Peter Misek is a partner at the Business Development Bank of Canada's IT Venture Fund.
Softbank shocked much of the technology world last week when it announced the imminent $32-billion (U.S.) acquisition of ARM Holdings, a London-listed semiconductor player that most average investors would struggle to recognize.
However, this play appears exceptionally shrewd and massively audacious. It cements the legacy of Masayoshi Son – the Japanese founder and controlling investor of Softbank – as a trailblazing, global pioneer who is willing to gamble heavily for success.
Softbank owns the third-largest communications company in Japan and in 2013 bought the substantial majority of Sprint, the third-largest player in the U.S. market. The same year, it began a vertical integration strategy when it acquired global wireless distributor Brightstar, adding to its portfolio of operating assets, which notably includes Yahoo! Japan. It also owns almost a third of Alibaba, the world's largest retailer on a gross merchandise basis.
Softbank has been an outstanding investment, generating a 44-per-cent internal rate of return annually as of March 31, 2016, delivering roughly $92-billion on an original investment of $3.7-billion. For investors, this acumen has significant bearing on the ARM transaction.
First, an explanation of what ARM actually does. It's a semiconductor licensing firm whose designs power the vast majority of central processing units (CPUs) in mobile devices in the world today. If you own a smartphone, there is a better than 90-per-cent chance that you are using an ARM processor. ARM has also begun to make headway into the personal computer (PC) and server world against Intel, the best-known semiconductor player in the world.
Why has ARM taken so much share against Intel in mobile and why is it poised to do the same in the server world? A bit of history.
ARM's semiconductor design is based on RISC (reduced instruction set computing) while Intel processors are based on CISC (complex instruction set computing). Without simplifying this to the extreme, CISC is a way of executing programs using as little memory and computational power as possible, by utilizing logic shortcuts to group execution programs. In the early days of PCs, CISC computers were much more powerful and faster than their predecessors. However, once RAM (random access memory) prices collapsed and processing power sped up, RISC began to eclipse CISC.
RISC-based ARM processors typically consume significantly less power than CISC-based Intel processors. This is especially valuable in the smartphone and mobile world. Now imagine data centres that combine thousands upon thousands of processors. Even just a small difference in power consumption at this micro level can add up to a substantial difference in heat generated.
So, back to Softbank and why I believe this is a genius move. Softbank is a vertically integrated tech company and controls one of the largest cellular companies in Japan and the United States, respectively. It does not hide its ambition to become a global technology powerhouse. By controlling ARM, Softbank can benefit in the following ways:
- It can advance its artificial-intelligence and smart robot initiative by focusing on driving the transistor count from three billion to 30 billion, roughly the equivalent of a human brain, using ARM. This gets Softbank closer to its goal of “singularity,” or super-intelligent machines.
- It can white-label smartphones and use them on its own networks, thereby providing a hardware-software bundle that undercuts its competition.
- It can enter the data-centre business more aggressively by leveraging ARM servers and networks to provide a cheaper and more complete solution for customers.
- It has probably realized that ARM’s opportunity in the Internet of Things and servers is massively misunderstood and it can simply run the business autonomously and potentially profit in a way that the market did not appreciate. In a world where 100 billion or more devices will be connected, providing the design for the semiconductors that power each of these devices would provide for a formidable revenue stream.
- It can get a head start in other areas of technology by having the research and development and road map for advanced semiconductors, which will allow it to build new devices faster than its competition.
Ultimately, the acquisition by Softbank catapults ARM onto the world stage in a way that may shed light on its incredible impact on our daily lives. The average consumer is likely to now find out that the iPhone or Android phone in their pocket is powered by ARM.
It's still possible that Apple, Samsung and Google will find this bid completely threatening and pull together a syndicate of buyers to outbid Softbank, as a non-independent ARM could pose challenges to their business going forward. Regardless, the dog days of summer just got a little hotter in the technology world.