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Nvidia's soaring shares make $40B ARM buy easier to digest

NVIDIA Corp.'s acquisition of ARM Ltd. will be the largest semiconductor-industry acquisition of the year — and one of the largest in history — but the terms and timing of the transaction still make it a relatively cheap buy for Nvidia, analysts said.

Nvidia agreed to pay ARM's current owner SoftBank Group Corp. $10 billion in cash and $21.5 billion in common stock, with an additional $2 billion in upfront cash paid to the target at the deal's signing. Another $5 billion could be added to the deal price if ARM meets certain financial targets, pushing the gross transaction value to about $38.59 billion.

Including an agreed-upon equity transfer of $1.5 billion to ARM employees, that means the total transaction value could reach as much as $40 billion by the deal's completion, which is expected to occur in about 18 months, or March of 2022.

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Softbank paid $31.49 billion to acquire ARM in 2016.

The Nvidia-ARM deal closing is subject to regulatory approval in the U.K., where ARM is based, as well as in the U.S., Europe and China, which constitute ARM's primary markets.

"The market will like that they're using shares and, from a financial perspective, things will only look more attractive 18 months from now," said Matthew Bryson, a senior vice president of equity research at Wedbush Securities. "You're going to have better financials from ARM due to market recovery and a pick-up in volume of 5G."

As announced, the ARM transaction would be more than four times the size of Nvidia's next-largest acquisition: the $7.34 billion it paid for data-center data-transport specialist Mellanox Technologies Ltd. in 2019.

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The deal price is unlikely to dent Nvidia, however, according to Stacy Rasgon, managing director and senior analyst at Sanford C. Bernstein & Co. LLC. Rasgon noted that the value of Nvidia's stock, which will constitute more than half of the payment for ARM, shot up 164% during the 12 months prior to the deal announcement, and as a result, Nvidia's market capitalization expanded by $150 billion.

"There were much bigger numbers than $40 billion being thrown around when the ARM/Nvidia story first hit the newsflow a few months ago, and the stock continued to go up since then," Rasgon said. "This may be one of the biggest semi deals in history, but on a financial basis, it looks like [Nvidia] can do this without breaking a sweat."

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It might have made more sense for Softbank to take ARM public, but the money Softbank invested in ARM following the acquisition during 2016 added headcount and expanded development programs less efficient or profitable than the company's core business, according to Linley Gwennap, president and principal analyst at the Linley Group.

To do an IPO, "you would have to pare down some of the extra investments and headcount, which would take more time than Softbank had to spend," Gwennap said. "Right now it just doesn't look too good from the standpoint of an IPO."