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U.S. Sues to Block Nvidia’s $40 Billion Chip Takeover of Arm

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·5-min read
U.S. Sues to Block Nvidia’s $40 Billion Chip Takeover of Arm
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(Bloomberg) -- U.S. antitrust officials sued to block chipmaker Nvidia Corp.’s proposed $40 billion takeover of Arm Ltd., saying the deal would hobble innovation in semiconductors and undermine Nvidia’s rivals.

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The Federal Trade Commission said in a statement Thursday that the acquisition would deliver Nvidia vast sway over the market by giving it control over chip designs used by the world’s biggest technology companies, including makers of smartphones, factory equipment and cars.

“The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” Holly Vedova, director of the commission’s Bureau of Competition, said in the statement.

Arm, owned by SoftBank Group Corp., is known as the Switzerland of the semiconductor industry. It licenses its technology to hundreds of companies, while competing with none of them. All major chipmakers are Arm customers and many of these companies, including Qualcomm Inc., Intel Corp. and Advanced Micro Devices Inc., sell chips that compete directly with products from Nvidia.

That reach has made ownership of Arm such a contentious issue because of the advantage it might give a chipmaker that acquires it. And Nvidia is already a heavyweight in the industry. Under co-founder and Chief Executive Officer Jensen Huang, the 28-year-old company has become the world’s most valuable publicly traded semiconductor maker.

Nvidia investors took the news in stride, with the shares climbing 2.2% to $321.26 on Thursday. The stock has jumped 146% this year, blowing past rallies for U.S. indexes and making the stock-based transaction even more attractive for SoftBank.

Nvidia said in a statement that the Arm acquisition will benefit the industry and promote competition.

“Nvidia will invest in Arm’s R&D, accelerate its road maps, and expand its offerings in ways that boost competition, create more opportunities for all Arm licensees and expand the Arm ecosystem,” the company said.

Nvidia agreed to buy Arm from SoftBank in September 2020 for about $40 billion, setting a record for a chip-industry takeover. And an increase in the value of Nvidia stock -- the main component of the sale price -- sent the value of the transaction even higher.

Qualcomm was one of the companies that raised competition concerns about the purchase, which is also facing a national security review in the U.K., where Arm is based. And the deal is likely to face challenges from other investigating authorities, including the European Commission and Chinese regulators, according to Bloomberg Intelligence.

“We have said for some time that it is unlikely this deal gets approved,” said Matt Bryson, an analyst at Wedbush Securities. “We also believe the investment community is largely of the same opinion.”

Even if the companies ultimately prevail, the complaint will create a significant delay. The case will be decided in the FTC’s in-house administrative court, rather than in front of a federal court judge. The proceedings can be lengthy. An FTC merger challenge filed in March took five months to go trial and has yet to be decided. The decision by the administrative law judge can be appealed to the five-member FTC and then again to a federal appeals court.

Arm’s technology is dominant in smartphones, where it’s used by both Apple Inc. and Samsung Electronics Co., as well as by Qualcomm, whose chips are the basis of most of the industry’s premier models. Arm also has made inroads into computing, including Apple’s M series processors, and data centers, with Amazon.com Inc.’s in-house designs using the technology in server chips.

Nvidia, based in Santa Clara, California, made its name in graphics chips for gaming systems and has pushed into processors that run servers. Booming sales have sent its market valuation past $800 billion, eclipsing Intel and other chip giants.

From the moment the deal was announced, analysts have fretted about the many regulatory barriers in its way. Many said that Nvidia would be better to continue doing what it has always done: license Arm technology and beat competitors to market with better products.

But the messy process may have had some upside for Nvidia. By causing disruptions for rivals -- forcing them to waste resources and time on alternatives to Arm technology -- the attempted merger may have helped the company regardless of whether it gets done or not.

As a result, opposition to the purchase has had relatively little impact on Nvidia’s stock, which has been fueled this year by its successful foray into Intel and AMD’s most lucrative market: data center chips.

The complaint comes as the Biden administration and members of Congress are debating ways to bolster semiconductor production amid a global shortage. They also want to make U.S. companies more competitive with their peers in Asia.

The U.S., which still leads the world in semiconductor design, has lost a significant share of global chip manufacturing capacity over the last 30 years, falling to 12% from 37% in 1990, according to the Semiconductor Industry Association.

If the Arm deal ultimately prevails, it would create “revenue synergies,” Bryson said. But he’s not betting on that happening.

“The likely failure of the proposed M&A should largely be baked into expectations,” he said.

(Updates with analyst’s comments starting in 11th paragraph.)

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