This week, Nvidia officially tossed in the towel on its proposed acquisition of Arm, as we speculated might happen when the deal ran into stiff opposition in the EU and U.S. (see Why Not Buying ARM May Be Better for NVIDIA).
Coincidentally, Arm has announced that Rene Haas has become CEO. Haas not only has had a storied career at Arm, but he was also one of the more powerful VPs at Nvidia and remains close to Nvidia CEO Jensen Huang. As Arm is a licensing entity, a tight partnership between Nvidia and Arm could end up being more powerful than the acquisition would have been. The two companies are not competitors and have vastly different business models, making it very difficult for regulators to argue they need to oversee the partnership like they would an acquisition.
Given Nvidia would have had to operate Arm at arm’s length anyway (pretty good pun, huh?), the only operational difference between a tight partnership and an acquisition is regulatory oversight and the need for approvals. Certainly, the partnership will raise concerns and might have been less controversial before the acquisition attempt, but the result should be, assuming continued competent management in both firms, very powerful.
Let us talk about this outcome this week.
Acquisition vs. Partnership
Acquisitions and partnerships between unequal entities may function in much the same way if the acquisition, as is the case here, is not a physical merger of the firms. The acquisition plan was to place Arm under Nvidia as an owned subsidiary, with a similar model to what EMC andthen Dell had with VMware. Nvidia would have some say over who ran Arm but agreed to let the company operate independently.
Regulators were clearly concerned that this would be a promise in word only and that Nvidia would, like other U.S. companies have done, eventually break its word and merge the firms or make licensing so restrictive that existing licensees would have been damaged.
While either move would have broken Arm and damaged the asset, regulators have been burned before and were clearly not comfortable with Nvidia’s promises. An acquisition would have, as it does, created a period when leadership was uncertain, and direction, at least inside Arm, was uneven. Employee retention was under somewhat of a cloud anyway, and Nvidia could not move aggressively with retention programs until the acquisition was done.
After a protracted but eventual acquisition, the result could have been a crippled Arm, which then would have had to be rebuilt, with licensees no longer trusting the firm and looking for alternatives.
Partnership Better for All
A partnership eliminates most of those risks. While there may be concern about the relationship between Haas and Nvidia, he will be measured on revenue, and he is well liked and trusted by the existing licensees. It is in his best business interest to maintain those relationships while working with Nvidia on projects they prefer.
He also may use this Nvidia relationship as a template for deeper relationships with others, strengthening Arm significantly while still providing a greater benefit to Nvidia given the lack of active regulatory oversight.
In short, a partnership is not only far cheaper for Nvidia, but it should also result in faster near-term results because it would have taken months, if not years, to get regulators to allow the merger. The only reason this was not approached first was that Softbank wanted out of its Arm ownership and the purchase provided a faster and less risky path to profit for Softbank, had regulatory approvals been granted.
Better than a Merger Even
Given the selection of the new Arm CEO, Nvidia and Arm will still be close and will continue with their planned joint effort to create a more powerful CPU option for Nvidia. They no longer must seek regulatory approvals, and other Arm licensees may benefit from similar partnerships once the Nvidia effort proves to be successful, though they do not have to wait that long.
Assuming these companies remain tight, Nvidia can now use the money it would have spent buying Arm, which would have gone to Softbank, to further the joint initiative while an IPO buys out Softbank. The result should be a far better funded and focused effort than would have otherwise been the case, especially since it nearly eliminates the specter of regulatory oversight.
In short, the goal that the merger was conceived to create may be far more achievable with this approach than with the initial one. Go figure.