Why SoftBank's Big Bet On ARM Is Actually Good News for Intel and Qualcomm

SoftBank's $32 billion bet on ARM Holdings highlights the tech industry's growing optimism about the Internet of Things.
By Jaewon Kang ,

SoftBank Group's (SFTBY) aggressive $32 billion bet on chip designer ARM Holdings ARMH highlights the tech market's growing interest in and enthusiasm for the Internet of Things (IoT). And analysts say the takeout will likely have more positives than negatives for other semiconductor companies with exposure to IoT, including chipmakers such as Intel (INTC) - Get Report and Qualcomm (QCOM) - Get Report .

On Monday, Japan's SoftBank said that it has agreed to acquire ARM Holdings of the U.K. for £24.3 billion ($32.1 billion). In making the announcement, the Japanese conglomerate particularly highlighted its plan to invest in the growing IoT market.

IoT essentially refers to the idea of connecting physical devices and vehicles with the Internet.

"It ups the ante going forward on IoT," said Morningstar analyst Abhinav Davuluri via phone.

Direct peers interested in moving up the chip stack and bringing the ARM licensing technology in-house, such as Qualcomm and Apple (AAPL) - Get Report , were expected to emerge as potential buyers of ARM, he said.

But there would have been significant regulatory push back to such tie-ups, Davuluri explained. By comparison, SoftBank is more of a financial buyer with no regulatory concerns.

"This honestly helps ARM accelerate its effort in IoT," he added, given the financial resources Softbank can now pour into ARM. 

Meanwhile, the acquisition comes as some semis have tapped into IoT in hopes of finding new sources of revenue growth.

Intel, for instance, has identified IoT as an area of growth. The chip giant has traditionally focused on the PC market, which is a low-volume, high-margin business.

SoftBank's investments could ramp up IoT competition, but the broader market will ultimately benefit from the increasingly favorable perception toward IoT, Davuluri said.

ARM doesn't actually build chips, but instead creates the designs for them. Hence, chipmakers with exposure to IoT will still turn to ARM for licensing, and ARM's investments from its new backer should benefit the entire ecosystem of software developers, chip makers and chip designers.

Designing and manufacturing represent two different business models, so chip manufacturers such as Intel will still have a seat at the IoT table, according to Davuluri.

Aside from Intel and Qualcomm, Cypress Semiconductor (CY) - Get Report has also made a bet on IoT, as illustrated by its $550 million purchase of Broadcom's (AVGO) - Get Report  IoT business, a deal which just closed this month.

It's unlikely that a customer of ARM's, such as Intel, would step in with a competing bid, said Stifel analyst Kevin Cassidy via phone.

Having ARM could help slightly via integration cost savings, but they wouldn't be worth the concerns created about one company controlling the entire supply chain. In other words, some of ARM's customers would have to purchase designs from their main competitor, which Cassidy said would likely create backlash.

Meanwhile, SoftBank's bet came as a surprise Monday.

While the bold play was unexpected in the market, the Japanese conglomerate makes strategic sense as a buyer, said one industry analyst who asked for anonymity.

Meanwhile, SoftBank has committed to invest further in IoT post-acquisition, and it's unlikely that ARM will see more growth from its mobile business as the broader cellphone end-market has been slowing.

"If you're Intel, maybe your concern is that ARM now [has] got an owner that's committed to IoT," the analyst said.

Chipmakers have undergone heavy levels of M&A, but there aren't many IoT plays left in the market. At the end of the day, ARM supplies players in IoT and its buyout is more of a unique situation with somewhat limited implications on the broader semi sector.

"If Internet of Things is really a theme that people think is worth investing in, then I think this falls into that category," the person said.

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