Today Softbank announced it is buying ARM Holdings. ARM has technology that powers billions of devices from phones to servers to IoT devices. We have heard rumors of ARM being vulnerable for a few weeks now. Probably the biggest reason for Sofbank making the move is the weakness in the British pound due to Brexit. On June 23, 2016 the JPY to GBP was trading at 159. These deals generally take a few weeks for diligence and closing but the JPY to GBP fell to 130 last week and is trading around 140 to 141 as of the deal’s announcement. Denominated in GBP, that is approximately a 12% discount to four weeks ago.
We do expect to see more UK technology assets purchased by non-UK firms over the coming weeks if the GBP weakness continues. This is similar to what we have seen as major currency swings have occurred due to sharp recessions in other countries.
For the technology market, the Softbank acquisition is interesting. From Softbank’s telecom and infrastructure roots, this could certainly make sense as we have seen some interesting performance from Cavium and others recently. ARM Holdings already had a P/E ratio that took into account aggressive earnings growth. You can see the linked image below for more information.
In paying a 50% premium, Softbank will need to find a way to grow ARM revenues either through higher IP licensing costs or through pushing deeper into the enterprise/ Telecom equipment markets. If the company simply wanted to push IP into the telco space, licensing IP would likely have been the logical move. On the other hand, if the company wanted to increase license costs, an acquisition of the IP may make sense.
Overall, we expect this to have little impact in the next few quarters, however by late 2017 we are interested to see how the Softbank acquisition will impact the ARM IP portfolio. The timing of the deal seems linked to currency exchange rates so we await the strategic outcomes Softbank is trying to achieve with the purchase.