the proceeds of its sale of Supercell and a chunk of its Alibaba stock (both transactions were previously announced). That will leave SoftBank, which finished its recent fiscal year with negative free cash flow of $4bn, with about $2.5bn in cash and $25bn in debt.
The acquisition is the second-largest semiconductor deal, edged out by Avago’s $37m purchase of Broadcom last year. Despite the wave of large-scale consolidation in the chip industry over the past two years, $30m-plus chip pairings are rare. The third-largest transaction, the take-private of Freescale Semiconductor, was announced almost a decade ago and was just over half the size of today’s deal.
SoftBank will pay 20.9x trailing revenue for ARM. That’s the first time any company has cracked the 20x mark in a $1bn-plus chip acquisition. Even 10x has only been passed on two previous occasions, according to 451 Research’s M&A KnowledgeBase. As a supplier of intellectual property, not the chips themselves, ARM has a stronger profit margin compared with other chip vendors. That accounts for some of the high multiple. Still, the roughly 46x EBITDA multiple is one of the highest among such transactions.
Part of the rationale for the deal – and the valuation – is built on the emerging Internet of Things (IoT) opportunity. As a major licenser of system-on-chip technologies, ARM stands to play a major role in that market. And SoftBank, as a provider of wireless connectivity services in both Japan and the US, anticipates that substantial synergies will develop among the companies’ offerings, although it admits that such synergies won’t generate meaningful revenue or cost savings for many years.
That said, the overall growth of IoT will provide tailwinds for ARM to grow into its valuation with or without synergies. According to 451 Research’s Market Monitor, service providers globally will post $11bn in annual revenue servicing M2M connections. That number will nearly triple by the end of 2020.
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