The $66 billion deal between Softbank and Nvidia for the latter to acquire semiconductor design company Arm Ltd from the Japanese investment major has been called off after backlash from various competition authorities, including in the US, Europe and the UK. The deal, if it went through, would have created a behemoth in the semiconductors and chip design space, with primary concerns being that it would have skewed the competitive landscape. The two companies in a joint statement alluded to the deal being cancelled as a result of “significant regulatory challenges”.
What were the contours of the deal?
In September 2020, Nvidia had announced that it will purchase Arm from SoftBank. This became the largest ever deal in the semiconductor industry. At the time, the deal was looked at giving the US a leg up in its so-called trade wars with China, in a highly strategic sector like semiconductor design and manufacturing. Even though China is still looking to develop its presence in the semiconductor industry, the deal saw protests from other quarters like South Korea and Taiwan, where major players expected a negative impact on competition.
Who opposed the deal and why?
Rivals of the two companies had feared potential locking out of smaller players if Nvidia decided to put brakes on Arm’s open-licensing business model, which is based on customer neutrality. As a supplier of chip designs and intellectual property to most players in the semiconductor industry, Arm has managed an unparalleled reach with large customers like Intel, Samsung, Apple, Qualcomm, etc — some of which are increasingly competing with Nvidia. One of the opposers of the deal was British chipmaker Graphcore, which is backed by Microsoft and Samsung, among various other investors. One of the early developers of Arm in 1990s, Hermann Hauser, who is now an investor in Graphcore had last year said: “If Nvidia can merge the Arm and Nvidia designs in the same software then that locks out companies like Graphcore from entering the seller market and entering a close relationship with Arm”. Graphcore had made a “major submission” to the UK’s Competition and Markets Authority (CMA).
What did the antitrust regulators look at?
In addition to the impact that Nvidia’s acquisition of Arm could have on its rivals, the regulators looked at the impact of a deal this size on the strategic interests of their respective jurisdictions. For the UK, which opened the probe into the deal in January 2021, it became the first major investigation by the competition watchdog after Brexit. The UK CMA had also noted earlier that it plans to put greater scrutiny on strategic deals in the technology sector, irrespective of the size of a deal. The two companies have also said that they expect the deal to undergo “tough and protracted” scrutiny from China. Tuesday, the UK CMA said in a statement: “NVIDIA has abandoned its proposed deal with Arm during the CMA’s in-depth investigation, following its initial finding that the merger could lead to a substantial lessening of competition. The Competition and Markets Authority (CMA) has therefore today confirmed it intends to cancel its investigation into the merger”.
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What is next for Arm?
Softbank said that it will now plan to list Arm Ltd on the stock exchanges in 2023, and while an IPO may not provide Softbank returns comparable to the now-scrapped deal with Nvidia, industry watchers believe the public offering would be better for the Arm ecosystem in that the access to Arm’s intellectual property does not face the threat of being restricted for use by other players including Nvidia’s rivals.