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Arm raises $5 billion in IPO, China investments raise concerns

Arm raises nearly $5 billion for its IPO, but the chipmaker’s investments in China raise some concern.

Arm, the British chip designer, which is owned by Japan’s SoftBank, raised nearly $5 billion for its initial public offering (IPO) this week, the largest since 2021.

The firm’s Sept. 14 opening, after filing with the Securities and Exchange Commission (SEC) last month was the largest IPO of 2023, easily eclipsing Johnson & Johnson’s spin-off Kenvue.

This marks the return of Arm to the market after a $40 billion attempt by Nvidia to buy the chipmaker from Softbank in 2020 fell through last year over antitrust concerns.

SoftBank acquired the United Kingdom-based semiconductor firm in 2016 for $32 billion and took it off as a public listing.

The IPO comes right before two highly anticipated offerings next week for grocery-delivery company Instacart and marketing SaaS company Klaviyo.

ARM Relaunches After Seven-Year Hiatus

Arm launched its IPO on the New York Stock Exchange in the middle of a downturn in chip sales, partially caused by a decline in smartphone demand.

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An economic slowdown in China as well as “factors related to export control and national security matters” was blamed for slower growth in royalties from Beijing in the last fiscal year, despite total revenue increasing in that period.

Royalties and licensing it the primary source of revenue for Arm, since it gets a paid a fee for each chip developed using its products.

The company priced its 95.5 million shares at $51 a piece, raising $4.87 billion at the high end of its public offering range.

The total amount raised could rise to $5.2 billion if banks exercise an option to buy additional shares, giving the chip designer a total valuation of around $54.5 billion.

However, this would be below the initial $64 billion valuation, when SoftBank bought a remaining 25 percent stake in the company from its Vision Fund unit last month, leading to accusations that it overvalues its assets.

Tech giants like Apple, Google, Nvidia, AMD, Samsung, and TSMC have also indicated interest in acting as cornerstone investors for the offering, according to the SEC filing.

SoftBank CEO Masayoshi Son has refashioned the chipmaker as an AI-focused company with potential “exponential growth” and promised similar services to ChatGPT that would be eventually be offered on its own products.

The chip market is shifting toward AI applications, leading Arm to enter the race with Nvidia, its former merger partner.

“Arm Holding investors buying here might make money over time, but they’ll be like SoftBank only doubling in roughly seven years because they overpaid,” said Stone Fox Capital in a post on social media.

“The company is being sold at a steep valuation, approximately 20 times its sales,” said Tom Nash, a Former Deloitte Senior Manager, in a tweet.

“The company has shown little growth, with revenues of $2.7 billion, remaining relatively flat year over year. Their net income is $550 million, and they have a strong cash position of $1.5 billion. However, their margins have been decreasing, down from 50 percent to 25 percent.”

“Conclusion: ARM is a solid company with strong fundamentals. However, the valuation at the IPO might be inflated,” Mr.Nash added.

Chipmaker’s Business in China Becomes an Issue

Meanwhile, Arm’s business in China has become a serious area of concern for investors, as the scale of its operations there made it “particularly susceptible to economic and political risks,” but this has not prevented many of the biggest tech firms from investing in the company.

The chipmaker repeatedly warned investors of risks related to its dependence on China, in its IPO prospectus, while tensions between Washington and Beijing become increasingly tense over sharing sensitive chip technology.

The United States and China are heavily competing in the sector and both nations have recently implemented export controls, to limit each other’s capacity.

This has become a vulnerability for the firm and may lead to a lower market valuation than it was expecting.

Arm’s China Unit No Longer Under Its Control

A quarter of its sales come from China through an independent entity it no longer controls due to a complicated history it has with its subsidiary.

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