IPO Focus: Arm Holdings

Arm IPO could spell the end for Arm China

The value of initial public offerings has fallen by 90% this year¹https://www.ft.com/content/bc96ce22-8065-4be7-b577-5ba9ba225568 as rising inflation and interest rates, as well as the Russia-Ukraine conflict, push companies to postpone going public. However, bucking this trend is SoftBank Group Corp, which in June reportedly moved forward with plans to list some of its stake in chip designer Arm Holdings on the London Stock Exchange – a deviation from its earlier plans to only list in the US.²https://www.bloomberg.com/news/articles/2022-06-14/softbank-said-to-plan-additional-london-listing-for-arm-ipo 

As SoftBank prepares to list the company it failed to sell to Nvidia Corp for USD 40bn in 2020, this IPO Focus draws on expert insights from a former senior executive at Qualcomm Inc to examine Arm’s future growth opportunities and the impact of a UK or US listing on Arm China – an Arm Holding subsidiary – which SoftBank has a 47.3% stake in. 

Our specialist told Third Bridge Forum that Arm is the “dominant player” in chips for smartphones, with Apple, Qualcomm and MediaTek all using Arm technology. The specialist said that the only threat to Arm’s dominance is if Apple decides to move to RISC-V – an open standard instruction set architecture in competition with Arm’s CPU core. They told us Apple is the only company with the expertise to convert its customer base across different CPU architectures and, having done it three times before, it “could do it again”. 

Arm’s 35% revenue growth between FY2020 and FY2021 will most likely slow over the next 2-5 years, according to the specialist. As of 2020, the specialist told us Arm has 160 licensing deals, which they said is a “high number” that would be difficult to sustain YoY. Arm has also penetrated the server market at a slower rate than expected, having predicted it would hit 20-25% market penetration by 2025. However, the specialist said 10% penetration by the middle of the decade is possible, and was bullish that it would be an important growth opportunity for Arm “in the near future”. 

“Arm said that by 2015 they would have 20% of the server market. That is not likely to happen, so it’s going to be slow adoption of Arm technology in the server space, but it will happen. The question is how long will it take and who has the patience? Former senior executive at Qualcomm Inc.

Artificial intelligence (AI) is another growth area for Arm, according to the specialist. They said at present Arm is not a “big player” in AI because it does not allow customers to modify instruction sets. The specialist said Arm prohibits this, as it creates a “good software system” with a “consistent software story”. But we were told if Arm were to allow customers to customise the instruction for their own needs then it would help Arm “expand” further into the AI market.

On Arm’s potential upcoming IPO, the specialist said where Arm finally decides to list “does not matter”. More important, they said, is where the company’s headquarters and leadership reside. While the specialist said there is “a lot of good work” being done in the US, they doubted Arm could “survive” if it were to shut down the Cambridge Cluster – where Arm was first developed. 

Arm China contributes 20-25% to Arm’s revenue, we were told, making its margins lower than those of Arm’s western business. In the specialist’s opinion, a US or UK listing would have a significant impact on Arm China – which licences technology from Arm and then sub-licenses that technology to Chinese customers. One or both governments could instruct Arm to not licence its technology to the Chinese subsidiary once they have been listed, which, in the specialist’s opinion, Arm China would “not be able to survive”.

For more human insights on Arm Holdings, click on the transcript below.