Arm’s public offering is looming—and there could be a lot riding on this IPO as the largest public offering of the year and a key company in SoftBank’s portfolio.
Earlier this week, Arm announced it would price its shares between $47-51 per share. That means the chipmaker is planning to raise up to about $4.9 billion and is eyeing a valuation of up to $55 billion, depending on how the investor roadshow plays out and where the final share pricing lands. This isn’t the valuation Arm was rumored to be aiming for earlier this year, but it would still be much more than the $32 billion SoftBank paid to take Arm private six years ago.
“The valuation is still very high relative to other semiconductor companies,” says Brendan Burke, a senior emerging technology analyst at PitchBook. That's a nod to Arm’s ubiquity in the device market (its chips power 99% of the world's smartphones), as well as the developments Arm has made in A.I. analytics, such as object identification or word detection. But the lower-than-estimated pricing suggests investors may be scrutinizing where Arm will land in the broader generative A.I. boom. (Arm said in its investor roadshow presentation that an increasing need to train large language models would be good for business and emphasized its work with NVIDIA to develop a new type of processor for data centers. But the company has also disclosed in SEC filings that new kinds of A.I. algorithms may pose a risk to Arm's business.) Companies like Apple or Google see an opportunity here–as they have expressed interest in scooping up $735 million worth of Arm's shares, according to Arm's SEC filings.
This is a massive IPO, whatever way you look at it. But just how good a deal is this for SoftBank, which owns the chipmaker and will still hold more than 90% of it post-IPO? To answer that question, it's worth comparing it to the deal SoftBank was trying to close for Arm three years ago. That’s why I’m sitting at my desk doing a little back-of-the-napkin math as I eat some chicken tortilla soup.
Let’s look at the deal that almost was: A.I. computing company NVIDIA agreed to acquire Arm from SoftBank for about $40 billion three years ago. As we all know, regulatory challenges ended up dooming that deal, though NVIDIA still partners with Arm (and NVIDIA CEO Jensen Huang made appearances in Arm's roadshow video). If you look at the acquisition figure alone—$40 billion—it looks like SoftBank actually might make it out better with an Arm IPO. That’s until you look at the terms.
NVIDIA had agreed to pay SoftBank $21.5 billion in NVIDIA common stock, plus $12 billion in cash, for Arm. There were also some other components to the deal, including an up-to $5 billion earn-out, granted Arm met specific targets, and $1.5 billion in equity to Arm employees. All of that rounded out to a $40 billion deal valuation.
Here’s the breakdown of what, theoretically, could have ended up in SoftBank’s pocket:
$12 billion (cash)
$21.5 billion (common stock)
$5 billion (earn-out cash or common stock, subject to hurdles)
TOTAL: $38.5 billion
While it’s fun to get all wrapped up in the big number here, the key is the performance of NVIDIA shares post-close. And, in hindsight, SoftBank could have really made out on that front if the deal had gone through and it chose to hold onto those shares for a bit.
NVIDIA shares were trading at more than $485 a pop by market close Tuesday, up from nearly $129 per share the day the NVIDIA-Arm deal was announced. That means they are now worth 277% more than they were the day the transaction was announced. Here’s a chart, because this is pretty insane:
There’s a lot of reasons for NVIDIA’s explosive three years. An obvious one would be the generative A.I. boom, as NVIDIA is the main infrastructure supplier for A.I. systems. The company has repeatedly surpassed earnings expectations this year.
The point of all of this is that, theoretically, if the NVIDIA-Arm deal had won regulatory approval and if SoftBank had held onto a decent chunk of 44.3 million NVIDIA shares for three years, those shares would be worth 277% more. Here’s my napkin math:
$12 billion (cash)
$59.6 billion (common stock)
$5 billion (let’s assume Arm met the hurdles and SoftBank took cash)
TOTAL: $76.6 billion
SoftBank seems poised to do really well from the Arm IPO. But not that well.
At the same time, SoftBank will likely be able to use NVIDIA’s enormous success in the public markets in its favor, according to Burke. And SoftBank could try to sell investors on the A.I. computing exposure they may have missed out on with NVIDIA’s run-up, according to Burke.
“I think that's part of the timing behind the listing,” he says.
Demo Day…Yesterday Y Combinator kicked off presentations for its 2023 summer batch Demo Day with an enthusiastic (and rather dramatic) nod to San Francisco: “We believe putting the most eminent founders of our generation together makes YC in San Francisco just like Rome or Athens in antiquity,” YC’s new president and CEO Garry Tan said in an introduction to Demo Day as he pointed out that this batch was 100% back in person. Tan said that YC is aiming to do next year’s Demo Day in-person “in some form,” which I imagine will be welcomed by investors, as I got an error message the first 10 minutes I was trying to get into the Zoom, saying that “too many people are accessing this website at the same time.”
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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