SoftBank’s Arm Sale Tests Brexit Britain’s Mettle
(Bloomberg Opinion) -- We all have regrets. For the U.K., letting Arm Ltd. fall into foreign hands in 2016 is probably high on the list. A potential government veto of SoftBank Group Corp.’s onward sale of the Cambridge, England-based chip designer to Nvidia Corp. is best viewed through the prism of British remorse.
While the $40 billion deal triggers antitrust concerns, the issue that’s ostensibly vexing London is national security. That could lead to an approval subject to conditions or possibly an outright block, Bloomberg News reported on Tuesday.
The backdrop here is one of growing wariness to foreign takeovers among U.K. lawmakers, driven in particular by fears that China could acquire sensitive technology through M&A. From next January, new legislation will significantly broaden the number of U.K. deals liable to be scrutinized on national security grounds — a radical shift that’s prompted fears the rules could be abused for protectionism.
The government is now monitoring potential defense takeovers by U.S. industrial giant Parker-Hannifin Corp. and Advent International Corp.-backed Cobham Ltd.
The Nvidia-Arm transaction is so big it’s already covered by the U.K.’s existing national security regime. That prompted a first look by trustbusters. An in-depth probe may follow. This meatier investigation ought to establish whether a change of ownership is likely to hamper the U.K.’s access to critical technology and know-how, or weaken its control over where such expertise goes.
At first glance, the grounds for concern look spurious: Arm passes from one group of benign owners to another. Investment firm SoftBank is based and listed in Tokyo with disparate shareholders, although founder Masayoshi Son has a sizeable stake. Chip giant Nvidia is based in California and listed in New York with control also spread between international investors. Japan and the U.S. are trusted trading partners of Britain.
The snag is that Arm would go from being a holding within what’s essentially a tech-focused fund to being an operating subsidiary of a larger corporation in the same business. Were there to be a full-blown integration into Nvidia it would be hard to ever undo. The risk for the U.K. is that Arm’s activities gradually migrate overseas, and London ultimately loses all influence.
That’s not just a security issue. Arm is arguably the U.K.’s most important tech business — a magnet for talent and related enterprises. If it’s diminished, that would cost Cambridge and the country.
Similar concerns surrounded SoftBank’s original acquisition of Arm, when it was trading on the London stock market. To assuage them, Son made historic, quantifiable and binding commitments for the first five years of ownership, including doubling U.K. headcount. This set a precedent that others have followed. The deadline expires next month: SoftBank faces potential prosecution if it hasn’t delivered.
So Nvidia finds itself in a markedly tougher British political climate than SoftBank did. As an industrial acquirer it also has a harder job proving it can be a hands-off steward of what it buys. For London, halting a big U.S. deal would advertise that its tougher stance on foreign bidders isn’t really biased against China.
But Downing Street is in a tricky position too. International investors are watching this situation closely. A move to block the deal would complicate Brexit Britain’s claim to be open to foreign investment. The U.K. needs to show it’s constructively exploring how a takeover could work.
Maybe Nvidia can make binding commitments to address any concerns about access to and influence over Arm’s technology. These would need to be viable over the long term. Nvidia has said it would keep Arm headquartered in Cambridge, and expand R&D at the site.
Yet the more it agrees to run the business at a distance, the less it can combine Arm with its own operations, reducing the attractions of the deal. Nvidia’s shareholders might then force it to ditch the plan altogether. Conveniently, that would allow the U.K. to say it had approved the deal when in fact the related conditions were so tough as to amount to a veto.
“Should we have blocked Arm’s sale in 2016?” was an important subtext to the debate over the new national security regime. Meanwhile, the government is working on attracting more tech firms to list in Britain. A return by Arm to London via an initial public offering would tick a lot of boxes: Rewind history and revitalize the U.K.’s listed tech sector by reestablishing its former standard bearer. That could end the regret.
Analysts at Citigroup Inc. have concerns about U.S. and Chinese regulatory approvals too. But if the U.K. can also obstruct Nvidia’s purchase, it can’t force SoftBank to take Arm public in London. For that, Son would need persuading.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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