SoftBank-owned chip designer Arm has started the countdown to the biggest US initial public offering in almost two years, unveiling a preliminary prospectus for a Nasdaq listing that is set to take place early next month.
Arm is on track to be the most valuable company to complete a US IPO since at least November 2021, when electric-car maker Rivian listed with an initial market capitalisation of $70 billion.
SoftBank, led by Masayoshi Son, acquired UK-based Arm for $32 billion in 2016. Monday’s filing confirmed that an internal transaction earlier this month between SoftBank Group and its Vision Fund — an investment vehicle that the Japanese conglomerate manages — valued Arm at $64 billion.
The prospectus reveals that Arm depends on China for almost a quarter of its revenues, at a time when the Joe Biden administration is ratcheting up restrictions on US semiconductor companies’ activities there. Arm’s business in China is run through a local company that neither it nor SoftBank controls.
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Arm’s designs have a near-monopoly on the chips at the heart of every smartphone, with a market share of more than 99 per cent. “We estimate that approximately 70 per cent of the world’s population uses Arm-based products,” the company said in the filing, adding that chips containing its technology had a 49 per cent share of a total addressable market worth just over $200bn 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.
Arm reported revenue of $2.7 billion in the 12 months to March 31st, down 1 per cent year on year, according to the prospectus. Net profit fell 5 per cent to $524 million. Arm itself will not receive any proceeds from the IPO, which will entail SoftBank selling down its stake.
The slowdown is pressuring Arm to tap new sources of growth by expanding in the automotive and cloud computing markets and by driving up the value of its intellectual property. Son has also been keen to stress Arm’s role in the burgeoning market for artificial intelligence.
SoftBank has held talks with various customers and tech groups about becoming investors in the IPO, including Amazon, Intel and Nvidia, the AI-focused chipmaker whose $66 billion bid to buy Arm collapsed in 2022. It did not provide any further information on potential cornerstone investors in Monday’s filing.
Among risk factors detailed in the prospectus, Arm warned it was “particularly susceptible to economic and political risks” affecting China, the world’s largest smartphone market. Royalty revenue from that country declined last year because of a combination of slowing economic growth and “factors related to export control and national security matters”.
The company’s relationship with China is further complicated by the idiosyncratic ownership structure of Arm China, which holds exclusive rights to sub-license its intellectual property to Chinese customers such as Alibaba and Xiaomi.
Despite what it describes as a “significant reliance” on Arm China, Arm has no direct management rights at the company and holds only a 4.8 per cent indirect ownership interest in the entity, which is majority owned by several Chinese investors, the prospectus said. A SoftBank subsidiary, in which Arm holds a 10 per cent stake, owns 48 per cent of Arm China.
However the FT has previously reported that Chinese authorities have not registered the transfer to the SoftBank subsidiary.
Former Arm China chief Allen Wu spent two years resisting attempts to oust him until he was eventually forced out by Shenzhen officials last year.
Elsewhere in the filing, Arm also noted it had identified a “material weakness” in controls over the IT systems used to prepare its financial statements. It said it introduced several measures to address the problem during its past financial year, but gave no guarantee over when they would be fully fixed.
One long-term investor in SoftBank said that the ability of the Japanese group to list Arm at a valuation of more than $60bn in a difficult market would potentially serve the function of restoring confidence in Son’s powers as a paramount tech investor.
Arm’s large size and prior history as a public company means it is considered less risky than many traditional IPO candidates, but the deal is nonetheless being closely watched as a test of strength for the US IPO market after an 18-month drought.
Goldman Sachs, Barclays, JPMorgan Chase and Mizuho are lead advisers on the offering, alongside a further 24 banks.
Monday’s filing allows Arm to begin its IPO roadshow after markets reopen after the Labor Day holiday in early September. Arm filed a confidential preliminary prospectus with the Securities and Exchange Commission earlier this year, but companies are required to make their documents public at least 15 days before the beginning of a formal share sale process.
Arm chief executive Rene Haas is in line to receive a $20mn cash award upon completion of the IPO, on top of a $20 million stock award.
Copyright The Financial Times Limited 2023
