SoftBank Group Corp.’s $32 billion bid for ARM Holdings Plc—the linchpin of the mobile revolution—is predicated on the notion that succeeding generations will come to depend on smart appliances, gadgets and office gear that talk to each other and function free of much human intervention. For that to work, each of them must come with a microchip, and Son’s betting it’ll be an ARM design.
It’s a bold vision, but then Son’s been there before. SoftBank’s progenitor has been at the forefront of technology for 35 years: he founded his company to capitalize on the early PC boom, backed web startups and e-commerce in China when they were still novel concepts, and challenged older wireless operators in Japan with innovative pricing plans.
The sheer size of the ARM investment suggests Son again thinks he’s onto something. By jumping to the top of the hardware supply chain, SoftBank is eschewing an increasingly bewildering array of devices—everything from a smart rice cooker to mini-robots—and angling instead for a slice of vital components in all that hardware. The concept could take off once ultra-fast fifth-generation broadband goes mainstream.
“If you are going to get into something like that to position yourself, it’s now," said Shiv Putcha, associate director of consumer mobility and telecoms at IDC Asia Pacific in Mumbai. “The whole range of connected devices is already booming but it’s just the beginning." “5G is a good four or five years out and SoftBank themselves come from a telco background, so they know what’s coming."
Son founded the company as a distributor of software in September 1981, a mere month after the first IBM personal computer appeared. It remained at the forefront of technology investments in the late 1990s, driving its share price to a record 22,000 yen in 2000—a level it hasn’t come close to matching since. It was in 2000 that Son invested $20 million in a then-scrappy e-commerce startup and a founder struggling to explain the Internet to Chinese bureaucrats. Today, led by Jack Ma, Alibaba Group Holding Ltd dominates every aspect of the country’s online shopping.
Then in 2006, Son agreed to pay 1.8 trillion yen ($17 billion) for Vodafone Group Plc’s Japanese operations even as the economy stalled and larger rivals held sway. The next year, Apple Inc. unveiled the iPhone and a year later, SoftBank gained the exclusive rights to the pioneering device in Japan.
“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,"’ Son said in a statement. “This is one of the most important acquisitions we have ever made."
Son unveiled the ARM deal less than a month after his heir apparent, Nikesh Arora, quit the company when the billionaire founder decided he wasn’t ready to retire. The former Google executive was brought on board to spearhead a search for the next Alibaba.
To be sure, Son’s track record is far from unblemished. SoftBank missed out on much of the smartphone software revolution, though it just cashed out of game developer Supercell Oy. The jury’s still out on its investment in Sprint Corp., the US carrier that’s whittling away at its losses but remains an enormous drain on capital.
SoftBank’s latest target is a cash-generating mobile industry leader that gets royalties every time clients such as Apple Inc., Samsung Electronics Co. or Qualcomm Inc. adopt its designs, which are considered power-saving and efficient. It’s evolved from a small lab in a converted barn to a company whose designs challenge deep-pocketed Intel Corp. and are found in 95% of the world’s smartphones.
Its strength lies in a culture of engineering and agnostic collaboration. The company licenses its designs, for a fee, to virtually anyone that needs to stick a microchip in anything. When it comes to the Internet of Things, that’s just about everything: Gartner estimates that there will be 3.5 million consumer connected devices in use this year alone, and 10.6 million by 2020. Total spending on such gadgets will hit $235 billion in 2016. By 2018, every household in mature markets will sport 40 devices and things that talk to one another, the research company estimates.
“More and more products of ARM are getting used because of the development of IOT. It seems that Son has made the decision of the acquisition because ARM’s market share and profit margin are very high and it is expected to grow," said Hideki Yasuda, an analyst at Ace Research Institute.
It remains to be seen how the market will take to Son’s punt. The company remains mired in debt—to the tune of more than $100 billion as of the end of March -- and will have to borrow more to get the deal done. Investors have raised concerns about its liabilities, and specifically voiced fears that Son will use proceeds from the sale of Supercell to pursue yet another Sprint-like mega-deal.
“SoftBank at its heart is an investment company," said Minoru Matsuno, president of Value Search Asset Management Co., a Tokyo-based investment advisory firm. “Because of its acquisition of Sprint in the US SoftBank has a lot of high interest debt and shares are likely to fall tomorrow." Bloomberg