NVIDIA’s Acquisition of Arm in the Balance

On 13th September 2020, the world-leading AI computing company, NVIDIA, announced its acquisition of the Cambridge-based central processing unit (CPU) giant Arm Holdings in what has become the largest global semiconductors deal in history. The deal valued SoftBank-owned Arm at 40 billion USD, which NVIDIA would pay using their own shares and cash. The central aim of the deal was to form a partnership that solidified NVIDIA’s position as the premier computing company for AI and to broaden the markets where the company could implement their AI technology. The proposed completion of the transaction was set for March 2022. However, major scrutiny by governmental regulators from the UK, US, China and other European countries in the last month has put the fruition of this deal in question.

NVIDIA is a US-based technology company globally renowned for making integrated circuits, particularly for its graphics processor units (GPUs), of which it is the world’s largest manufacturer. GPUs are used to carry out a wide range of computational commands, but their primary use is for 3D rendering tasks – that is, the creation of 3D images on 2D screens. Their advanced GPUs have enabled the firm to branch into the fast-growing market of AI, where the company’s three major focus areas are gaming and PCs, automotive electronics and mobile devices.

Arm Holdings, which is one of the UK’s biggest tech companies, is equally as recognized as NVIDIA for its CPU architecture. Arm designs are responsible for some of the most widely used chips, like Apple’s A8 and Samsung’s Exynos range. This is merely scratching the surface of the scope of their implementation, as they operate in practically every technology-based market worldwide. However, the company’s business model is not based on CPU manufacturing. Instead, it is based solely on the licensing of their architectures to chip manufacturers, who pay the company a subscription fee for access to the designs.

Since the two companies operate in extremely related markets, the vertical nature of the acquisition provides considerable opportunities for synergies between them. For example, NVIDIA have decided to integrate their GPU architectures into Arm’s CPU open licensing model. This will not only provide NVIDIA with a new source of income from subscriptions, but will combine NVIDIA’s intellectual property with Arm’s, thereby greatly increasing their market exposure.

Furthermore, this acquisition will provide opportunities for the companies to co-operate in the advancement of AI technologies. Even though advancements in GPU capabilities are widely regarded as more significant to increasing AI workloads, CPU innovation in conjunction with this is still crucial. To achieve this, NVIDIA has committed to funding a world-leading AI research and development centre which will be located at Arm’s headquarters in Cambridge, UK, and will house the UK’s largest supercomputer.

Due to concerns about anti-competitive outcomes from the acquisition, the UK government’s Competition and Market Authority (CMA) launched an inquiry into the deal last August. Published details from Phase 1 of the inquiry stated that they believed the deal had the potential to lead to a “substantial lessening of competition” in markets for data centres, Internet of Things, the automotive sector and gaming applications. This is mainly due to Arm’s history of supplying both NVIDIA and its competitors (for example, AMD, Dell, and Intel) with integrated circuit (IC) designs. The prospect of Arm being owned by a rival has sparked fears amongst NVIDIA’s competitors that it could result in a reduction or termination of Arm’s products being available to them. To combat this, NVIDIA promised regulators that they would maintain global customer neutrality. However, the CMA’s response displayed a lack of faith in this when they said that they believed “behavioural” remedies weren’t effective in nullifying the threat. On 16th November 2021, Digital Secretary Nadine Dorries ordered a phase 2 investigation to further probe into the company’s antitrust and national security issues. Governmental regulators from the EU, China and the US have all shared a similar sentiment and have placed the deal under review by their respective authorities.

Given that Arm is a British company, there has also been concern about the implication of the deal on national security because NVIDIA is an American company. ICs underpin practically every technological infrastructure, so in terms of British national security interests this is critical for the development of their defence technology. Therefore, regulators want to assess whether this deal will be beneficial for British self-interest.

Despite the mounting concerns that the deal will be blocked due to governmental regulations, NVIDIA’s shares have surged 130% in the last 14 months since the deal was proposed, lifting their market capitalisation to 824.63 billion USD. This may be attributed to NVIDIA’s success throughout the lockdowns in spite of the global shortages in the semiconductor supply chain, as well as investor excitement about the deal.

With the completion of this transaction in the balance, NVIDIA have been forced to extend their deadline beyond their original projection of March 2022. During phase 2 of the enquiry, the CMA will have 24 weeks to report their findings to the government, after which the Secretary of State will have 30 days to make up their mind on whether the transaction should be made. These delays could potentially cause Arm’s business to suffer from uncertainty and this could incur unexpected costs for NVIDIA. This could see the 1.5 billion USD stock award to Arms staff start to deplete, which would further reduce incentive for the deal.

By Paul Brown

Sector Head: Hortense Comon

Posted in