In dancing with Softbank, ARM may start stepping on more toes
In dancing with Softbank, ARM may start stepping on more toes.
One of the key factors behind ARM’s rise is that it has carefully avoided stepping on its customers toes. To the frustration of certain shareholders, it kept royalty rates affordably low – a low single digit percent of the chip price – despite its dominant position. And while the company has progressively expanded its portfolio of designs, it has done so in a measured fashion, carefully selecting domains which do not compete with those of its key customers. Its acquisitions have for the most part been small and focused – Falanx for graphics processing and more recently the likes of Sansa Security and Offspark for IOT security.
One of the key factors behind ARM’s rise is that it has carefully avoided stepping on its customers toes. To the frustration of certain shareholders, it kept royalty rates affordably low – a low single digit percent of the chip price – despite its dominant position. And while the company has progressively expanded its portfolio of designs, it has done so in a measured fashion, carefully selecting domains which do not compete with those of its key customers. Its acquisitions have for the most part been small and focused – Falanx for graphics processing and more recently the likes of Sansa Security and Offspark for IOT security.
Softbank’s statement that it intends to double ARM’s UK headcount and increase the headcount outside of the UK may flag the shift to a more aggressive approach to expanding its portfolio of IP. However, this could put the company into increasing competition with its chip maker customers and increase their resistance to licensing more IP from a dominant player.
An alternative interpretation could be that ARM accepted the deal because it needs to substantially increase R&D costs to fund the development IP across an rapidly expanding field of applications and that public market investors were unlikely to stomach the compression in margins that would entail.
Either way, it does mean that, in the near term, Softbank is paying more than the 48x forward earnings the 1700p offer price entails. It could potentially look to offset this by nudging up royalty rates, but to do so could seriously imperil the company’s largely benign status amongst the chip community it serves. In the longer term, it is clear that Softbank will need to very substantially expand earnings to generate a return. Whether it can do this, while continuing to dance delicately around the toes of its customers base will now be a question for the semiconductor industry and Softbank to figure out.
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