Arm’s Potential Path Post-Nvidia

Last week, after the apparent demise of Nvidia’s bid to acquire Arm,  I wrote about Nvidia’s potential path forward now that the Arm merger is effectively dead thanks to the current anti-big tech environment in the U.S. and antitrust concerns elsewhere.

This week let’s take a look at what may happen with Arm now that it’s on a path for an IPO in what remains a very volatile environment for IPOs and stocks in general.

Acquisition vs IPO

An acquisition has several advantages and disadvantages compared to an IPO. The advantages are that you are bought for a reason that can cement your strategy going forward, you often get a large influx of both cash and help post-acquisition, and you get access to the larger acquiring company’s IP and resources, which can provide significant long-term strategic advantages.

Disadvantages include a loss of independence, the fact that most acquisitions fail, the acquiring company may not ever understand your business and yet still try to direct it, and it is often hard to pass down things like stock options to the employees in the acquired company, making attracting and retaining talent harder.

‘the acquisition path gives you a direction, but that direction may take you off a cliff’

In short, the acquisition path gives you a direction, but that direction may take you off a cliff. An IPO, on the other hand, gives you independence, but management may still be at a loss as to where to go, and you might not have enough money to get there anyway.

Arm’s Next Steps

Looking at this more granularly, if the IPO is successful, Arm may be out from under Softbank’s control and have stronger tools to attract and retain talent, but have far less money to expand and build its business. Let’s take each issue in turn.

Independence: While Softbank may, depending on how the IPO is done, retain some interest, it is believed that this IPO will mostly allow Arm to separate from Softbank’s full control. Independence is very important to a licensing entity like Arm because companies don’t like to license from providers who are, or are owned by, competitors. In addition, being owned by a U.S. company might have blocked sales in countries hostile to the U.S., much like being owned by a Chinese company might block sales to the U.S. and parts of Europe. Potentially, being independent makes the company available to a far larger market.

Employee retention: The tool most often used to retain and attract employees isn’t salary, it’s stock options, because you only pay taxes on stock options when you sell them or sell the stock you buy with them. But if the company is closely held, there either is no stock to share or the stock shared can’t be easily traded, reducing its value when it comes to retaining and attracting workers.

Operating capital: Nvidia’s plan was to both buy Arm and to extensively fund an R&D expansion. The IPO will largely handle the sale part but, given sellers try to take as much of the profit as they can, that may not leave much room for the company to grow. And with so much focus on the Nvidia acquisition, it isn’t clear if Arm developed anything more than a sustaining strategy going forward.

With Intel strengthening, Nvidia likely working to build its own part since it has little other choice, and a broad wave of others developing their own processors, Arm will be facing an unusual amount of competition shortly, which could dampen the interest in its IPO.

Also read: NVIDIA Turns Its Focus to AI Inference

Arm’s Uncertain Future

It isn’t like Arm had a choice here. It was on an acquisition path, and now it’s on an IPO path, but 2022 isn’t looking to be a great year for IPOs given the uncertainty caused by the pandemic, the increasing potential for war, and what is turning out to be a very uncertain world economy.

However, Arm still has a big market share, and its technology is still generally favored for IoT and mobile devices. It has made inroads in PCs, and its licenses continue to be supportive. If the IPO doesn’t tank, which is a possibility given the uncertain nature of the world now, Arm will have a decent foundation to create a successful independent company.

It will all hinge on the new vision for the company and whether Arm can execute that vision. Part and parcel of that will be the company’s ability to overcome the coming wave of enhanced competition without Nvidia backstopping it and potentially becoming a competitor instead.

The IPO is far more uncertain than the acquisition was, but you don’t get enhanced rewards without enhanced risks. Let’s revisit this in a year and hopefully for Arm, the IPO path will remain viable.

Read next: Why Not Buying ARM May Be Better for NVIDIA

Rob Enderle
Rob Enderle
As President and Principal Analyst of the Enderle Group, Rob provides regional and global companies with guidance in how to create credible dialogue with the market, target customer needs, create new business opportunities, anticipate technology changes, select vendors and products, and practice zero dollar marketing. For over 20 years Rob has worked for and with companies like Microsoft, HP, IBM, Dell, Toshiba, Gateway, Sony, USAA, Texas Instruments, AMD, Intel, Credit Suisse First Boston, ROLM, and Siemens.

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