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The ARM – Softbank Deal: Heart Before Mind

Gabe Moretti, Senior Editor

If you happen to hold ARM stock, congratulation, you are likely to make a nice profit on your investment.  SoftBank, a Japanese company with diversifies interests, including Internet provider, has offered to purchase ARM for cash by tendering $32.4 billion dollars.  SoftBank is a large company whose latest financial result show that it made a profit of $9.82 before interest payments and tax obligations.

ARM, on the other hand, reported for 2015 fiscal year revenue of $1.488.6 billion with a profit of $414.8 million and an operating margin of 42%.  This is a very healthy operating margin, showing a remarkable efficiency by all aspects of the company.  So, there is little to improve in the way ARM operates.

What seems logical, then is that SoftBank expects a significant increase in ARM revenue after the acquisition, or an effect on its profit due to ARM’s impact on other parts of the company.  ARM profit for 2015 were 414.8 million British sterling and the revenue in sterling was 968.3 million for a ratio of 42.8%.  Let’s assume that SoftBank instead invested all of the $32.4 billion and obtained a 5% return or $1.62 billion per year.  To obtain the same result from the ARM acquisition it would mean that ARM must generate a profit of 3.9 times what it generated in 2015.  This is a very large increase since if we assume that all other financial ratios stay the same revenue would have to be a little over $5.5 billion. Yet, using the growth of 15% realized between 2014 an2015 for every year between 2015 and 2020 we “only” achieve a $2,913.6 billion mark.  And keeping the growth ratio constant as revenue increase gets harder and harder since it means a large increase every year.

So the numbers do not make sense to me.  I can believe that ARM could be worth $16 billion, but not twice as much.  And here is another observation.  I have read in many publications that financial analysts expect the IoT market to be $20 billion by 2020.  Assuming that the SoftBank investment, net of interest charges, returns 5% per year in 2020, it would mean that ARM’s revenue would be $5.5 billion or over 25% of TAM (Total Available Market).  This, I consider impossible to achieve, simply because the IoT market will be price sensitive, thus opening ARM to competition by other companies offering competitive microcontrollers.  SoftBank cannot possibly believe that Intel will go away, or that every person will own three cell phones each, or that Google will use only ARM processors in its offerings, or even that IP companies like Cadence and Synopsys will decide to ignore the IoT market.

I am afraid that the acquisition marks the end of ARM as we know it.  It will be squeezed for revenue and profit like it has never been before and the quality of its products will suffer.

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