SoftBank’s chip designer Arm, which is owned by SoftBank, has begun the countdown for the largest US initial public offering (IPO) in nearly two years. The company unveiled a preliminary prospectus to be listed on Nasdaq early next month.
arm will be the most valuable US company to have completed an IPO at least since November 2021 when Rivian, a maker of electric cars with a market capitalisation initial of $70bn, listed.
SoftBank led by Masayoshi Son acquired UK-based Arm in 2016 for $32bn. The filing on Monday confirmed that a internal deal that took place earlier this month between SoftBank Group, its Vision Fund, an investment vehicle managed by the Japanese conglomerate and Arm valued Arm at $64bn.
The prospectus shows that Arm is dependent on China for nearly a quarter its revenues at a moment when the Joe Biden Administration is increasing restrictions on US semiconductor company’s activities in China. Arm’s China business is managed by a local firm that neither SoftBank nor Arm controls.
Arm designs hold a nearly monopoly over the chips that are at the core of all smartphones, with a share of the market of more than 99%. The company stated that “we estimate that about 70 percent of the population of the world uses Arm-based devices.” It also added that chips that contained its technology held a 49 percent share of an addressable market valued at just over $200 billion last year.
However, Cambridge-headquartered Arm is returning to the public markets after a seven-year absence just as the smartphone market is seeing its biggest slump in a decade.
According to the prospectus, Arm reported revenues of $2.7bn for the twelve months ending March 31, a 1 percent decrease compared to last year. The net profit dropped by 5 percent to $524mn. Arm will not benefit from the IPO. SoftBank will sell down its stake.
Arm is under pressure to find new growth opportunities by expanding its business in the cloud computing and automotive markets, and increasing the value of intellectual property. Son also emphasized Arm’s importance in the rapidly growing artificial intelligence market.
SoftBank held discussions with several customers and tech groups to become investors for the IPO. These included Amazon, Intel, and Nvidia. Nvidia is the AI-focused chipmaker whose bid of $66bn to acquire Arm in 2022 failed. In its filing on Monday, it did not give any additional information about potential cornerstone investors.
Arm’s prospectus warned that it was “particularly vulnerable to economic and political risk” in China, the largest smartphone market in the world. The decline in royalties from China was due to a combination of factors including a slowing economy and issues related to national security and export control.
Arm China’s ownership structure is a further complicating factor in the company’s China relationship. Arm China has exclusive rights to sublicense its intellectual properties to Chinese customers like Alibaba and Xiaomi.
The prospectus states that despite what Arm calls its “significant dependence” on Arm China the UK group moved last year to transfer ownership to a SoftBank company, giving it a 4.8% indirect ownership interest.
Chinese government records, however, show that the UK group still holds nearly half of Arm China. Chinese officials are refusing to register the transfer of shares because they want Arm to remain directly involved in their joint venture.
Allen Wu, the former Arm China chief, resisted attempts to remove him for two years before he was finally forced out of Shenzhen by officials last year.
In other parts of the filing, Arm noted that it had also identified a “material flaw” in its controls over the IT system used to prepare financial statements. The company said that it had taken several steps to fix the problem in its last financial year but did not give a time frame for when they will be fixed.
A long-term SoftBank investor said that SoftBank’s ability to list Arm in a market with a low valuation (less than $60bn) could serve as a way of restoring Son’s power as a tech investor.
The large size of Arm and its prior experience as a publicly traded company makes it less risky than other traditional IPO candidates. However, the deal will be closely monitored as a test to see if the US IPO industry can recover after an 18 month drought.
Goldman Sachs is the lead advisor on this offering. Barclays, JPMorgan Chase, Mizuho and 24 other banks are also involved.
The filing on Monday allows Arm to start its IPO roadshow once the markets reopen in early September after Labor Day. Arm filed a confidential pre-prospectus with the Securities and Exchange Commission in early this year. However, companies must make their documents publicly available at least 15 working days before they begin a formal share sales process.
Rene Haas, the chief executive of Arm, is set to receive a cash prize of $20mn upon completion of IPO. This will be on top of a stock award of $20mn.
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