Wednesday, July 20, 2016

Why did SoftBank offer £24.3 billion (US$32.4 billion) in cash to acquire ARM Holdings? - Part 2

 In part 1 of this article we considered some of the given reasons for the ARM bid and whether the new ownership would be positive, neutral or negative for ARM given Softbank’s record at Sprint.  Here we look at recent M&A activity in semiconductors and consider some salient points concerning SoftBank’s charismatic Chairman Masoyoshi Son.

For comparison - A String of Recent Mergers for Semiconductor Companies

SoftBank's acquisition of ARM also continues the on-going consolidation in the semiconductor business.  Although SoftBank is not a player in semiconductors and in that sense is not contributing to the further consolidation of the industry into just a few houses, investment bankers representing ARM would surely be familiar with current valuations and the desire to match smaller players to larger buyers.  Bigger seems to be better when it comes to silicon companies.

In March 2015, NXP Semiconductor agreed to acquire Freescale in a stock swap value at $16.7 billion (including Freescale's debt).   The deal created the largest supplier of semiconductors for the automotive industry and the No.1 supplier of general microcontrollers (MCUs).

In May 2015, Avago Technologies agreed to acquire Broadcom in a deal valued at $37 billion ($17 billion in cash and $20 billion in Avago shares).  This merger created the third largest global semiconductor company with strong presence in wired infrastructure, wireless infrastructure, enterprise storage, ASICs, PHYs, Ethernet switching silicon and set-top box silicon.  The new company has an annual revenue of approximately $15 billion.

In January 2016, Intel completed its acquisition of Altera, a provider of field-programmable gate array (FPGA) technology, in a deal that was valued at $16.7 billion when it was first announced six months earlier.  Altera now operate as a new Intel business unit called the Programmable Solutions Group (PSG).  Its portfolio includes its Stratix series FPGAs with embedded memory, digital signal processing (DSP) blocks, high-speed transceivers, and high-speed I/O pins. Altera's Arria system-on-chip solutions integrate an ARM-based hard processor and memory interfaces with the FPGA fabric using a high-bandwidth interconnect. These devices include additional hard logic such as PCI Express Gen2, multiport memory controllers, error correction code (ECC), memory protection and high-speed serial transceivers.

In November 2015, Microsemi Corporation consolidated its offer to acquire PMC Sierra for $9.22 in cash and 0.0771 of a share of Microsemi common stock, representing an enterprise value of $2.5 billion.

In June 2016, Cavium agreed to acquire QLogic for $1.36 billion in stock. QLogic, which is based in Aliso Viejo, California, supplies Fibre Channel Adapters, converged network adapter for the Fibre Channel over Ethernet (FCoE) market, Ethernet adapters, iSCSI adapters, and ASICs.  The company has design wins for next generation Ethernet (10/25/50/100Gb) and Fibre Channel (16/32Gb) platforms.

In March 2016, Cisco agreed to acquire Leaba Semiconductor, a venture-backed fabless semiconductor company, for $320 million in cash and assumed equity awards, plus additional retention based incentives. Leaba, which is based in Israel, specializes in networking semiconductors.  The company is in stealth mode and has not announced any products.

Through this string of mergers, we see that enormous consolidation is underway in the semiconductor industry and that given its prominence in the field, we can surmise that ARM must have been the subject of many proposed deals.  It would have been expected to see ARM paired up with developers of switching silicon, RF chips, or fast memory.  The SoftBank acquisition therefore is incongruous.

SoftBank’s Charismatic Chairman

When trying to assess the rationality of this bid it is worth noting that Masayoshi Son has never been easy to characterise. He is certainly a long way from being an investor in the calm mould of Warren Buffett or Bill Gates and does not have a flawless history in the investment business. During the dotcom boom Son bought almost anything that moved and ended the decade with the unenviable reputation of having lost more money than any other entrepreneur in history i.e. about $ 70 billion Son has a risk-aggressive and maverick personality and is inclined towards making massive and unusual bets on trends and companies that usually result in either colossal successes like Ali Baba or huge failures like Vodafone KK --therefore normal financial yardsticks cannot be easily applied to his decisions --since almost by definition he is working on an unique perception that almost no one else shares. As an example of Son's unpredictability, a few weeks ago Nikesh Arora the ex-Google executive most people thought was certain to succeed Son left his job abruptly after Son changed his mind and decided he was too young to retire which indeed at under sixty years he certainly is.
Masayoshi Son's abiding interest in humanoid robotics should be also noted.

In February 2015, SoftBank acquired 95% stake in Aldebaran Robotics SAS, a decade-old robotics developer based in Paris that, in collaboration with SoftBank Mobile, created Pepper, a humanoid robot with four microphones, two HD cameras, a 3-D depth sensor, a gyroscope in the torso, touch sensors (head and hands) six lasers, and a touch-screen display.  The big advancement with Pepper is its attempt to understand its physical environment and interact with humans on an emotional level. Following the buyout, Bruno Maisonnier, founder and CEO of Alderaban, stepped down and was replaced by Fumihide Tomizawa.

Several thousand early versions of Pepper were shipped in late 2015.  Full commercial release of Pepper is expected shortly in Japan. An active third-party develop program is underway.

Earlier this year, various company activities in this sector were consolidated under SoftBank Robotics Holdings Corp, based in Tokyo and with offices in France (formerly Alderaban Robotics), U.S., and China.

In March 2016, SoftBank and Microsoft announced a partnership to create a next-generation cloud-enabled robot using “Pepper” — SoftBank Robotics' humanoid robot — and Microsoft's cloud-based Azure IoT Suite. The idea is to build a humanoid robot for the retail industry to serve customers in person.  This version of Pepper will use Microsoft's Surface Hub large-screen collaboration device, its Surface 2-in-1 devices, and data repositories in the Azure cloud, such as inventory systems, AI assistance from Cortana, and the Microsoft Translator application.

In January 2016, SoftBank announced plans to offer a version of the Pepper humanoid robot to the enterprise market that would integrate cognitive capabilities of IBM's Watson.   The Watson-powered Pepper would try to make sense of a range of social media, video, image and text inputs. IBM said it will give clients access to Watson APIs and various pre-packaged applications.  The hospitality industry is target for the partners.

On June 21st 2016, SoftBank reached a deal to sell its 84% stake in Supercell Oy, a developer of mobile games based in Helsinki, Finland, to Tencent Holdings for approximately US$10.2 billion. SoftBank owned the controlling stake in Supercell since 2013, but let the business operate as an independent company with its own unique culture and independent team of developers. The proceeds from the sale will be used for the ARM acquisition.



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