In my 26 years working in the mobile business, I haven't seen a situation like this. Softbank agreed to buy ARM Holdings this week for $31B. That's triple the valuation of Motorola in the Google acquisition and four times as much as Microsoft paid for Nokia's handset division. It's a high valuation for ARM, at more than 45x their expected earnings for next year. Personally, I think ARM is worth it, because they have a strong and lasting place in the technology market.
ARM is not a household name like Nokia and Motorola were, but they are a critical part of every smartphone on the market. Intel had a few chips in Asus smartphones and other niche platforms, but they've decided to bail out of that market anyway. That leaves ARM as practically the only processor core used in the smartphone market.
There are a few possible outcomes here:
1. Antitrust regulators could decide that the acquisition is anti-competitive. Control over the IP for the ARM core could give Softbank (and Sprint, by proxy) an unfair advantage. I think this outcome is unlikely. Softbank has promised to double employment in the UK, and the British authorities are looking for this kind of good news right now.
2. The UK authorities might reject the deal because they're tired of foreign takeovers for UK companies. This is possible. Several government ministers have spoken out against this deal, and the new Prime Minister has vowed to protect "strategic firms." Having said that, there are encouraging signs for this deal from the new Prime Minister's office. To address this concern, Softbank has already announced plans to double staff in the UK, as well as plans to leave the ARM headquarters in Cambridge.
3. Some industry pundits think that Softbank may buy ARM and get more aggressive with royalty agreements, creating leverage in Softbank's negotiations for network equipment or mobile devices. This is the ultimate "what if" scenario: What if Softbank negotiates a great deal with one handset vendor, while jacking up the rates for another one? Could this create a competitive advantage for Softbank as an operator? In my opinion, this would not be a big enough sustainable advantage to be worthwhile for Softbank. If ARM somehow could double their royalty revenue, that would be fine, but their customers would find another microprocessor core design and their leverage would disappear in about 2-3 years. The additional $2B in revenue would not be significant enough to move the needle, with Softbank's revenue at $80B. At the same time, the royalties would not be enough to hurt Softbank's operator competitors.
4. Softbank is most likely to simply let ARM operate and grow. This would be consistent with Masayoshi Son's (Masa's) history. He started in the software distribution business, then got involved in magazine publishing and organized trade shows. He used acquisitions to enter the Japanese mobile market, and at every step he has showed remarkable flexibility to match his aggressive plans. He sets a strategy that works for the market he's in… he doesn't hang onto his old baggage. ARM's best future is to invest heavily to compete in processors for routers, networking equipment, and servers. Their power-efficient designs should be popular in these large new markets. Softbank will fund that investment, and possibly act as a friendly customer for ARM-based network equipment.
As a carrier, Softbank will enjoy better visibility into future performance improvements in handset performance and possibly in network equipment, so there may be some future benefits that are difficult to define today. Maybe they'll be able to develop software that reaches the market faster than NTT DoCoMo or KDDI. Enjoying those benefits will depend on ARM's continued growth in the processor market.
Overall, it's clearly unusual for a mobile operator to move this far into the supply chain. They've bypassed the smartphone OEM and even the chipset suppliers, to buy the microprocessor design shop. Our advice for people that are worried about the strategic implications: Don't worry, Masa's not Darth Vader and he's not out to get you.
I look at it differently. To me, this deal is an indication that Masa has given up on Sprint and is unwilling to invest his cash there. He's more interested in the basic building blocks of the hardware, to secure a future in the global mobile network.
Joe Madden is Principal Analyst at Mobile Experts LLC, a network of market and technology experts that analyze wireless markets. The team provides detailed research on Small Cell, Base Station, Carrier Wi-Fi, and IoT markets. Mr. Madden currently focuses on trends in 5G, IoT, and Enterprise markets for wireless infrastructure. Over 26 years in mobile communications, he accurately predicted the rise of Digital Predistortion, Remote Radio Heads, Small Cells, and the rise of a Mobile IT market. He validates his ideas with mobile and cable operators, as well as semiconductor suppliers to find the match between business models and technology. Mr. Madden holds a Physics degree from UCLA. Despite learning about economics at Stanford, he still obeys the laws of physics.