On Feb. 7, Nvidia(NASDAQ: NVDA) formally announced the termination of its $40 billion bid for SoftBank's (OTC: SFTB.Y) Arm Holdings. SoftBank will retain the $1.25 billion that Nvidia had already prepaid to lock in the deal, while Nvidia will retain its 20-year license for Arm's chip designs. SoftBank now plans to spin off Arm in an IPO before the end of March 2023.
Nvidia agreed to buy Arm back in September 2020 to create the "world's premier computing company for the age of AI." It had initially planned to close the deal by September 2021, but a barrage of competitive, regulatory, and internal problems derailed the massive deal. Let's review the three main reasons Nvidia's bid for Arm failed, and how its failure might impact the chipmaker's future.
Image source: Nvidia.
1. Protests from competitors
Arm doesn't produce any chips on its own. Instead, it licenses its low-power chip designs to a wide range of chipmakers, including Nvidia, Qualcomm (NASDAQ: QCOM), and Apple. Arm-based chips now power approximately 95% of the world's smartphones, and they're gradually creeping into PCs, data centers, and connected cars as well.
Arm is based in England, but it's often referred to as the "Switzerland of the semiconductor industry" because it doesn't favor any single chipmaker. SoftBank's takeover of Arm in 2016 sparked a few concerns, but it passed because the Japanese conglomerate didn't produce any chips of its own.
Nvidia, however, produces its own Arm-based CPUs for set-top boxes, gaming consoles, connected cars, and data centers.
Buying Arm would have granted Nvidia access to advanced Arm designs before other chipmakers, enabled it to block other chipmakers from licensing those designs, and allowed it to license Arm's designs for free. Meanwhile, Nvidia's Arm-based competitors would still have needed to pay royalties and licensing fees to Arm -- so Nvidia could have sold its own Arm-based chips at lower prices while profiting from its direct competitors.
Nvidia repeatedly declared it would maintain Arm's neutrality, but Qualcomm, Microsoft, and Alphabet's Google all objected to the deal.
2. Regulatory headwinds
Those protests attracted the attention of antitrust regulators in the U.S., the U.K., Europe, and China. In the U.S., the Federal Trade Commission (FTC) started investigating the deal last February. Last December, it sued Nvidia to formally block the deal.
In the U.K., the deal faced probes from Britain's Competition and Markets Authority (CMA) and the U.K. Secretary of State for Digital, Culture, Media and Sport. Those investigations led to a deeper national security probe last November. The European Union also launched an investigation into the deal last February, which led to a full-blown antitrust probe last October.
In China, the State Administration of Market Regulation (SAMR) also kept the deal in limbo as it weighed the impact of an American chipmaker taking control of Arm's designs, which are widely used by Chinese chipmakers.
All those regulatory headwinds indicated that Nvidia had bitten off more than it could chew, and highlighted the importance of Arm remaining neutral and independent from the control of a single chipmaker.
3. An unresolved legal battle in China
Even if the regulators had approved Nvidia's takeover of Arm, it would still have needed to resolve a messy executive battle at Arm China, a joint venture that Arm owns a 47% stake in.
Arm China's CEO Allen Wu was ousted in 2020 for allegedly using his position to promote investments in his own firm, Alphatecture. However, Wu refused to leave, and he sued Arm China -- as well as the three executives who were appointed to replace him -- to maintain control of the company.
SoftBank's inability to resolve this ugly conflict, along with the regulatory challenges in China, likely contributed to Nvidia's decision to end the deal. SoftBank's unresolved issues with Arm China could also still impact its IPO plans for Arm, since Wu has been blocking Arm from auditing the joint venture.
What does this mean for Nvidia's investors?
Nvidia ultimately wasted $1.25 billion, or 5% of its projected revenue this year, on the deal. That's definitely a setback, but Nvidia's core business still has a bright future without Arm.
Nvidia still controlled 83% of the discrete GPU market in the third quarter of 2021, according to JPR, and that market dominance puts it in a strong position to profit from the secular expansion of the gaming, data center, professional visualization, and cryptocurrency mining markets. Its own Arm-based CPU business also has plenty of room to grow in connected cars, data centers, and popular game consoles like the Nintendo Switch.
That's why analysts still expect Nvidia's revenue and earnings to grow 60% and 74%, respectively, this fiscal year.
Therefore, investors shouldn't fret too much over Nvidia's failure to buy Arm. It will likely allocate that cash toward other investments, acquisitions, buybacks, or higher dividends instead -- and those moves could strengthen its core business while making it more attractive investment for long-term investors.
10 stocks we like better than Nvidia
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Nvidia wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of January 20, 2022
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns Alphabet (A shares), Apple, Nintendo, and Qualcomm. The Motley Fool owns and recommends Alphabet (A shares), Apple, Microsoft, Nvidia, Qualcomm, and SoftBank Group Corp. The Motley Fool recommends Alphabet (C shares), Nintendo, and Softbank Group and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
