How Nvidia’s CEO cooked up America’s biggest semiconductor company

In the midst of the pandemic, Nvidia Corp. Chief Executive Jensen Huang engineered his company’s biggest game changer from his kitchen: a $40 billion acquisition that could cement his status as the semiconductor industry’s hottest CEO.

The proposed acquisition of Arm Holdings from SoftBank Group Corp., in the chip industry’s biggest deal ever, would transform Nvidia into a force across the most important arenas of computing, from servers and PCs to consumer electronics to smartphones, making it one of the most formidable threatsIntel Corp. has ever faced. To do so, though, Mr. Huang still needs to clear regulatory hurdles and potential opposition from competitors that may appeal to authorities to block the deal.

The deal is a milestone in an extraordinary run over the past few years, one that has transformed Nvidia from a niche maker of high-end graphics chips for gamers into the most valuable U.S. chip company. “I couldn’t have dreamed two years ago that I’d be sitting here,” Mr. Huang told The Wall Street Journal this week.

Nvidia’s market value has soared to $319.8 billion, surpassing Intel’s valuation of $214.5 billion, even though Nvidia had $10.92 billion in annual sales in its latest fiscal year, compared with $71.97 billion for Intel. Nvidia’s bet on some of the hottest fields in tech, videogaming and artificial intelligence, have fueled investor enthusiasm, while Intel has stumbled with some of its most advanced chips.

It is a long way from 1993, when Mr. Huang dreamed up Nvidia on his 30th birthday at a Denny’s in San Jose, Calif., with two like-minded engineers. They bet on a future where consumers demanded better computer graphics, which would require specialized, high-performance hardware that wasn’t available at the time.

That bet has paid off. Videogaming has taken off, and its processors have found new applications. To deliver the best video content, Nvidia’s graphics chips handle data differently than traditional designs, processing information in parallel rather than sequentially. That approach has also proven particularly useful to cryptocurrency mining and running AI software that is in increasingly hot demand.

Mr. Huang, now 57 years old, early on styled himself after Steve Jobs, adopting a black leather jacket as his edgier version of the late Apple Inc. co-founder’s black turtleneck. Also like Jobs, the Nvidia boss hogs the stage during his company’s unveilings of ever-faster graphics chips.

The Arm deal couldn’t have happened if it weren’t for Mr. Huang’s ties to SoftBank’s CEO, Masayoshi Son, who bought Cambridge, England-based Arm in 2016 for $32 billion. SoftBank has invested in Nvidia and, at the end of June, held a stake valued at around $245 million at Monday’s close.

SoftBank first approached Nvidia earlier this year to gauge Mr. Huang’s interest in making a deal. “At some point it became clear that SoftBank would be interested in maybe not holding onto Arm, and I just jumped on the opportunity,” Mr. Huang said, adding his focus then turned to ensuring Nvidia was the top bidder.

Mr. Huang limited his use of outside bankers and largely negotiated the deal with an internal team. Amid the pandemic, he worked out the terms not from the company’s Santa Clara, Calif., headquarters, but from his nearby home in the hills outside Palo Alto, where he also hosted virtual conferences and product launches from his kitchen, occasionally shedding his signature leather jacket for a down vest.

To James Wang, a former Nvidia product manager who is now an analyst at New York-based asset manager Ark Invest, which is an investor in Nvidia through some of its funds, the Arm deal is a sign that Mr. Huang realized that the next step of Nvidia’s growth couldn’t happen without outside help. “That’s the attitude change that’s enabled Nvidia to go from a big M&A-averse company to one that’s just swinging for the fences,” he said.

Arm, known for its power-efficient chip design, could become a potent tool for Mr. Huang to battle Intel across a broader range of products. Apple said in June that it was ditching Intel in its Mac computers in favor of its own chip design with Arm ingredients.

Mr. Huang says Nvidia could offer Arm an entry into hardware for AI computations in devices like phones, watches, gadgets and cars—areas where it previously had a more limited presence. At the same time, Nvidia could help introduce Arm-based devices into central processors for the kind of servers that go into big data centers and supercomputers and challenge Intel’s dominance there.

Eric Ross, chief strategist at Cascend Securities in New York, said Mr. Huang told him about two decades ago that he was gunning for Intel, betting that his graphics processors would become the calculation workhorses of the next age of computing. “It did take awhile, but he’s had his eye on this for a very long time,” Mr. Ross said.

Nvidia has faced recent setbacks. Its growth slumped after the boom in cryptocurrencies flamed out. An earlier foray into smartphone modems via an acquisition in 2011 fizzled, and the company wound down the business in 2015.

And the sale of some of its chips and their use in China for artificial intelligence has raised concerns in Washington.

The Arm deal also could run into political turbulence amid the U.S. battle with China over dominance in the tech sector. Huawei Technologies Co., which has been at the center of U.S. efforts to curb China’s technology ambitions, is a big Arm customer and would owe Nvidia licensing fees to use its technology.

Nvidia’s biggest acquisition to date, a $7 billion deal for Mellanox Technologies Ltd., faced delays because of protracted regulatory scrutiny in China. It closed in April.

British politicians have already expressed reservations over potential job losses at Arm’s home base. Arm has around 6,700 employees. Nvidia and Arm have promised to establish a new AI research center with a new supercomputer in Cambridge that would be open to researchers in the U.K. and elsewhere.

Chip-industry opposition will also likely be strong, analysts say. Some of Arm’s customers also compete with Nvidia, raising questions about Arm’s neutrality should the deal go through. Arm has long acted as a kind of Switzerland to the chip industry, offering its designs to everyone without favoring any one company. Nvidia and Arm are promising that won’t change.

Mr. Huang, who anticipated a future where demand would surge for content built around high-quality graphics, is planning for the next phase of computing powered by his chips. “Homes will have holodecks,” he said at a recent virtual conference. “We will beam ourselves through time and space, traveling at the speed of light, sending photons, not atoms.”

—For more WSJ Technology analysis, reviews, advice and headlines, sign up for our weekly newsletter.

Write to Asa Fitch at asa.fitch@wsj.com