Japan’s Softbank set to acquire ARM for £24bn - good for British tech?

Profile picture for user ddpreez By Derek du Preez July 17, 2016
Summary:
Chip designer ARM is one of the Britain’s most successful tech companies and the proposed takeover provides quite the quandary for new PM Theresa May.

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News broke late on Sunday that ARM had reached a takeover agreement with Japanese telecoms company SoftBank, in which the British chip maker will be acquired in an all cash buyout for £24 billion.

The offer is nearly a 43% premium on ARM’s closing market value at the end of last week and the company’s board of directors are set to recommend to shareholders that the acquisition go ahead.

However, questions are already being raised about whether the deal is a good sign for British industry, following the result of the EU referendum. On the one hand it obviously is encouraging that foreign firms are still willing to invest billions of pounds in British technology, despite the persistent economic uncertainty.

On the other hand, new Prime Minister Theresa May has explicitly said that she is going to assess whether or not direct foreign investment and takeovers are good for British business or not. In her first policy speech, she suggested that other recent takeovers would not have gone ahead under her premiership.

Where will she side on the news that arguably one of Britain’s last standing tech giants could be operated by a Japanese company?

The news

ARM’s board of directors has unanimously confirmed that it intends to recommend the acquisition to ARM’s shareholders, which will see Softbank acquire 1,412 million shares at a total price of £24 billion.

The company expects the closing of the acquisition to occur as soon as is practical in the third calendar quarter of 2016 (by the end of September), but is subject to the approval of ARM’s shareholders and the English courts.

Arm holding screwdriver to digital schematic © Sergey Nivens – Fotolia.com
Softbank said that it sees ARM as one of the world’s leading technology companies, in particular citing its presence in the ‘Internet of Things’ market. ARM-designed chips are in a significant proportion of the world’s smartphones, but it has said that it intends to focus on cementing itself as the leader in all other connected devices too.

The Japanese firm added that it intends to support ARM’s multiple growth initiatives by investing in engineering talent and complementary acquisitions, with the aim of ensuring ARM maintains a R&D edge over existing and emerging competitors.

Softbank added that it intends to keep ARM headquartered in Cambridge in the UK and that it would be at least doubling the company’s headcount in the country.

Stuart Chambers, Chairman of ARM, said:

It is the view of the Board that this is a compelling offer for ARM Shareholders, which secures the delivery of future value today and in cash. The Board of ARM is reassured that ARM will remain a very significant UK business and will continue to play a key role in the development of new technology.

SoftBank has given assurances that it will invest considerably in the business, including doubling the UK headcount over the next five years and maintaining ARM's unique culture and business model.

ARM is an outstanding company with an exceptional track record of growth. The Board believes that by accessing all the resources that SoftBank has to offer, ARM will be able to further accelerate the use of ARM-based technology wherever computing happens.

Masayoshi Son, Chairman and CEO of SBG, said:

We have long admired ARM as a world renowned and highly respected technology company that is by some distance the market-leader in its field. ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the “Internet of Things”.

This investment also marks our strong commitment to the UK and the competitive advantage provided by the deep pool of science and technology talent in Cambridge. As an integral part of the transaction, we intend to at least double the number of employees employed by ARM in the UK over the next five years.

SoftBank intends to invest in ARM, support its management team, accelerate its strategy and allow it to fully realise its potential beyond what is possible as a publicly listed company. It is also intended that ARM will remain an independent business within SoftBank, and continue to be headquartered in Cambridge, UK.

This is one of the most important acquisitions we have ever made, and I expect ARM to be a key pillar of SoftBank’s growth strategy going forward.

A quandary for British government

As an aside to the deal itself, this acquisition will be an interesting test for Prime Minister Theresa May’s government, which has only been recently formed in the wake of the fallout from the EU referendum.

In May’s one and only policy speech to date, she called into question the sale of British firms to foreign investors, particularly where those British firms are strategic to the UK’s future economic growth.

Given that ARM is one of the last standing ‘tech giants’ to be sold off to a foreign firm, what will the new PM make of its takeover by a Japanese company? Just last week May said:

Because as we saw when Cadbury’s – that great Birmingham company – was bought by Kraft, or when AstraZeneca was almost sold to Pfizer, transient shareholders – who are mostly companies investing other people’s money – are not the only people with an interest when firms are sold or close.

Workers have a stake, local communities have a stake, and often the whole country has a stake. It is hard to think of an industry of greater strategic importance to Britain than its pharmaceutical industry, and AstraZeneca is one of the jewels in its crown. Yet two years ago the Government almost allowed AstraZeneca to be sold to Pfizer, the US company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax.

A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.

I doubt many would argue that ARM is central to the UK’s technology industry. And I doubt many would argue that technology should be central to protecting the UK’s future growth - a field that we are getting better at fostering, but still is a far cry away from the booming Silicon Valley.

However, Sky News is reporting that May and Chancellor of the Exchequer Phillip Hammond held talks with Softbank founder yesterday in order to ensure the protection of British jobs. But will that be enough to protect May from her own early commitments?

Chancellor Hammond has already come out in defence of the deal, tweeting the following:

The deal has also been supported by Minister of State for Digital & Culture (previously Cabinet Office Minister, in charge of the Government Digital Service):

My take

A bit of a test for Theresa May, a week into her premiership - one that could not have been predicted. I’ve got a feeling, on this occasion, that the perception that the UK is still a good place to invest significant amounts of money following the EU referendum will outweigh her desire to keep British business British.

But if ARM is sold off to a Japanese company, where will the next British tech giant come from? There has been lots of activity in certain sectors in the UK, such as FinTech and retail, which we have a strong play in. However, will companies be able to resist the allure of foreign investment? Recent history suggests otherwise.