In claiming the U.K.'s ARM Holdings (ARMH) , whose semiconductor know-how is used in 95% of feature and smartphones including Apple (AAPL - Get Report) and Samsung products, Japanese telecom giant SoftBank (SFBTF) has followed through on May commentary to investors that the so-called Internet of Things market represented a major opportunity.
SoftBank founder and CEO Masayoshi Son, who recently took back control of the company from chief operating officer Nikesh Arora, stated that in "one of the most important acquisitions it has ever made," SoftBank would be investing "to capture the very significant opportunities provided by the 'Internet of Things'."
SoftBank is investing in ARM "because we are now at the starting point of a paradigm shift, from mobile Internet to Internet of Things," Son said at a press conference following the announcement. "Up to now, SoftBank has achieved 44% return from our investments, and the reason for this high success rate is that we've always invested at the entry point of a paradigm shift, which we are in now."
SoftBank made the official offer to ARM two weeks ago, according to Son, who said Brexit accounted for "about 0.1%" of its rationale. He added that the transaction was the most exciting investment in his life to date. (The 58-year old recently said his change of mind about handing over the reins to one-time successor-designate Arora came because he wanted to "work on a few more crazy ideas.")
In recent years, the Cambridge, England supplier of semiconductor intellectual property has poured additional resources into technology for smart devices such as connected wearables or tracking devices used in hospitals or farming, by enhancing R&D and acquiring companies involved in that business. Between 2015 and 2020, ARM expects to gain market share in embedded intelligence, or intellectual property for chips used in connected devices, by a compound annual growth rate of 7%.
In November 2015, Gartner estimated that 6.4 billion connected devices will be in use globally in 2016 and will reach 20.8 billion by 2020, while revenue from consumer applications will grow from $1.4 trillion to $3 trillion. In comparison, Gartner forecasts smartphone sales to post annual growth of 7% in 2016, down from an increase of 14.4% in 2015.
ARM has said it believes the total available market for embedded intelligence, or chips used in connected devices, would expand by 43% between 2015 and 2020, from $21 billion to $30 billion, This outpaces the 39% growth it estimates over that same five-year period for mobile application processors. As of 2015, the company had 30% market share for embedded intelligence, compared with 85% for mobile application processors.
TheStreet's Jim Cramer said following the announcement, the semi-conductor group has been "ignited." This could be the first "take advantage of Brexit" moment in the market so far, he said.
"It is breathtaking in the same way that LinkedIn [and Microsoft] was breathtaking to me because it says that nobody ... [at] less than $50 billion is necessarily going to be able to say no to a deal," Cramer said. "This is a very big premium."
ARM has not shied away from turning to other companies for technology where it has deemed it needed external knowledge. In 2013, ARM acquired Finnish Sensinode, which provides software technology for connected devices, while in 2015, it acquired Israel-based Sansa Security, a provider of software for system-on-chip components used in IOT and mobile devices.
SoftBank's Son said that the synergy between the two companies will come as Internet of Things devices installed with ARM's technology can be offered through the telecom infrastructure that SoftBank currently offers in Japan and the U.S. Going forward, he hopes that the two companies can also find synergies on the security side of Internet of Things.
For the 35-year-old company, the acquisition bolsters Son's strategy of building a business able to achieve growth over the long term. Son's rationale behind this strategy is that every technology company faces a 30-year life cycle followed by decline, which needs to be countered by transformation of existing businesses, as well as allowing room for disruptive businesses.
One of the key messages in today's announcement is that SoftBank will be allowing independence to ARM. The Japanese company said in the announcement that ARM "will remain an independent business within SoftBank," promising to at least double the employee headcount in the U.K. and to increase staff outside of the U.K. over the next five years. ARM said it has 4,064 employees.
ARM accepted the offer as it would be enable the company to make significant R&D investments without worrying about making losses. ARM's board of directors unanimously agreed to the acquisition. In 2015, ARM's revenue jumped 22% to £968.3 million ($1.3 billion). ARM is led by CEO Simon Segars.
"ARM's management is extremely competent, and I see no need to change them," Son said. "I would very much like to be involved and support ARM's mid to long-term strategy."
SoftBank's decision to allow independence for ARM may also keep competitive bids at bay, as one analyst pointed out.
"While we don't rule out a competitive bid, we believe the chances of it happening are low," Liberum Capital analyst Janardan Menon said. "The independence that SoftBank can continue to bring to ARM can make the deal more acceptable to its customers in our opinion. This is likely to reduce the chances of a counter-bid, particularly if SoftBank can assure key stakeholders like Apple, Qualcomm ( QCOM ) and TSMC ( TSM ) that the strategy will remain unchanged and that investments in the technology will be increased."
Following the announcement, ARM shares initially soared by 47%, over the 1,700 pence value of the offer. But by early afternoon they had edged down to 1,695 pence, a rise of almost 43% on Friday's close.