AI: Arms together on Arm Holdings

...some IPO headwinds

The largest IPO later this year after an IPO drought, is likely to test so many of current technology and geopolitical tail and head winds. The much anticipated IPO for the chip company Arm Holdings, which enables much of the smartphone world we live in today, and the AI directions we’re traveling. It’s the Switzerland that sells its core chip designs to most of the big tech companies that are building our technology layers.

And this past week saw a number of them chip in on the company to be valued at $50 billion or more, as Bloomberg outlines:

“SoftBank Group Corp. has lined up some of Arm Ltd.’s biggest customers as strategic investors for the chip company’s initial public offering, including Apple Inc., Nvidia Corp., Intel Corp. and Samsung Electronics Co., according to people familiar with the situation.”

It’s a ‘Club deal’ of the type I’ve been discussing for technology infrastructure companies.

“The investors also include Advanced Micro Devices Inc., Cadence Design Systems Inc., Alphabet Inc.’s Google, Synopsys Inc., among others, said the people, who asked not to identified because the details haven’t been announced. SoftBank has been in discussions with Arm customers and partners for months, but the plans are just being finalized now. Still, the specifics could change as the company gets closer to the IPO, which is expected to have its investor roadshow underway by next week.”

“The investors will put in amounts ranging from $25 million to $100 million, according to the people.”

And of course there are a cross-current of interests among the ‘corporate strategic’ investors, with goals beyond financial returns. As Reuters points out:

“These companies' interest is fueled by a desire to expand their commercial relationship with Arm, and make sure that their rivals do not gain an edge, according to people familiar with the discussions.

This is because Arm's customers view its semiconductor designs as an indispensable resource. They are used by more than 260 technology companies to make over 30 billion chips annually, powering 99% of the world’s smartphones and everything from the tiniest of sensors to the most powerful supercomputers.”

The goal for Arm’s largest investor of course are financial returns, having been in ARM since 2016:

“The show of support from some of the tech industry’s biggest names will help bolster the offering, which is expected to raise $5 billion to $7 billion. SoftBank, which acquired Arm in 2016, was previously aiming to value the chip business at $60 billion to $70 billion.”

The banks managing the transaction are counting on investor enthusiasm of late for semiconductor companies like Nvidia and others, helped by the general enthusiasm for AI big tech.

But the IPO has Risks that should be considered in the company’s 300 page plus SEC F1 filing. Chief among them of course are issues both specific and general around current China. I’ve of course covered the current geopolitical ‘threading the needle’ US-China relationship, an issue discussed here at length. As Reuters explains, “Arm’s China relationship complicates IPO”:

“There is one complication, however. Almost a quarter of Arm's revenue comes from an entity it does not control but nonetheless relies on to access China's massive smartphone market.”

“Scattered throughout the hundreds of pages of Arm's prospectus are details of the company's labyrinthine relationship with China, its second-largest market. Sales in China contributed 24.5% of its $2.68 billion revenue in fiscal 2023, according to filings published on Monday ahead of its initial public offering.”

“Virtually all of that revenue comes from Arm China, an independent entity that has the exclusive rights to distribute Arm's technology in the country. That makes Arm China, not better-known names like Apple (AAPL.O) or Qualcomm (QCOM.O), Arm's largest customer. And this customer has a history of late payments and presents "significant risks" to Arm's business, according to its filing.”

To complicate matters further, the relationship itself between Arm and its China subsidiary has been bumpy:

“Arm China, in which Arm itself is in effect only a minority shareholder, underwent a nearly two-year boardroom battle between its local chief and shareholders that ended last year. A group of Chinese investors and a private equity firm control a majority stake.”

So there’s that.

This upcoming IPO, one of the first at this early stage of the AI tech Wave, is a poster child for the positive tailwinds driving our LLM AI technologies forward globally, with the countervailing headwinds we’ve not seen before at this scale. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)