Why NVIDIA Could Lose Arm Deal

It’s looking less likely than ever that NVIDIA will succeed in its $40-billion plan to buy Arm Holdings from Japan’s SoftBank. The company faces an obstacle course that would dampen the ambitions of most other firms. And if NVIDIA can’t successfully navigate the course, rival chip suppliers could force an Arm IPO.

This week, a news report in the U.K.’s The Telegraph said NVIDIA’s delay in filing answers to questions from the European Commission (EC) threatens to push that inquiry into September. (European businesses are generally vacated in July and August.) Until the documents the EC wants are approved, no mergers can happen in Europe.

Meanwhile, industry support is coalescing around a potential Arm IPO funded in part by powerful industry partners.

Where will it end? Following is a list of the more glaring obstacles NVIDIA faces in its pursuit of the merger, in order of their potential to ultimately break the deal:

Obstacle #3: Antitrust inquiries worldwide. NVIDIA’s EC inquiry is just one of several NVIDIA must answer globally. Others are pending in the U.S., the U.K., and China. China’s paperwork could take the longest, reports state, since its antitrust department’s tendency to crawl through inquiries, particularly ones involving foreign companies, is legendary. If these prerequisite approvals aren’t closed before September 2022, the deal is null and void and NVIDIA must pay $1.25 billion to Arm as a result.

Obstacle #2: Powerful opposers. Right from the start, companies such as Alphabet/Google (Nasdaq: GOOGL), Microsoft (Nasdaq: MSFT), and Qualcomm (Nasdaq: QCOM) opposed the merger of NVIDIA and Arm on grounds that it would hinder competition and put NVIDIA in a position to control mobile chip licenses. (Currently, Arm owns most mobile phone chip designs worldwide.) While there are other firms, including Broadcom (Nasdaq: AVGO) and Marvell (Nasdaq: MRVL), that claim the merger could be positive, those voices could be drowned out by the outcry from some of the most influential mobile software and hardware companies on the planet -- some of which, like AWS and Google, are Arm ecosystem partners. It doesn’t hurt that Google and Microsoft are also hyperscaler cloud firms with deep interests in 5G mobile networking, which is key to the future success of Arm.

Obstacle #1: China. In addition to presenting NVIDIA with a nearly insurmountable regulatory approval process, the Chinese government could decline to approve the NVIDIA/Arm merger on political grounds. The U.S. government’s ban on technology products from China, including ones from Huawei, which relies on Arm technology, could reverberate in the decision-making process. Further, Arm’s China operation has been a source of woe for months. That segment, which is 51% owned by a consortium of Chinese investors but answers to Arm headquarters in the U.K., has been headed up by Allen Wu, an executive who has been fired by the board but refuses to leave. His grounds are that he doesn’t have to answer to a foreign parent. That has resulted in a tug-of-war, with Wu standing firm against any control from HQ. The deadlock won’t be broken anytime soon. China is heavily invested in Arm chips and won’t cede them to a foreign company without a long, hard fight.

What Could Happen

Unless NVIDIA can find a way through this maze of opposition to its Arm purchase, Arm could go public, with help from Qualcomm. That chip supplier has expressed interest in buying a stake in Arm if NVIDIA and SoftBank can’t finalize the deal. According to CNBC, Qualcomm CEO Cristiano Amon told The Telegraph in June 2021:

“If Arm has an independent future, I think you will find there is a lot of interest from a lot of the companies within the ecosystem, including Qualcomm, to invest in Arm. If it moves out of SoftBank and it goes into a process of becoming a publicly-traded company, [with] a consortium of companies that invest, including many of its customers, I think those are great possibilities.”

If Arm does go public, questions remain as to whether NVIDIA might remain an investor, one of many. Also in question is what might happen to Arm’s China subsidiary. It is possible that Allen Wu would reverse his position if NVIDIA were not the sole buyer. That said, an IPO in New York, which is rumored to be the preferred venue, could make it untenable for Arm to retain a subsidiary in China, given U.S. bans. That could result in Arm China spinning off from its parent, though that process too could become difficult.

Ultimately, NVIDIA CEO Jensen Huang has no doubt removed the rose-colored glasses he wore in declaring the Arm merger would happen in the second quarter of 2022. It’s now looking like the actual outcome of the deal could be a new and powerful public Arm, and a chastened if unbowed NVIDIA.