Nvidia’s Acquisition of Arm: A Chip on the Shoulder

The semiconductor space is beginning to heat up in the new age of artificial intelligence. The ‘Da Vinci’ of chipmaking and CEO of Nvidia, Jensen Huang, looks to sail Nvidia above its competitors with the acquisition of Arm Holdings, a British semiconductor and software design company. Many synergies are expected to be realized if Nvidia’s leading GPUs and Arm’s prominent CPUs were to amalgamate. Despite all the fuss, the $40 billion deal has yet to be completed, as conflicts with Nvidia competitors and British authorities are making the deal seem even less probable. Moreover, tech investors predict, as stated in the new “State of AI” report, that Nvidia will most likely not end up acquiring Arm. The major factor backing this claim is the discussion of tech sovereignty, specifically Europe’s retaliation against the allocation of technological power to the U.S. and China. This contemporary theme has led to British lawmakers criticizing the guidelines of the deal, as well as the acquisition as a whole. 

With over 6000 employees globally and half in the U.K. alone, Arm is a centerpiece for Europe’s technological prowess. Their processor architecture is crucial in the computing and communications market and almost every single smart device has Arm chips ingrained in their systems, namely Apple, Samsung, and even the U.S. Defense Department. Consequently, Arm’s prominence has galvanized the U.K.’s Labour party to take action and oppose the takeover. On September 21st, the party urged the government to implement conditions, which aim to keep jobs in Arm’s Cambridge headquarters, along with the company’s business model, all in the hopes of upholding the U.K.’s tech sovereignty. In response to the concerns, Jensen Huang announced that they intend to aid AI research in the U.K. by building a $52 million supercomputer in Cambridge. Huang said, “The Cambridge-1 supercomputer will serve as a hub of innovation for the U.K., and further the ground-breaking work being done by the nation’s researchers in critical healthcare and drug discovery.” In regard to Arm’s staffing in the U.K., Huang has not commented on further hiring or company relocation. If Nvidia does not adhere to the new requests, the deal can be barred by either the U.K. government or the Competition and Markets Authority (CMA). 

Alongside British authorities, Nvidia’s competitors are also adamant against the restructuring of Arm’s business model. This second conflict arose because of Arm’s many channels throughout the semiconductor industry, specifically Nvidia’s competition who are also Arm licensees. Arm’s intellectual property (IP) is crucial for many of Nvidia’s major competitors such as AMD, Intel, and Qualcomm. Even companies such as Apple, who have begun to use their own chips, still do so using Arm’s blueprint. As a result of Arm’s interconnectedness in the industry, confidentiality is another issue that has prompted Jensen Huang to act quickly. In a press conference on September 14th, Huang said that Nvidia does not intend to reconstruct Arm’s business model and hopes to keep everything confidential among Arm’s many channels. Nvidia is able to do so through firewalling, which allows them to keep Arm as an independent subsidiary. Similarly, SoftBank Group, Arm’s current owner, also went the route of firewalling; however, SoftBank is a conglomerate holding company that is viewed as more of an investment house than a competitor. For example, Nvidia could leverage Arm against competitors by blocking new innovations or by directly barring access to current patents. Given Nvidia’s competitive behavior, it is likely that many opposers will formally retaliate due to anti-trust concerns, worsening the chances of deal completion. Further, competitors can also divert to other companies for chips, which would decrease upside for Nvidia in the long run. Nevertheless, Nvidia firewalling Arm will decrease buyer upside because of the limited communication and collaboration between the two firms. 

To worsen deal potential, Arm also operates as a joint venture in China, called China Arm, with a Chinese-majority interest. Jensen Huang has noted that he is confident in Chinese regulators approving the deal, however the opposite was cited in a state-backed Chinese news outlet which referred to the deal as “disturbing”. The current geopolitical landscape will only amplify downside, as the Chinese government’s ‘biggest nightmare’ is losing more access to technology to the U.S. Managing director and head of technology research at CLSA, Sebastian Hou, noted that if the deal were to go through, the U.S. government would have full sanction to limit Arm’s utility in China. Furthermore, Nvidia is also at risk of losing IP because of China Arm’s majority interest in the joint venture.

By transitioning from gaming to data centers and AI, Nvidia has grown tremendously in the past several years, jumping from a $30 billion valuation since SoftBank’s original acquisition of Arm in 2016, to over $300 billion now in 2020. However, much like the many peaks and troughs of this year, several obstacles have hindered a smooth transition for Nvidia to build on that growth. Specifically, if tech sovereignty discussions were to block the acquisition of Arm, the U.K. would be able to retain that sovereignty and potentially watch SoftBank pursue their IPO option to cash out on their investment, as well as allow Arm to grow even larger independently. In terms of geopolitical impacts, it all comes down to the leniency of U.S. sanctions. Since China has leverage with their China-Arm joint venture, they can demand the U.S. to allow access to Arm chips, which would ultimately benefit Nvidia immensely if the deal were to go through.

While externalities continue to stall the Nvidia and Arm deal, competitors are beginning to make moves. AMD recently announced they entered a definitive agreement to acquire Xilinx for $35 billion in all-stock deal, which insinuates that we will see Intel begin to make their own operational moves in order to compete in this titanic battle. Accordingly, Nvidia and Jensen Huang must find a way to solve their looming geopolitical complications and relationship with the British authorities before competitors leave them in the dust.