Seeing the Bigger Picture of SoftBank’s Potential Acquisition of ARM Holdings

A number of SoftBank’s investors took umbrage with its CEO, Masayoshi Son, when SoftBank announced it would acquire ARM Holdings, the UK firm behind the ARM application processor architectures. Semiconductor vendors such as Qualcomm, Samsung, Apple, etc., then use the ARM chipset architectures and/or the processor instruction set to mass produce APUs that power more than 95% of the world’s handset and smartphones. Despite ARM’s dominance in one of the world’s most important industries (ICT), SoftBank’s shares dropped 10% in trading on Tuesday, July 19, 2016. Why the bolt for the exits by investors?

In a word: “debt.” SoftBank has been piling on the debt, as the company made a number of acquisitions. In 2006, SoftBank bought Vodafone’s Japanese operation for US$ 17 billion. In October 2012, the company purchased Japan’s eAccess (US$ 4.4 billion) to expand the company’s mobile subscriber footprint and spectrum. In the same month, SoftBank also merged with US’ Sprint-Nextel for US$ 36.1 billion. And there have been a number of smaller acquisitions, as well. There were investors back in 2012 that felt SoftBank was going too far with the Sprint acquisition. Indeed, SoftBank had to work hard to bring the financiers onboard. Even to the point of stressing that amalgamated world mobile telco would help SoftBank to get better terms from handset vendors and that the telco would move away from a handset subsidy model to a handset installment/leasing model that would help reduce inventory costs, but also allow it to recoup expenses from selling on second hand handsets.

The debt as a result of all these acquisitions is substantial, at US$ 113 billion. So is Masayoshi Son making a big mistake?

The answer depends on your timeframe. Short term investors already made their feelings clear. ABI Research believes SoftBank is playing the long game. On the face of it, SoftBank looks like a voice and data mobile telco “pipe,” but the company sees itself as empowering the “Information Revolution,” and that vision relies as much on end-user hardware, software IP, as well as network infrastructure. In 2015, SoftBank announced it sold 7,000 of its person friendly “Pepper” robots. In 2013, SoftBank invested US$ 1 billion in SuperCell, which develops games and mobile internet experiences. However the size of SoftBank’s current bet, US$ 32 billion, reflects Masayoshi Son's belief that the Internet of Things is about to drive the next expansion wave in wireless communications. ABI Research backs up SoftBank’s view of the market.

IoT already has a significant presence in our lives. Our dependence on IoT will only deepen. At the end of 2015, ABI Research estimates there were 20.8 billion IoT devices embedded in our consumer, business, and industrial lives. By 2021, the number of IoT devices providing telemetry, monitoring the safety of our homes, business premises, embedded in our health care equipment, gas and utilities management, etc. will grow to 47.9 billion. Handsets will remain a cash cow for ARM as it receives its licensing fees from the “1.99 billion” handsets that will be sold in 2016, but the CAGR outlook over the next 5 years is just 3.4%. The CAGR outlook for IoT over the same period is 15%. It should also be noted that new IoT application scenarios are constantly being invented, so the upside could be even higher.

SoftBank’s offer of US$ 32 billion is pretty hefty. If the deal goes through, and no other bid materializes (could Intel suddenly enter the fray?), it would rank as the 3^rd largest in the tech sector… behind Dell’s acquisition of EMC (US$ 67 billion) and Avago Technologies’ acquisition of Broadcom (US$ 37 billion). If Masayoshi Son pulls it off, investors will be keen to see some synergy between the different subsidiaries of SoftBank Group… and of course profits that return the investment handsomely.