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What you need to know about the ARM Holdings IPO


ARM Holdings is a British semiconductor chip and software design company based in Cambridge. Their primary business is designing processors, chips, as well as systems and platforms. ARM doesn’t manufacture computer processors itself but sells licences to other production firms. It describes itself as the R&D department for the entire semiconductor industry.

ARM traces its roots back to Acorn Computers in 1990. At the time, the company was part of a joint venture with Apple which would see them making chips for Apple’s first handheld computer. The venture at the time turned out to be a bit of a flop leading to Apple selling its 43% stake in ARM.

Nokia then started using ARM-based solutions, and by the end of the 1990s, the rest of the mobile-phone manufacturing industry pretty much followed suit, including Apple who used ARM-based chip designs in the first iPod, iPhone and iPad.

In 2016 ARM was bought by SoftBank for $24bn which at the time was a 43% premium over ARM’s share price. SoftBank had to take on more debt to finance the deal which raised a lot of eyebrows at the time but ultimately the move was a good one as ARM chips subsequently soared in popularity. ARM’s designs are now found in a huge range of devices, such as tablets, computers, smart TVs, smart homes, electric vehicles, drones, electronic passports, and even automatic streetlights. Its technology is found in around 95% of the world’s smartphones  including Apple, Android and Samsung – and 95% of chips designed in China.

What is ARM’s business model?

ARM’s business model is really based on staying ahead of the curve when it comes to technological advancements. The company understands new applications, device categories and markets are continually emerging, which require advanced semiconductors to provide their capabilities. So, ARM actively tries to predict the products that consumers and businesses will need in 5-10 years’ time by investing in R&D. In doing so, the company hopes to ensure that it can develop technology ahead of the competition.

How does ARM make money and are they profitable?

Most of ARM’s revenue comes from the royalties it collects every time a company makes a chip using its design. Up to last year over 160bn chips have been made based on ARM designs. In Softbank’s Annual Report for 2021, it was stated that ARM’s technology royalties had grown 16.7% year-on-year. The firm also has a non-royalty revenue stream coming from the licenses for processor designs to other semiconductor companies.

These companies pay an up-front fee to gain access the technology and then a subsequent royalty on every chip that uses one the company designs.

According to the company’s reports, ARM’s 2021 total revenues were up 35% to $2.7bn, due to strong growth in both royalty and non-royalty revenue. Until the company is public, it’s under no other reporting obligations.

Current ownership & valuations

ARM is currently owned by Japanese conglomerate SoftBank, whose portfolio also includes 400 other companies. The IPO is expected to value the company around $40bn, although the company has said it’s really aiming for a minimum of $50bn.

Whilst these numbers may seem lofty it’s still considerably lower than its previous valuation in 2021. In 2021 ARM was valued at $80bn when reviewed in a potential deal with NVIDIA. The value of the sale was directly tied to NVIDIA’s stock price as SoftBank would be taking a 10% stake of the US firm.

The deal’s valuation was originally set at $40bn, but during the global chip shortage, NVIDIA’s share price shot up and so did ARM’s valuation.

Who are ARM’s competitors?

ARMs main competitors are still the likes of IBM, Intel and AMD who also produce semiconductor chips. However, the firm no longer has any significant competition within the smartphone chip space. In the manufacturing of graphic processing units (GPUs), ARM faces competition from other giants like NVIDIA, Qualcomm and Intel. Although it’s worth pointing out that for the most part, these other manufactures have combined their proprietary GPUs with ARM-licensed designs.

What do we know about the ARM IPO?

SoftBank Group is expected to list its ARM Ltd segment at some point this year 2023.The exact timing of the IPO has yet to be confirmed. The company has selected four investment banks to lead the listing – Barclays, Goldman Sachs, JPMorgan Chase and Mizuho Financial Group. The firm has also confirmed it will pursue a listing in the US, which will come as a disappointment to UK ministers who had been lobbying the company to list on the London Stock Exchange.

ARM previously had been dual-listed firm in London and New York, until it was bought by SoftBank in 2016 and delisted.

In 2020 Softbank announced it would be selling ARM to US Chipmaker NVIDIA, but the $80 billion sale fell through in February 2022 due to government intervention on competition issues. The decision to list ARM instead will likely not be as profitable as its sale to NVIDIA would have been.

SoftBank Group is expected to list its ARM Ltd segment during September 2023. The exact timing of the IPO has yet to be confirmed, but according to Bloomberg the roadshow is scheduled to start in the first week of September with pricing to come on the following week. The firm has also confirmed it will pursue a listing in the US, which will come as a SoftBank Group are in talks to acquire the 25% stake in Arm Ltd it does not directly own from Vision Fund 1, according to people familiar with the matter.

Amazon is reportedly in talks to become ARM Holdings’ cornerstone investor. According to a story from the Reuters news agency, Inc is in discussions to become a major ARM backer ahead of the IPO. This move highlights ARM’s exposure in the cloud computing sector, given that Amazon Web Services and Amazon’s cloud division use ARM processors. The firm is now targeting a Nasdaq quote in early September. The strategy aims to fortify Arm’s relationships with leading clients and enhance the IPO’s allure.

With thanks to CFD broker Atlantic Capital Markets for their assistance with this article.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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