NVIDIA’s attempt to buy ARM Holdings is facing stiff resistance from the EU and the U.S, and China hasn’t exactly been supportive either. At this point, NVIDIA may have better options, and we’ll get to those soon enough.
If acquisitions like this can be made quickly, they are more likely to succeed. But if they can’t be done in a timely manner, then the opposition to it will build over time, destroying the value of the acquisition to the acquiring company or making it impossible to complete. That appears to be the path that NVIDIA is now on. Given these headwinds, there is a better alternative path potentially available to NVIDIA.
Let’s talk about why it may be better if NVIDIA doesn’t acquire ARM, given the level of opposition that has emerged blocking the deal.
Acquisition Was Never Going to Be Easy
There is a lot of focus in the U.S. on big tech getting too big. While it is relatively difficult to break up large companies like Facebook, Google, and Apple, as some would like, it is far easier to block companies from becoming more prominent. Once you have a combined company, you have a high risk of causing the divested units to fail, creating a political time bomb for any politician who backed the move.
But blocking an acquisition creates no problem because both entities are already operating independently and are more likely to continue to do so. If they fail, that failure will be attributed to mistakes by operational management, not to the politicians that blocked the deal. Therefore, it is far less risky for politicians to block a merger than to break up a company.
ARM Holdings is a European firm owned by an Asian umbrella company, Softbank. So it should have been easier, in both the U.S. and EU, to argue that NVIDIA would be better than Softbank, both in terms of where the control resides and because Softbank is Japanese. Japan and China aren’t exactly close, so NVIDIA taking ownership would be a wash there. However, Softbank operates ARM Holdings at arm’s length, no pun intended, and the concern is that NVIDIA would not.
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The Problem with the Acquisition
This desire to have ARM Holdings remain independent would typically force a set of contractual limitations on what NVIDIA can do with ARM to gain approval for the deal. Due to prior companies breaking their word, these limitations would have likely had severe penalties associated with them if the agreements were violated. And depending on who is doing oversight, NVIDIA could be put in a guilty-until-proven-innocent position regarding any violations and penalties.
In addition, it will make it even harder for NVIDIA to make future acquisitions because, should it succeed with ARM and possibly even if it doesn’t, the company will be under extreme scrutiny in any subsequent acquisition. NVIDIA could still provide funding, but its ability to tie conditions to that funding may be hobbled by its concessions to get the deal approved.
A ‘Public’ Solution for NVIDIA
However, ARM Holdings is a licensing entity and, while not now, the company is rumored to be considering an IPO given the NVIDIA deal headwinds. While blocked from taking a controlling interest, NVIDIA could buy a significant interest in ARM and acquire more board seats in the newly public company. This move would allow NVIDIA to get better access to ARM Holdings’ technology with fewer potential conditions and less oversight than required for the companies to merge.
It would also create a significant barrier to any other company acquiring ARM Holdings because such a move, if NVIDIA’s position was significant, needs to have NVIDIA’s overt approval. ARM is structured to license, so the exchange of intellectual property could still happen at a similar level protected by contract between the firms. Like Qualcomm does with Snapdragon, NVIDIA could create and sell a unique ARM-based part without the headaches that might otherwise be in place because of the merger approval process.
The cost to NVIDIA would be lower, so it would still be motivated to co-fund ARM Holdings. Still, under a contract to share revenue between the firms, NVIDIA could avoid having a regulatory target on its back, shifting regulatory focus back to social media companies and Apple, where NVIDIA would likely prefer it to be.
Acquisition at ‘Extreme Risk’
NVIDIA’s acquisition of ARM is now at extreme risk. Were it to go through, the needed approvals would come with conditions that significantly restrict NVIDIA’s company control. However, if ARM Holdings goes public and NVIDIA acquires a significant ownership interest, it can still gain much of the benefit of the acquisition; it would cost less and not only help NVIDIA’s future acquisitions, but also remove much of the oversight threat it would otherwise have.
Depending on how this plays out, with these massive deal headwinds and the potential for an IPO, NVIDIA could create a better path to a stronger future than the acquisition would have provided. In a way, this latter outcome could be considered an example of having your cake and eating it too, given the benefits of a minority portion in the newly public ARM Holdings.
One additional benefit if it goes this route: Most acquisitions fail to meet expectations, and this alternative path nearly eliminates that likely adverse outcome.
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