Arming for a fight

Nvidia’s $38.6 billion target

When it comes to world wars, countries generally don’t have long to decide whose side they’re on, or whether they can adopt a neutral position. Three decades of rampant globalisation has left the corporate world in the same invidious position in relation to the Sino-US tech war.

Few companies encapsulate this dilemma better than Arm, as the microchip designer is looking at a potential new owner following a $38.6 billion bid in mid-September by US semiconductor company Nvidia.

The consequences of the acquisition are far-reaching. What happens to Arm could determine whether national regulators really have the teeth to block M&A deals between third-party countries’ companies.

Arm is currently “Japanese” after Softbank paid £24.3 billion ($31.1 billion) for it in 2016. Selling it to an American company puts it in danger of exposing it more directly to export restrictions the US government is deploying to prevent technology transfers to China. This would strengthen American dominance over the global semiconductor industry and weaken China’s ability to catch up in chipmaking.

Arm’s intellectual property emanates from its Cambridge headquarters in the UK. Consequently, Hermann Hauser (who co-founded Arm but is no longer an executive), says the British government should step in on national security grounds and prevent a sale to Nvidia: Arm should remain the “Switzerland of the semiconductor industry” in his view, which means taking no sides in the escalating Sino-US tech war.

He believes there are two ways to maintain this status. The UK government could persuade Softbank to list Arm and purchase a golden stake to prevent hostile takeovers. Alternatively, it could facilitate a merger with a homegrown AI start-up like Graphcore, in which his investment fund has a stake.

Historically, the UK government has pursued the world’s most laissez-faire approach to M&A approvals. But Softbank and Nvidia are now in the process of also seeking regulatory approval from other jurisdictions which Arm operates in.

Many observers believe that China’s State Administration for Market Regulation won’t give its consent to the deal. It famously let time run out on Qualcomm’s $47 billion bid for Holland’s NXP Semiconductors (a big chip player in the auto industry). It could do the same again, causing the takeover agreement to lapse.

However, there’s a key difference. Qualcomm had to abide by China’s decision because it derived more than two-thirds of its revenues from the country. Arm is not quite so heavily exposed (about 20% from China), though Forbes points out that around 25% of Nvidia’s revenues come from China too.

The reality is that there are no globally binding regulatory rules. In the post-war period a succession of bodies have tried and failed to put them in place including the OECD and UNCTAD. The latest effort is the International Competition Network (ICN), set up 2011 with 92 member states. It tries to harmonise international competition laws, but it’s a voluntary body. The realpolitik reality is that the power of a nation’s antitrust body lies in the size of the market. If the Chinese regulator shuttered the China market to Nvidia and it lost a quarter of its total sales as a consequence, that would impose a hefty commercial cost.

The Economist thinks China will object to the deal as “it is already upset over American attempts to strangle its technology firms”.

The context could change before Nvidia’s agreement with Softbank lapses including a possible change of government in the US. There’s also a more imminent test of China’s attitude involving two other semiconductor equipment companies. America’s Applied Materials agreed to buy Japan’s Kokusai for $2.2 billion in June 2019. The agreement was recently extended from June to September because Chinese regulatory approval was still outstanding.

Meanwhile, Arm also needs to sort out who really controls its 49%-owned Chinese subsidiary. As we reported in WiC501, the local board is having problems ousting CEO Allen Wu on conflict-of-interest grounds. Reuters reported last week on a lawsuit by a local firm, which owns a 13.77% stake in Arm’s China unit. The suing company’s legal representative is one Allen Wu, although the newswire says it cannot prove he is the same Allen Wu as Arm’s CEO.

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