Arm IPO bankers will struggle to tell growth story

Rambus

29/04/2022 09:30

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Karen Kwok
    LONDON, April 29 (Reuters Breakingviews) - Technology
investors want growth. That’s an opportunity and a headache for
the bankers hoping to lead chip designer Arm’s initial public
offering, which owner SoftBank Group  9984.T  wants to complete
by March 2023. The advisers have lots of material to work with,
but not enough to justify SoftBank boss Masayoshi Son’s
hoped-for $60 billion price tag.
    Son opted to float the British company, which licenses chip
designs to companies like Qualcomm  QCOM.O , after regulators
scuppered a sale to Nvidia  NVDA.O   urn:newsml:reuters.com:*:nL8N2UJ2NJ. Arm on Friday
said it had replaced the head of its Chinese joint venture,
resolving a long-running governance issue and clearing the way
for the listing  urn:newsml:reuters.com:*:nL2N2WR06R. Goldman Sachs  GS.N , Barclays
 BARC.L , JPMorgan  JPM.N  and Mizuho Financial  8411.T  this
month helped arrange a margin loan against SoftBank’s Arm
shares, making them likely picks for an IPO. 
    Their job is to convince investors that Arm’s revenue will
soar. That’s challenging since its top line grew at a measly
compound 4% annual rate, in dollars, between 2016 and March
2021, partly because of its reliance on the saturated smartphone
market. 
    Granted, Arm grew at a racier 26% in the financial year to
March, based on SoftBank’s forecasts https://group.softbank/system/files/pdf/ir/presentations/2021/investor-presentation_q3fy2021_01_en.pdf.
 The rise of 5G mobile networks increased shipments of Arm-based
semiconductors. It also helps that Apple  AAPL.O  is using Arm
to design chips for its new Mac notebook. 
    The next chapter could be all about selling chip designs for
cloud-computing data centres. Nvidia wanted to acquire Arm for
this very reason. Meanwhile, Amazon.com’s  AMZN.O  cloud
business has started using the UK group’s designs. Research firm
IDC estimates that Arm could boost its data-centre market share
to 10% by 2026, from 3% last year. Electric and autonomous
vehicles will give Arm a boost too, Son reckons. 
    But the Japanese billionaire has been wrong before. When
buying Arm in 2016 https://www.breakingviews.com/considered-view/softbanks-31-bln-arm-bet-gives-investors-a-shock,
 he touted the trend for connected devices known as the internet
of things, which turned out to be wildly optimistic. A major
investment programme under SoftBank’s ownership has seen the
adjusted EBITDA margin fall to 36%, from about 50% in 2016. 
    And Arm would have to grow at an astonishing rate to hit
Son’s target valuation. Peers Nvidia, Advanced Micro Devices
 AMD.O , Intel  INTC.O  and Rambus  RMBS.O  on average trade at
5.6 times 2024 sales, including debt. To justify a $60 billion
value, using the same multiple, Arm needs to be on track for $11
billion of sales in 2024, equivalent to 41% compound annual
growth. That looks unlikely: chip giant ASML  ASML.AS  warned of
a two-year industry slowdown https://www.ft.com/content/763c9e15-44ab-43bc-b3e9-0d03bf27e841
 linked to supply-chain problems. The bankers gearing up to
write Arm’s IPO prospectus have their work cut out.
    Follow @karenkkwok https://twitter.com/karenkkwok on Twitter
    
    CONTEXT NEWS
    - Arm said on April 29 that its Chinese joint venture had
replaced its Chief Executive Allen Wu. Wu said the change had
“major legal flaws”. 
    - Since 2020, Wu has refused to step down and continued to
control the company, complicating Arm’s planned initial public
offering. 
    - Arm’s owner SoftBank Group is seeking a valuation of at
least $60 billion in Arm’s IPO, according to a Bloomberg report
on March 24. 
    - SoftBank chairman and Chief Executive Masayoshi Son said
he plans to take Arm public in what would be “the largest IPO in
semiconductor history”, after a deal to sell it to U.S.
chipmaker Nvidia was scrapped in February over regulatory
pushback. The Japanese conglomerate aims to list Arm by the end
of March 2023. 
    - SoftBank acquired the business in 2016 for about $32
billion.

 (Editing by Liam Proud and Oliver Taslic)
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