The global leader in smartphone chip design, UK-based ARM confirmed on Monday it agreed to a $32 billion acquisition offer from Japan’s tech giant SoftBank Group Corp, an almost 43% premium over the share price. This comes at a perfect time when the sterling pound has got weaker due to the BREXIT (Britain exiting EU) and sweetened the deal for Softbank’s Masayoshi Son (Masa) towards his ambition to transform Softbank into a global tech giant. Since hitting the masterstroke with investing early in Alibaba, Masa’s investment spree has seen significant diversification in the tech space. The investments and M&A activity has ranged from buying the US operator Sprint for $22 billion roughly three years ago, to one of the world’s leading distributors Brightstar, to a series of investments in hot companies such as Snapdeal (Indian ecommerce), Ola Cabs (India’s no 1 Taxi hailing service), to Coupang (S. Korea’s e-commerce), to Kuadi dache (China’s leading mobile taxi app), to Gungho (gaming company), DramaFever (video streaming) and so forth.

• Buying ARM adds healthy diversification to the investment portfolio for Softbank.
• ARM processor designs were in more than 15 billion chips shipped in tech computing market in 2015 with almost 45% of them went into mobile devices which is a significant scale and share for any tech player globally.
• ARM has a significant share of the smartphones processor chip design market and has been ramping up R&D expenditure in the next big growth areas beyond smartphones where ARM has modest share.
• While one might think the mobile devices opportunity is maxed out for ARM, there is enough room to expand with IP into other areas within mobile devices itself as the chips become more sophisticated, plus other peripherals beyond application processors, such as with the Mali GPU that can drive higher royalty revenue per device.
• Furthermore, ARM has hired more R&D engineers in non-mobile compute space in last three years with projected tally to be almost half-and-half when compared to ARM engineers dedicated to the smartphones opportunity, which highlights significant focus to replicate its smartphone lead into other adjacent markets
• In 2015, almost 63% of ARM’s operating expenses went towards R&D.

Source: ARM

• The adjacent markets such as automotive, servers, embedded intelligence and so forth, which combined has a potential TAM of more than $50 billion for ARM, offers significant opportunities for ARM to grow and almost double its share over the next five years to drive leadership in the Internet of Things (IoT) segment.
• The total opportunity which ARM can achieve with current momentum justifies the big ticket acquisition price offer by Softbank.
• So Softbank, once the UK exits the EU, should see at least a $4-5 billion gain in its investment — assuming the Pound Sterling returns to levels seen pre-BREXIT referendum, and the massive potential for ARM to succeed and take a significant chunk from its competitors such as Intel, IBM, Imagination should point towards a healthy ROI.
• For ARM, it will be important to have some autonomy and there is minimal clash of cultures between European vs Japanese management styles to maintain the same momentum.
• It will be also important, if Softbank aims for bigger ambitions to transform ARM into something like Intel in future but this could upset some core customers which I believe won’t happen in near-to-mid term.
• Resurrecting Japanese semiconductor industry with this deal also looks unlikely in the next four to five years compared to the sophisticated American and aggressive Chinese or Taiwanese semiconductor companies.
• For Softbank, the next logical step would be to invest in cloud computing, Automotive and AI segments.
• For likes of Apple and Alphabet this might be a missed opportunity, but could prompt them to go after other companies in this space such as Imagination Tech, CEVA, DSP Group and so forth or even counterbid for ARM.

Additional commentary here in the CNBC interview:
Japan’s Softbank to buy chip-design powerhouse ARM for $32 billion