How six City analysts reacted to Arm's acquisition by Softbank

 
Emma Haslett
Follow Emma
Samsung Highlights Mobile Products Using Its Thin Semiconductors
Arm Holdings is one of the UK's best-known technology companies (Source: Getty)

Another ripe fruit was plucked from the tree of UK plc today, after Japanese lender Softbank announced it was acquiring Arm Holdings, the rockstar chip designer.

Not surprisingly, shares in the company, whose clients include Apple and Samsung, shot up more than 40 per cent on the announcement of the news.

But how did the City react? Here's what analysts said.

1. "An obvious consequence of Brexit"

Dan Risdale, analyst at Edison Investment Research:

"An increase in inbound M&A was one of the obvious consequences of Brexit and weakened sterling but few expected it to manifest itself so quickly or at so large a scale.

"Arm has always traded at a significant premium rating because its competitive position in its core market is so secure and because growth is locked in as the company's IP penetrates new domains - such as Automotive and Internet of Things (IoT).

"The company's dominant position and IP business model also mean that there is no obvious cap on how far margins can expand."

2. "A logical step in an increasingly tough market"

Mark Skilton, professor of practice at Warwick Business SchooL

“The 50 per cent premium on valuation is a good price with a conglomerate that has a track record in company purchases positioning more investment in Arm, assuming the UK government doesn't block the deal for national strategy reasons.

“The concern of brain drain and ARM business moving from the UK must be considered in this equation based on its knowhow and leadership in chip design.

“This move by Arm is recognition of the limits of this current market and the need to invest to expand beyond PC and mobile into the multitude of consumer home, building, car and other platforms emerging in the IoT."

3. Opening the floodgates of foreign acquisitions?

Neil Wilson, markets analyst, ETX Capital:

"It’s the biggest ever technology acquisition in Europe and the price seems pretty steep – 50 times earnings before interest, taxes, depreciation and amortisation.

"Firstly, we can see in this deal the effect of Brexit and the collapse in the pound as British companies become ripe takeover targets.

"Poundland was recently snapped up by Steinhoff and if this Arm deal is anything to go by, we can expect a torrent of deals to flow. Fears that Brexit would kill off deals in the UK seems to have been overblown – Britain is very much open for business and the weak pound is key. A lot more British firms could become foreign-owned quite soon.

"Secondly, Arm is without question an appealing prize. It has grown thanks to booming smartphone sales in recent years, but it is reducing its dependency here. The firm ships more than half of its chips to non-mobile markets, which makes it well positioned to tap the emerging Internet of Things, which seems to be a key consideration for SoftBank."

4. Keep buying

Neil Campling, global head of TMT at Northern Trust Capital Markets:

“While tempting, as it must be, to lock in gains on any share price appreciation in Arm as a result of this news we continue to advocate buying ARM shares. Why? Because the strategic importance of the Arm technology and model in our view is one which may attract additional suitors.

"It is not merely a deal reflective of sterling weakness in our view. Sure, ARM could be considered an attractive target given the... fall in sterling against the dollar and... the Japanese Yen over the last year.

"But the real attraction in our view, to a range of potential suitors, is [its] core technology. Arm has what we view as an unassailable library of IP processor designs based on chip performance, size and power performance across all IoE (Internet of Everything) applications. Arm is growing at 10 times the rate of the semiconductor industry it serves and is increasingly the glue that binds the disruptive forces of the entire digital world, not just $700 smartphones."

5. Calm in a sea of unpredictability

Jeremy Lang, founder and partner of Ardevora Asset Management:

"Arm may look like a 'risky' technology stock, but in reality it is more like a utility.

“Arm is an intriguing stock because it operates in an industry characterised by unpredictability and risk: semiconductors. Individual semiconductor chip makers face difficult to predict demand, high fixed costs, intense competition and periodic technological upheaval. New products can explode in popularity, but just as quickly face new competition and commoditisation.

“Yet Arm glides through the industry with amazing predictability. This is because Arm provides a vital product for huge portions of the industry. Also, regardless of the price of any individual semiconductor chip, Arm receives a fixed royalty for every chip sold using one of its designs. Its customers may have wildly unpredictable pricing, but Arm does not. This gives Arm consistent, easy to predict, free cash flow year after year.”

6. "Not a Brexit baby"

Lair Khalaf, senior analyst at Hargreaves Lansdown:

‘The ARM takeover doesn’t look like a Brexit baby, because the company is actually more expensive in Japanese Yen than it was on the day of the referendum vote. Almost all of the company’s revenues come from overseas, so as the pound has fallen, the share price has risen sharply.

"That won’t stop UK-based investors popping the corks though, they have now seen a 67 per cent rise in the value of their shares since referendum day.

"Softbank has offered an olive branch to the new UK government by promising to double the UK workforce, clearly mindful of Theresa May’s promise to defend British industry from foreign takeovers. A lower pound should make Softbank’s employment pledge more affordable, as UK labour is now that much cheaper."

Related articles