SoftBank’s Arm unveils plans for biggest US IPO in nearly two years

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Arm, the chip designer owned by SoftBank, has commenced the timer for the largest initial public offering (IPO) in the United States in nearly two years. Recently, it released an initial prospectus for a Nasdaq listing, expected to occur in the beginning of next month.

Arm is poised to become the most lucrative firm to go public in the US since November 2021, when Rivian, a manufacturer of electric vehicles, debuted with an initial market value of $70 billion.

In 2016, the Japanese conglomerate SoftBank, under Masayoshi Son's leadership, purchased Arm, a company based in the UK, for a whopping $32 billion. The recent filing on Monday has now revealed that a transaction occurred within SoftBank Group and its Vision Fund, which is an investment entity managed by the conglomerate, placing a value of $64 billion on Arm.

The brochure discloses that Arm relies on China for approximately 25% of its income, while the current actions of the Joe Biden administration are progressively tightening restrictions on the operations of American semiconductor companies in China. Arm carries out its business in China through a domestic company that is not under the control of either Arm or SoftBank.

Arm's designs dominate the market for smartphone chips, with a share of over 99 percent. According to the company's filing, approximately 70 percent of the global population uses products that rely on Arm's technology. Furthermore, chips incorporating Arm's technology accounted for nearly half of the total market, valued at more than $200 billion, in the previous year.

Nonetheless, Arm, which is based in Cambridge, is making a comeback to the stock market following a seven-year hiatus, coinciding with a significant decline in the smartphone industry, the largest one seen in ten years.

According to the document, Arm generated a total revenue of $2.7 billion in the twelve-month period ending on March 31, experiencing a slight 1 percent decline compared to the previous year. Additionally, their net profit also decreased by 5 percent, reaching $524 million. It is important to note that Arm will not benefit directly from the initial public offering (IPO) as SoftBank will be the one selling a portion of its shares.

Arm is feeling the effects of the slowing down and is now under pressure to seek alternative avenues for growth. This entails expanding its presence in the automotive and cloud computing sectors and increasing the significance of its intellectual property. Son has also made it a point to emphasize Arm's involvement in the thriving artificial intelligence market.

SoftBank has engaged in discussions with multiple clients and technology firms regarding their potential involvement as investors in the initial public offering (IPO). Some notable names include Amazon, Intel, and Nvidia, the chip manufacturer with a strong focus on artificial intelligence. However, it is worth noting that Nvidia's unsuccessful $66 billion attempt to acquire Arm took place in 2022. In its filing on Monday, SoftBank refrained from sharing additional details about the potential major investors.

In the prospectus, Arm highlighted that it faced a higher chance of being influenced by economic and political uncertainties that impact China, the biggest market for smartphones worldwide. The income derived from royalties in that region dropped last year due to a mix of slower economic expansion and issues related to export control and national security concerns.

The connection between the company and China is made more intricate by the distinctive ownership arrangement of Arm China, which possesses sole authority to grant sub-licenses for its intellectual assets to Chinese clients like Alibaba and Xiaomi.

While Arm China is heavily dependent on Arm, the latter has no direct control over the former. Arm only possesses a 4.8 per cent indirect ownership stake in Arm China, which is predominantly owned by various Chinese investors. Additionally, a SoftBank subsidiary, in which Arm holds a 10 per cent stake, owns 48 per cent of Arm China.

The ex-CEO of Arm China, Allen Wu, spent a period of two years opposing all endeavors to remove him until he was ultimately compelled to step down by local authorities in Shenzhen in the previous year.

In another section of the document, Arm also mentioned that it had discovered a significant flaw in the supervision of the IT systems it utilizes for its financial reports. It mentioned that it took steps to resolve the issue throughout the previous fiscal year, but did not provide any assurance regarding the timeline for a complete resolution.

A devoted investor in SoftBank, who has stayed with the company for a considerable period of time, mentioned that the capacity of the Japanese conglomerate to go public with Arm at a value exceeding $60 billion in a challenging market could potentially act as a means of regaining faith in Son's capabilities as a leading technology investor.

Due to its substantial scale and previous experience as a publicly traded entity, Arm is seen as having a lower level of risk compared to many typical initial public offering (IPO) contenders. However, the market is paying close attention to this transaction as it serves as a crucial indicator of the current state of the US IPO market following a lengthy period of inactivity lasting 18 months.

Goldman Sachs, Barclays, JPMorgan Chase, and Mizuho are the main consultants facilitating the offering, joined by an additional 24 banks.

Arm has taken a step towards its IPO by submitting its paperwork on Monday. The company will now be able to embark on its roadshow once markets reopen after the Labor Day holiday in September. Arm had previously filed a preliminary prospectus with the Securities and Exchange Commission, but it is necessary for companies to disclose their documents publicly at least 15 days before commencing the official share sale process.

Rene Haas, the CEO of Arm, is set to secure a whopping $20 million in cash as a reward once the IPO is successfully concluded. Additionally, he will also be granted a hefty $20 million in stocks.