What does $32 billion buy you these days?
For Japanese mobile communications firm SoftBank Group Corp. (SFTBY), it’s provided a route into one of the most lucrative up-and-coming technology fields.
On Monday, the company ponied up the cash to buy British chip designer ARM Holdings Plc (ARMH).
And Softbank’s Chairman, Masayoshi Son, isn’t shy about the reason why his firm paid such a massive price — it wants a piece of the Internet of Things (IoT).
The acquisition is notable for several reasons.
Banking on Britain: First, the deal is notable in that ARM is a British firm.
As I wrote last week in the wake of the surprise Brexit vote, British companies are seeking exposure outside of the United Kingdom — and ARM is a perfect example.
For ARM, relatively little of its revenue is generated in Britain and all of its sales are denominated in dollars. That advantage has made ARM a star performer on London’s FTSE stock market since the Brexit vote — and Softbank had to pay a very large premium to convince ARM’s management to surrender its place in the spotlight.
The company sure did pay it, too — the price paid was over 40% higher than the shares were trading before the announcement.
Light on Assets, Heavy on Influence: ARM doesn’t make semiconductors — it develops the technology and licenses it to others. That makes it an “asset light” company. Basically, there isn’t much overhead such as plant facilities and equipment. Rather, everything is in intellectual property.
If you’re a longtime reader, you’ll probably know that my colleague Louis Basenese repeatedly emphasizes the importance of patents when it comes to tech companies — and ARM is basically a huge bucket of advanced patents.
A Bet on the Future: As with all large companies, most of ARM’s revenue doesn’t come from the IoT at the moment. In ARM’s case, most of its revenue comes from smartphones. For example, Apple Inc. (AAPL) is a big customer.
Of course, it isn’t an incredibly big leap from the current state of mobile communications to the IoT. Indeed, ARM has already identified the IoT as a big growth market and a focus for investment.
But with this acquisition, SoftBank is betting on ARM’s future abilities more so than ARM’s current technology. Indeed, many analysts expect ARM to hit a profit plateau as smartphone growth slows.
SoftBank obviously thinks IoT growth will reach a critical stage very soon — but it’s actually already well-positioned to gain from it…
Profiting Twice: The interesting thing about this acquisition is that SoftBank is already expected to profit from the IoT. The primary companies it supplies are mobile telecommunications firms around the world, including both mobile and fixed-line services for its Sprint Corp. (S) segment in the United States.
These companies are expected to provide the communications backbone of the IoT, and many are positioning themselves to be service providers, too. The ARM acquisition basically doubles-down on the IoT — SoftBank is now in a position to profit initially from the hardware and software that will enable IoT applications, and then profit again by connecting IoT devices to their parent computers.
Such diversification is nothing new for SoftBank. The company has already succeeded mightily by investing in emerging areas outside of its core mobile companies. It’s actually made more from investments outside of its main areas than within it.
In fact, the company invested early in Chinese internet retail giant Alibaba Group Holding Ltd. (BABA). Its $20 million investment ballooned to $75 billion — more than double what it needed to fund the ARM acquisition.
We’ve been bullish on the IoT for some time — particularly the commercial and government areas. SoftBank’s investment in ARM is validation of the industry’s profit potential.
And you can expect this deal to accelerate an already-hot M&A market for companies enabling the IoT.
To living and investing in the future,