ARM race: Finally, an IPO worth losing a limb over

Some decent news out of Cambridge in England for once not involving toffs: the next tech juggernaut – a computer processor and software maker called ARM – just filed the paperwork with the US Securities Exchange Commission. And it’s a Form F-1 registration statement, which in SEC lingo means the path is set for what will likely be the global initial public offering (IPO) of 2023.

And 2022… and probably 2021.

Certainly, an Arm-listing would be a ray of sunshine on an otherwise wintry IPO market. Hands down we’d see the single highest profile float of the last few years, and the action could be fierce especially with Google, Microsoft, Apple, Amazon and Nvidia showing what a good chip and a few ideas around AI can do to a stock price and a market cap.

ARM is reportedly already in talks to bring in Nvidia as an anchor investor for the New York listing, alongside Mega Tech adults such as Apple and Amazon.

Arm and APPL as you’ll see, go way back…

Arm: We’ll go with the ticker ARM, I reckon

From a release I found deep within ARM’s mesmeric website, the advanced computing company said it’s applied to list American depositary shares (“ADS”) representing its ordinary shares on the Nasdaq Global Select Market under the symbol “ARM”.

“The number of ADSs to be offered and the price range for the proposed offering have yet to be determined,” the release added, knowing full well this is one listing in 2023 that could well turn into an (ahem) arms race.

The UK-based chip designer is one of the Japanese conglomerate Softbank’s various crown jewels in a portfolio of some 400 other companies, including sometime hits and misses like WeWork, Uber-wannabe Grab and the immense used-car company Auto1.

The exact timing of the IPO, like the listing price, will likely remain a tight secret and eventually be determined by a melange of the kind of buzz the overnight declaration of intent creates and the way market conditions unfold in the next weeks.

But as it stands ARM has rolled out its preliminary prospectus for the IPO, with a more formal discussion around pricing expected to follow in the next week or two.

Arm did have a previous life as a dual-listed public firm in both London and New York, until it was snapped up by SoftBank for a bit over US$30 billion in 2016, and then courageously delisted.

As an aside, but worth noting considering ~~the way the Ashes played out~~ the deplorable state of the UK financial world right now, Arm’s confirmation of a Nasdaq IPO is also something a terrific FU to the British government in what would’ve been London’s biggest IPO since forever.

*“The number of ADSs to be offered and the price range for the proposed offering have yet to be determined.” Screenshot via Arm Holdings.*

Last year Softbank’s drawn out effort to get a US$40 – US$80 billion sale for Arm across the line to Nvidia (NVDA) was eventually scuppered.

NVDA was keen enough, and while the price looks both sheer profit for Softbank and yet daylight robbery now, a headline Nasdaq listing in this current IPO desert should produce some fireworks.

The NVDA deal was two years in the unmaking, as COVID-19, stretched chip supply lines, geopolitical tensions with China and finally some grumpiness about market controls from the competition watchdogs in the states and across Europe finally saw the sale fall through.

And considering the insane evolution of AI et al over the last 12 months – they were probably right.

In that short time (say, a post Chat-GPT world), the AI universe, semiconductors and processor chips and NVDA itself have all gone totally rogue.

AI is suddenly writing philosophy essays for bored students and its potential alone has driven Wall Street into a frenzy, providing an unlikely engine for some massive tech giant gains on the Nasdaq.

NVDA’s share price alone – and the company reports on Wednesday NY time – is up well over 200% in 2023 and by March hatched itself into a trillion US dollar company.

So what kind of money are we talking?

There’s not heaps to go on outside of what Arm tells us, but there is a bit of an electronic paper trail.

In the SEC filing, ARM said it pulled in some US$2.68bn in revenue for the fiscal year into March 2023, which was a slight drop off from the previous year’s US$2.7 billion. Thus far in 2023, Arm grabbed net income (from continuing operations) of US$524m, against the US$676m for the same period in ’22.

The listing document reveals an internal transaction between SoftBank and its Vision Fund, which lost a record US$30bn last year. Arm is thought to be worth about US$64 billion.

The math is probably good, but since it’s an internal sale document – a transaction in which Softbank acquired its own Vision Fund’s (25%) stake in Arm for $16bn, thusly valuing Arm at exactly $64bn, this is at the higher end of a valuation range I’ve been seeing over the last 24 hours which goes from circa US$30 billion to US$70 billion.

Naturally Softbank wants to suck the marrow out of any float.

Even so, within this broad valuation top or bottom resides the single most valuable company listing on US markets since at least November 2021, when electric-vehicle maker Rivian went public with a market cap of US$70 billion. (Rivian BTW is worth about US$19 billion today.)

Arm’s only other valuation worth going through that I could find cames from the delightfully stricken sale to Nvidia, which was originally put up at US$40bn in 2020, but found itself at $80bn just 12 months later as the process drew on.

The crazy-arse deal was also directly tied to NVDA’s stock price, since SoftBank planned to horde a 10% stake of the US firm for itself, post-sale.

The deal played out painfully and then kinda perversely, as the pandemic’s confusion, sharemarket bubble and the global chip shortage all played into NVDA’s emergence as a major player. Its stock began to rise and so did ARM’s valuation.

According to CNBC overnight, while no-one knows what valuation SoftBank will be wanting for Arm – nor exactly how much of a stake SoftBank is likely to demand – reports in the US seem to be putting Arm’s prospective market cap in a narrower band between US$60 billion and US$70 billion.

So what do these guys actually do?

Arm doesn’t make computer processors itself but sells licences to other production firms. It says the business is like the R&D department for the global semiconductor sector.

In short, Arm makes its money by Microsoft Windows-ing its chip design and semiconductor-related soft and hardware to the actual semiconductor producers and the business which deliver hardware to the semiconductor sector.

The company says by flogging a LOT of energy-efficient processor designs and software platforms, it has “enabled advanced computing in more than 250 billion chips and our technologies securely power products from the sensor to the smartphone and the supercomputer”.

The Cambridge-based chip architect says it has over 1,000 global technology partners and claims that its chip-designs are inside nearly every smartphone on the planet, which means, ergo sum, its DNA is in both the iPhone and Android-based devices.

“We are enabling artificial intelligence to work everywhere, and in cybersecurity, we are delivering the foundation for trust in the digital world – from chip to cloud.”

If you want to go back even further, long before it was designing processors, systems and platforms, the business was first spun out of a computing company called Acorn Computers in the early 90s. Back then it was part of a JV (joint venture) with a sprightly tech firm called Apple, working on the processors which might drive Apple’s dream of making computers for the palm of your hand.

It was nuts. The JV was a complete dud. Apple threw a hissy fit, flogged its circa 45% stake in Arm and – interestingly – used the cash to buy some dumb American tech start-up which was founded by some inconsequential fella called Steve Jobs.

What now?

The other development which probably has SoftBank and its Vision Fund set up which also has a 25% piece of the Arm Pie (the elbow, for example) is Arm’s growing reach into the AI universe.

It’d be very surprising if Arm wasn’t totally an AI company by the time a listing date’s been set.

Investors will likely slather over the next big SEC document – the company’s S-1 filing – to literally taste the AI technology in the post.

And there’s a fair bit too.

In May, Arm released two new chipsets made for machine learning.

One is a fiery CPU called Cortex-4, which as a chip Arm says “delivers faster machine-learning performance and consumes 40% less power” than the Cortex-3.

The other, a GPU called G720, offers better performance and uses up 22% less memory bandwidth than its predecessor, Arm said.

In a few words, tech fiends and IPO lovers will be all over what happens with the Arm listing over the next weeks. Should be fun.

Barclays, Goldman Sachs & Co. LLC, J.P. Morgan, and Mizuho are acting as joint book-running managers for the proposed offering.

According to the Financial Times, the ‘large roster’ above is a kind of tacit admission that SoftBank needs some assistance to hit its targets. The FT says the most serious risk to Arm’s valuation is China.

“US and UK export controls mean revenues there, nearly a quarter of the company total, are under threat. Chinese companies have also been investing aggressively in developing RISC-V, open-source chip design architecture that could serve as an alternative to Arm’s designs.”

IPOn with the show

Whatevs happens here – and 2023 is pungent with the stench of 2022’s unreliability – investors will be all over how Arm’s offering plays out.

Wall Street is hungry for a listing rebirth, especially in prospective tech.

The optimism is bubbling away under the surface stateside and a few recent smaller IPOs – the restaurant chain Cava (CAVA – June) and AI beauty moonshot Oddity Tech (ODD – July) – have helped defrost the fridge.

Rumour even has it sandle king Birkenstock, maker of my comfy Birkenstock(s), has shown a bit of interest in going full public within the next month or so.