Ahead of a landmark public listing, one of the UK’s biggest success stories is facing an identity crisis
When the chip designer Arm shortly sells shares in this year’s most closely watched initial public offering (IPO), it will represent for many the final Americanisation of a great British company.
Born from the ashes of Acorn Computers in Cambridge 33 years ago, Arm was a constituent of the FTSE 100 until its takeover by the Japanese investment group SoftBank for £24bn in 2016.
When that deal was considered by Arm’s board in the weeks that followed the Brexit referendum, its directors counted years of experience accumulated at famous British brands including EMI, easyJet, Vodafone and Pilkington.
Re-emerging onto the public market on the other side of the Atlantic with a $60bn valuation in its sights, Arm will be guided by a board remade with Wall Street squarely in mind and featuring former executives from AOL, Intel and Qualcomm.
They echo the Stateside skew of the company’s 13-strong leadership team, whose members are mostly based in the US and frequent Arm’s main site on Rose Orchard Way in San Jose, California. That base is 5,000 miles from its leafy Cambridge birthplace that is still labelled the group’s global headquarters.
And yet Arm might have expected to have become more American before now, considering the US accounts for about half of all microchip revenues in an industry where sovereignty is paramount and the US and China vie for supremacy.
In fact, the company could have been acquired by arch rival Intel in its early years, long before a plan was hatched by SoftBank to fold it into the artificial intelligence leader Nvidia. That move was blocked by competition authorities in early 2022, sending Arm down today’s IPO path. Given the UK’s patchy record at growing its technology companies into world beaters, the fact its microprocessor designs are licensed 1000 times a second for use in smartphones, laptops, industrial sensors and cars – generating a handful of cents in royalties each time – is something to cheer.
Arm would be cheered louder at home if only SoftBank supremo Masayoshi Son had succumbed to Rishi Sunak’s overtures and agreed to relist Arm shares here.
Even though it is currently supporting 2,800 well-paid jobs in Cambridge, does the choice of Wall Street over the City of London represent a turning point for what remains the UK’s flagship technology firm?
The company benefited from US influence from day one. If Apple hadn’t been looking for a new processor for a portable device it developed many years before the iPhone, the Arm project would have been gradually wound down within struggling Acorn. For a modest $2.5m, Apple entered a joint venture with its one-time competitor in home computers and Arm was spun out to serve them both and see if it could build a wider customer base.
Even that nascent technology was American by design. Eager to leapfrog the pack, Acorn’s top engineers, Roger – later Sophie – Wilson and Steve Furber, were enchanted by a 1981 project that had emerged from the University of California, Berkeley to produce a high-performance central processing unit on a single chip.
The rationale for the reduced instruction-set computer (RISC) design was that 80 per cent of the time a chip used just 20 per cent of its instructions, so the rest could be stripped out to reduce cost and power consumption and tasks could be broken down into a handful of simple instructions.
Other RISC projects were fixed on producing high-end business workstations but Wilson and Furber favoured the mass market. Their Acorn RISC Machine – later Advanced RISC Machines (ARM) – delivered 25 times the performance of the top-selling BBC Micro computer.
The design featured in the Acorn Archimedes in 1987 and, six years later, Apple’s MessagePad, which also became known as the Newton. After some fallow years, liftoff happened in 1997 when the first Nokia mobile phone to feature Arm’s designs, the 6110 that also included the addictive Snake game, was unveiled.
A picture of the handset ensured the prospectus for Arm’s first IPO in 1998 sizzled, especially with fund managers in the US, a market that at the time lagged Europe for its nifty cellphones.
Arm’s instruction set architecture (ISA) – a digital rulebook that determines how the microprocessor in any device is controlled by software – broadened its application and the company broadened out too. The company charged into the US in August 2004, paying $913m for Artisan Components, its first significant acquisition, which was poorly received by investors who sent the shares down 18 per cent on the day. In retrospect, some Arm executives regarded the Artisan deal as the right idea at the wrong price – and perhaps it was even the wrong target too. What few realised – and the company did not acknowledge publicly – was that Arm viewed the deal as an insurance policy in its long-term face-off with Intel, the US microchip giant irked at the British upstart’s colonisation of the mobile space.
The deal certainly achieved a shift in Arm’s locus towards the US West Coast, where many of its customers were also based.
The leadership followed. High-flying executive Simon Segars relocated with his family from Cambridge in 2007 to fix an initially troubled integration, making him an instant favourite to succeed Warren East as Arm’s boss when the vacancy arose in 2013. Some insiders expected Segars to return to the UK at that point but he opted to remain in the US.
These days the company is led by a veteran American, Rene Haas, a Los Angeles Lakers basketball fan who often dresses head-to-toe in black like his Silicon Valley counterparts.
On his watch, the culture has toughened. Internally, Arm has culled blue-sky research projects to focus on more commercially viable activities. Externally, it has explored different pricing models with a view to fattening margins.
Arm has its low-priced royalties to thank for its ubiquity. Its designs have been used an astonishing 250 billion times. But this has led to frustration that the company has missed out on the growth and rocketing valuations enjoyed by its semiconductor peers.
What’s risky is attempting to shift the calculation of its fee from a slice of the chip’s value to a portion of the value of the end-device such as an in-car component or tablet computer.
What is easier to benefit from is supplying its designs to more expensive chips, such as those powering computer servers that store reams of data remotely. The Graviton chips custom-made by the cloud computing market leader, Amazon Web Services (AWS), contain Arm blueprints.
After 15 years of trying, the company’s breakthrough in this field is sure to be emphasised as a key growth opportunity when it comes to courting new investors this autumn. So too will be the buzz around AI, whose applications are portrayed as a step-change for computing but from Arm’s point of view still demand the upwards-only improvements in performance and power efficiency to which it has grown accustomed. And before AI generates meaningful revenues, the company can point to a 5.7 per cent increase in sales last year – creditable after a dip in the smartphone market from which it is eager to demonstrate it can diversify from.
The biggest indicator of corporate change emerged last summer, when Arm sued Qualcomm, one of its largest customers and a key developer of 5G technology, alleging the breach of licence agreements and trademark infringement.
Arm demanded the destruction of some designs it said were transferred without its consent from Nuvia, a start-up Qualcomm acquired a year earlier that had been set up by a group of former Apple chip designers.
It was a classic semiconductor industry spat, with parallels of the row between the mobile giants Apple and Samsung that rumbled on for years. Yet it was rare for Arm to be drawn into something where the stakes were so high.
Qualcomm’s use of Arm designs has been expected to increase its market share in personal computers and cars. The American company believed it had licences covering the Nuvia technologies and said the lawsuit, scheduled for September 2024, marked “an unfortunate departure” from the pair’s longstanding relationship.
This aggressive tone is mirrored by moves that may test Arm’s long-held industry independence. Success in recruiting Nvidia and others as anchor investors ahead of the IPO would certainly juice the company valuation but how to appease those among its 1,000 partners that didn’t get the invitation to buy early?
On the eve of that share sale, is Arm still the quirky British interloper with a unique business model or just another cutthroat American tech stock dreaming of Tesla-like multiples? Currently both descriptions resonate. But British or American, its future success relies on adopting the only culture that Wall Street gets – growth at all costs.