Nvidia’s Arm deal ‘was dead from day 1’ — and that’s OK

·5-min read

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Wednesday, January 26, 2022

Nvidia’s (NVDA) $40 billion bid to buy chip designer Arm is effectively over. The deal, which would have blown apart the balance of power in the microprocessor industry, already attracted intense scrutiny from regulators both in the U.S. and abroad. Industry heavyweights ranging from Qualcomm (QCOM) to Google (GOOG, GOOGL) also came out against the move, arguing it would consolidate too much power in Nvidia’s hands.

Now, sources tell Bloomberg, the graphics card maker is preparing to scuttle the plan. This is a smart move on Nvidia’s part.

The Federal Trade Commission sued Nvidia to block the deal in December, in order to “prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies.”

Regulators in the U.K were looking into the deal for potential national security concerns — Arm is based in Cambridge — and the move still needed to pass muster in both the European Union and China. It was a long shot from the start.

And according to analysts, the acquisition was more or less dead on arrival when Nvidia announced its intentions in September 2020.

“This was dead from day one,” explained Bharat Kapoor, Americas lead in the high tech practice at strategy and management consulting firm Kearney. “Buying an underlying technology or a platform that everybody else relies upon was going to be hard for anybody to swallow. And I could not see this happening from the very beginning.”

Nvidia will be just fine, though: Even without the deal, its massive lead in artificial intelligence processing makes it a go-to for both large and small companies looking to harness AI for their own applications. That lead, coupled with its graphics cards’ capabilities, has made it the richest chip maker in the world, with a market valuation of $570 billion.

As for Arm, Kapoor suggests that another tech company should snatch it up: Microsoft (MSFT).

Nvidia will continue to be an AI leader without Arm

Nvidia’s stock fell 3% on Tuesday following reports that it planned to ditch its takeover of Arm. Intel (INTC), Qualcomm, and AMD (AMD), meanwhile, were off 0.7%, 0.1%, and 2.5%, respectively. In other words, the move didn’t spark a huge sell-off.

That makes sense, since, according to Oppenheimer analyst Rick Schafer, the deal had just a 50/50 shot at ever being completed and wouldn’t have given Nvidia much of a financial boost anyway.

“In terms of investors ... you can kind of see it in the stock,” Schafer told Yahoo Finance. “It certainly wasn't a financial deal, at least from the get go. It was going to be very modestly accretive.”

Nvidia initially positioned the move as a means to further the development of artificial intelligence technologies. But the chip maker is already among the leaders in the space thanks to its high-powered graphics cards, which can perform more parallel processes than standard CPUs.

It’s not as though Nvidia won’t have access to Arm’s technologies, either. Nvidia already uses Arm’s chip architecture in the Tegra chip that powers Nintendo’s popular Switch console.

Arm, which is a kind of Switzerland of the chip industry, also supplies chip designs to everyone from Qualcomm and Google to Samsung, Apple, and even Intel.

Jensen Huang, CEO of Nvidia, reacts to a video at his keynote address at CES in Las Vegas, Nevada, U.S. January 7, 2018. REUTERS/Rick Wilking
Jensen Huang, CEO of Nvidia, reacts to a video at his keynote address at CES in Las Vegas, Nevada, U.S. January 7, 2018. REUTERS/Rick Wilking

And as BofA Securities analyst Vivek Arya points out in a research note, a tie-up with Arm would mean that Nvidia would have to work through complicated licensing agreements with its rivals.

“Even if [the] deal were to be consummated it could have been a constant source of complicated royalty negotiations, several with NVDA's competitors,” Arya wrote. “All-in, we believe NVDA could redirect the cash/equity towards other growth endeavors in AI, Metaverse, gaming, autos, and enterprise AI.”

Over the last year, Nvidia’s shares are up a staggering 64%, easily outpacing the likes of AMD and Qualcomm, which are up just 21% and 3% over the last 12 months. Intel, meanwhile, is down nearly 10%. Suffice it to say, Nvidia is doing just fine on its own.

Arm won’t be left hurting either, but it might still be an acquisition target

That just leaves Arm, then. According to Bloomberg, SoftBank Group, Arm’s parent company, will likely take the chip designer public if the Nvidia deal collapses, as it appears it will.

But that might not be the best bet for Arm’s future, according to Kapoor, who says that it could prove difficult for the company to stand up to its much larger customers in the future. To that end, he suggests Microsoft should swoop in and buy up the chip designer.

According to Kapoor, Microsoft is a solid option, because it works well with its business partners, largely staying out of their way when it comes to operating in their sphere. Microsoft, for instance, goes to great lengths to keep its Surface line of hardware from appearing as though it’s taking on Windows OEM partners like Dell or Lenovo.

And under CEO Satya Nadella, Microsoft has found itself working with even its biggest competitors to the benefit of its customers. Sure, it wants everyone on its Azure cloud platform, but it enables customers to use multi-cloud services by pairing up with Amazon’s AWS.

Still, with the FTC scrutinizing major acquisitions by Big Tech firms, Microsoft going after Arm could be an even bigger long shot than Nvidia.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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