After seven years, Arm is listed again, and SoftBank finally unwinds. Venture king Masayoshi Son has more confidence and passion, and has started a new round of gambling, and OpenAI is his latest target. Last Thursday, U.S. time, Arm, a British chip design company owned by SoftBank, raised $4.87 billion in its initial public offering on the Nasdaq Exchange in New York. At the end of the first day of trading, Arm's stock price closed up 25%, with a market value of US$68 billion. Two trading days later, Arm’s current share price is US$60.31, with a market value of US$85.8 billion.


Arm is not a company with impressive financial results. Revenue in the past year was only US$2.68 billion, and profit was only US$400 million. Based on the closing price on the first day, Arm's price-to-earnings ratio is close to 170 times, even more than Nvidia (109 times) whose stock price has tripled this year, and far more than the average of 21 times for the Philadelphia Semiconductor Index.

Nvidia's stock price surge is based on a doubling of revenue in the last fiscal quarter and a future growth forecast of up to 170%; in comparison, SoftBank's price-to-earnings ratio of 170 times is even more exaggerated. Perhaps this price-to-earnings ratio only reflects the market's demand for Arm's few outstanding shares.


Son’s conservative pricing

In this Arm listing, Sun Zhengyi only took out 10% of the shares, and about 1 billion shares were sold to the outside world. SoftBank and the Vision Fund continue to hold up to 90% of Arm’s shares, which are currently worth more than 70 billion US dollars. Because there are not many shares in circulation, Arm became the fifth most actively traded stock on Nasdaq on Thursday.

Arm's listing price is US$51, which is at the upper end of the previously expected IPO price range. It has been subscribed more than 10 times, and the overall valuation is approximately US$54.5 billion. Arm’s valuation is lower than the market’s previous expectations of $60 billion to $70 billion, and its financing scale is also lower than the previously expected $8 billion to $10 billion.

According to US media reports, many underwriters and SoftBank executives held several discussions around Arm’s listing price. Many people advocated raising the price, but in the end, Masayoshi Son decided to set the price at a more conservative $51. He does not want Arm's listing performance to be affected by excessive pricing, and he values ​​future growth prospects more.

Son has direct experience in this area. In 2018, SoftBank Group spun off its telecommunications subsidiary SoftBank and listed it on the Tokyo Stock Exchange, raising US$21 billion, setting a record for the largest financing scale in the Japanese securities market. However, due to excessive pricing, SoftBank's shares fell 14% on the first day of listing.

The listing of Arm has attracted great attention from the market. Because this is the largest IPO transaction in the U.S. stock market since the electric vehicle company Rivian went public at the end of 2021 and raised US$13.7 billion. The largest listing financing in the U.S. stock market to date is still Alibaba’s US$25 billion financing in 2014.

As the Federal Reserve continued to raise interest rates significantly, the U.S. stock market entered a bear market last year, and new stock listings also entered a period of weakness. Many companies chose to wait and see. The market earnestly hopes that Arm's successful listing can serve as a benchmark, boost market confidence in the listing of new stocks, and pave the way for the subsequent listing of dozens of companies such as Instacart and Birkenstock.


British technology industry crown

For SoftBank, Arm’s listing is of even greater significance. After Nvidia was forced to abandon the acquisition due to regulatory issues last year, Arm's listing became SoftBank's only option. With the current successful listing of Arm, the largest merger and acquisition transaction in SoftBank's history, it is finally time to invest and unwind.

In July 2016, SoftBank spent 24 billion pounds (equivalent to US$32 billion) to acquire Arm in an all-cash manner. This price represented a premium of more than 40% to Arm’s share price at the time. This is the largest merger and acquisition transaction in the history of the British technology industry. After the transaction was completed, Arm also delisted from the London Stock Exchange.

In the high-tech industry, British companies do not play a very important role, and there are not many globally famous British high-tech companies. Arm, headquartered in Cambridge, England, is regarded as the crown of the British technology industry. The then British Prime Minister Theresa May was criticized by many British people for not blocking the deal.

In fact, SoftBank’s acquisition of Arm comes at a special period in British politics. In June of that year, the British people voted in a referendum to opt out of the European Union, also known as Brexit. After SoftBank announced its acquisition of Arm, the British government decided to approve the transaction, sending a signal to the world that the UK still welcomes foreign investment.

In this re-listing of Arm, the British government also hopes that Arm can choose to be listed on the London Stock Exchange. British Prime Minister Sunak even personally came forward to persuade Sun Zhengyi. However, Masayoshi Son insisted on listing Arm in New York in order to obtain better valuation and funding. Although he declined the British government, Arm CEO Haas also said that it may be listed twice in London in the future, which may be a relief to the British government.

Cornerstone Enterprise of Consumer Electronics

Arm has a special cornerstone position in the global technology industry. Although in the global technology field, Arm's revenue is only a fraction of that of many giants, with revenue in fiscal year 2022 of only US$2.68 billion and net profit of only US$524 million. However, the importance of this enterprise is immeasurable. It is no exaggeration to say that Arm is an unshakable pillar of the entire consumer electronics industry.

In this Arm listing, industry giants such as Apple, Intel, Samsung, NVIDIA and TSMC all invested in subscribing shares and became strategic investors. These industry giants are inseparable from Arm's chip ecosystem, and their collective investment also reflects Arm's special industry status.

Arm, which has a history of 32 years and is headquartered in Cambridge, England, is an independent chip design company spun off from Acorn Computers, which was previously known as the "British Apple". Arm focuses on designing chips and licensing them to other chip companies. It neither produces nor sells its own chips. Therefore, Arm has been compared to the "permanent neutral country of Switzerland" in the technology industry.

Today, up to 99% of smartphones in the world use Arm-authorized processors, including Apple, Samsung, Qualcomm and other giants. Last year, global Arm architecture chip shipments exceeded 30 billion pieces. It is no exaggeration to say that it is Arm’s chip design that drives technological innovation in the consumer electronics industry.

Arm CEO Rene Hass even confidently stated last year that Arm architecture chips have become ubiquitous, so no company in the consumer electronics industry can decouple from Arm. "Given that all major players in the industry use our technology, no one can afford to miss our product cycle or curtail R&D."

Because of its crucial position, although Arm's valuation is not high, no industry giant can take it into account, because this will inevitably encounter opposition from the entire mobile industry. Nvidia's $40 billion acquisition of Arm in 2020 cannot escape the fate of failure even if it declares early that it will continue to publicly authorize it. In the end, Nvidia decided to abandon the acquisition and compensated Arm with a termination fee of US$1.25 billion.

As the cornerstone of the global consumer electronics industry, Arm's financial status is also a barometer of the entire industry. The global consumer electronics industry is currently at the trough of shrinking demand. All major mobile phone and PC manufacturers are facing the dilemma of declining sales. Even Apple cannot stay away. As a result, Arm's revenue has inevitably declined. Revenue fell by 1% last year.

AI is the keyword for listing

However, the story told by Arm’s listing is not the cornerstone of the consumer electronics industry, but the broader future growth prospects of artificial intelligence. When SoftBank acquired Arm in 2016, it paid more attention to the growth prospects of Arm chip design in the future Internet of Things. However, in fact, the growth of the Internet of Things in the past seven years has not been fully realized. Now the chip industry is already in the era of AI.

The growth prospects in the artificial intelligence era are the key words for Arm’s listing and financing. Generative AI, which started last year, has quickly become a craze in the entire technology industry. From industry giants to startups, companies are devoted to machine learning and large model training, which require a large number of GPU and CPU processors for calculations.

Nvidia’s previous acquisition of Arm was to dominate the vast data center market. Compared with the saturated smartphone industry, the cloud computing market with huge room for growth is an area that Nvidia values ​​more. Even though it was forced to give up the acquisition of Arm, Nvidia still relied on its dominant advantage in the GPU field, and its stock price continued to soar, becoming the first chip company with a market value of one trillion US dollars.

While the consumer electronics industry is shrinking, the AI ​​era has brought new growth opportunities to Arm. During the listing process, Arm CEO Haas talked most about AI, data centers and smart cars. "We have broad growth in the cloud data center and automotive industries. And in the transformation process to AI-based computing, Arm is even more central. Arm's chip design is not only in almost every smartphone, but also in every electric vehicle and data center. It is difficult to find an AI device that does not have an Arm-designed chip."

In May of this year, Arm released two new chipsets for machine learning: one CPU Cortex-4 improves machine learning performance while reducing power consumption by 40% compared to the previous generation chip; while the other GPU G720 improves performance while reducing the memory bandwidth occupied by 22%. At the same time, Nvidia just released the new generation AI super chip GraceHopper last month, the CPU of which is also based on ARM architecture design.

Vision Fund becomes a laughing stock

In the years after acquiring Arm, SoftBank was aggressively expanding ambitiously. With the hundreds of billions of dollars in returns from its investment in Alibaba, Masayoshi Son sought acquisition investments and opportunities around the world, completing several billion-dollar or even tens of billions-dollar investment and acquisition transactions, involving many industries such as telecommunications, games, new energy, chips, and robotics.

In 2013, SoftBank spent $21.6 billion to acquire Spint, the third largest operator in the United States at the time. In addition, SoftBank’s star acquisitions also include private equity investment giant Fortress Inverstment and robotics industry leader Boston Dynamics (which has been sold to South Korean car giant Hyundai in 2021).

SoftBank raised US$100 billion in 2017 to create the Vision 1 Fund, with the ambition to invest heavily in the global technology sector. Major investors in the Vision 1 funding include the sovereign investment funds of Saudi Arabia and Abu Dhabi, the United Arab Emirates. In the same year, SoftBank sold 25% of Arm’s shares to the Vision 1 Fund for US$8 billion.


However, in the following years, the Vision Fund encountered failed investments one after another and made wrong decisions again and again, which not only caused heavy losses to the fund's investors, but also seriously questioned Son's investment vision.

In May of that year, SoftBank spent $4 billion to acquire Nvidia shares. However, just two years later, in 2019, almost at the lowest point of Nvidia's stock price, SoftBank sold this part of the stock for US$3 billion to stop losses. Not only did it miss the technology bull market in 2020, but it also missed Nvidia's subsequent surge.

The acquisition of Sprint also left SoftBank deeply entrenched. After being acquired by SoftBank, Sprint's market competition did not substantially improve. Instead, it was surpassed by T-Mobile and fell to become the fourth largest operator in the United States. In 2020, SoftBank sold Sprint to T-Mobile for US$21 billion, thus giving up its investment assets in the US telecommunications field.

But what embarrasses SoftBank and Masayoshi Son even more is WeWork’s investment. He himself had to admit that it was a “stupid” investment. Masayoshi Son originally thought he saw another Jack Ma in WeWork founder Adam NeuMann, but in the end he received the most tragic Waterloo.

Since 2019, SoftBank has continued to invest US$18.5 billion in WeWork, but ultimately discovered that it was a huge bottomless pit of losses. Even though WeWork finally successfully went public through the SPAC model in 2021, its business model and chaotic management have not been recognized by the capital market. Its current market value is only US$3.4 billion, and it even faces the prospect of bankruptcy.

Masayoshi Son reignites investment enthusiasm

One investment mistake after another turned SoftBank’s $100 billion Vision Fund into a joke. In fiscal year 2019, the Vision Fund’s investment losses were as high as US$18 billion, and SoftBank Group’s overall loss was US$13 billion. The loss in fiscal year 2021 was US$16 billion, and the loss in fiscal year 2022 was a staggering US$32 billion.

In order to obtain funds for investment and make up for shortfalls, SoftBank can only continue to sell off its Alibaba shares to cash out. Its shareholding ratio in Alibaba has also increased from more than 30% to a symbolic ratio of less than 4% currently, and it has withdrawn from the Alibaba board of directors. In May last year, Masayoshi Son, who was struggling with losses, announced that SoftBank and the Vision Fund would switch to defensive mode.

However, the arrival of the AI ​​era has rekindled Son’s passion for adventure. He said at an event in June that Arm is the core of synergy among many AI companies, saying that SoftBank will shift from defense mode to attack mode and seek investment opportunities in the AI ​​field.

The rebound in the stock market this year has made Son feel that there is a turning point. In the second quarter of this year (SoftBank's first fiscal quarter), the Vision Fund finally turned a profit after five consecutive quarters of huge losses, achieving an investment profit of US$1.1 billion. On the one hand, SoftBank CFO Yoshimitsu Goto admitted that profits came from favorable market conditions, but on the other hand, he said that SoftBank will begin to resume investment activities.

The market situation has just improved, and Son can’t wait to start investing in AI. In July this year, SoftBank just led a US$65 million investment in Tractable, a British insurance technology company. Masayoshi Son also said that currently 85% of SoftBank Group’s investment assets are overseas companies related to AI.

For Masayoshi Son and SoftBank, the successful listing of Arm not only freed up the $32 billion acquisition deal and brought about actual investment returns, but also rekindled the fighting spirit of SoftBank and Masayoshi Son and once again sounded the clarion call for massive investment.

According to reports from Japanese media citing people familiar with the matter, after Arm goes public, Masayoshi Son plans to invest tens of billions of dollars in the AI ​​field and hopes to invest in OpenAI. Masayoshi Son is a heavy user of ChatGPT and contacts OpenAI CEO Aitman almost every day. In addition to investment, he also hopes to achieve extensive strategic cooperation with OpenAI. In addition to planning to invest in OpenAI, SoftBank is also seeking other investment opportunities in the AI ​​field and has made preliminary contact with the acquisition of British AI chip company Graphcore.

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