SoftBank ARM cedes control of China ops to consortium for $775 million

Daniel Nenni · Jun 6, 2018

Comments? Is this a big deal or a nothingburger?

View attachment 21769TOKYO/HONG KONG (Reuters) - British chipmaker Arm Holdings, a unit of SoftBank Group Corp, will cede control of its Chinese business to a group of local investors in a $775 million deal.

Arm will be selling the 51 percent of Arm Technology China to a consortium led by Hou An Innovation Fund, which is jointly managed by ARM and Chinese private equity firm Hopu Investments, a source close to the deal told Reuters.

The chipmaker will then form a joint venture (JV) with the consortium, the source added.

The deal will help boost opportunities for Arm in China, SoftBank said in a statement on Tuesday.

“Arm believes this joint venture, which will license Arm semiconductor technology to Chinese companies and locally develop Arm technology in China, will expand Arm’s opportunities in the Chinese market,” SoftBank said.

According to the source, the consortium led by Hou An will be a controlling shareholder in the JV.

Backers of Hou An include sovereign wealth fund China Investment Corporation, Silk Road Fund, Singapore’s Temasek Holdings [TEM.UL], Shenzhen’s Shum Yip Group and Hopu, according to China’s Ministry of Science and Technology.

Arm will, however, continue to get a significant proportion of all license, royalty, software and services revenue earned by Arm China’s licensing of its chips, SoftBank said.

Arm’s China semiconductor technology IP business accounted for about a fifth of its revenue in the year ended March 2018.

SoftBank acquired ARM, Britain’s most valuable technology company, for $32 billion in 2016.

The Nikkei newspaper reported last month that Arm was planning to sign over control of its Chinese operations to a new JV involving itself and Chinese partners.

(This version of the story deletes erroneous reference to “all-equity deal” in penultimate paragraph. The same error appeared in previous stories.)

SoftBank's ARM cedes control of China ops to consortium for $775 million | Reuters

coldsolder215 · Jun 6, 2018

Seems like more of the usual.. gotta pay China to play in China.

Daniel Nenni · Jun 7, 2018

coldsolder215 said:
Seems like more of the usual.. gotta pay China to play in China.

China is the one that is paying. China has spent 100s of millions of dollars in joint semiconductor CPU development and licensing agreements that have gone nowhere. Fraud is running rampant inside the China semiconductor fund. When the final count comes out I'm guessing optimistically that the China semiconductor fund ROI is 10 cents on the dollar, just my opinion of course.

coldsolder215 · Jun 7, 2018

Yep, that is a misleading adage in this context. I was attempting to refer to the good ol' fashion IP shakedown that is often a requisite for access to Chinese markets, not limited to semiconductors.

10% ROI sounds crazy but I'd believe it. My small design services company provided an outrageous "go away" quote to a Chinese venture looking for our expertise, only to have them enthusiastically accept. The desperation is palpable and their ultra-wealthy have been highly motivated by this semiconductor fund. My two cents here is that you cannot force profitability in high-tech as easily as can be done in manufacturing, but that is the model that they know and will apply until something breaks, one way or another.

Eric Esteve · Jun 8, 2018

Arm will sell 51% of its equity interest in Arm China for USD 775.2 million to the Direct Investors. But is it a good deal?
Arm's semiconductor technology IP business in China made up around 20% of Arm's revenues. In 2017, it means that ARM bus in China was $332M (fact)

Arm has 46.2% of ALL IP revenues WW (fact)
ARM was bought by SB for $32B (fact)
Is the deal fair?

1. 20% * $32B = $6.4B, just compare to USD 775.2 million, or 1/8 of $6.4B.
2. 775.2/332 = 2.33 multiplicator. Just compare with Virage Logic or Denali acquisitions, made for a similar amount ($300 to $350M) when these companies revenue was $40 to $50M, or 8 to 7 multiple!! Compare 2.33 to 7 or 8.

This is certainly a good deal! But for China, not for Arm, not really a win-win deal!
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Tanj · Jun 9, 2018

ARM also retained royalties from the China deal, which it can expect to do well from as the new entity will probably have greater access to the China market. Maybe ARM is looking at reducing the push for home grown CPUs, and anyway will need a rapid advance into IoT to fend off the rise of RISC-V.

But yes, you clearly need to factor in some leverage to explain the deal.

Eric Esteve · Jun 11, 2018

Tanj, you're absolutely right:
"will need a rapid advance into IoT to fend off the rise of RISC-V."

RISC-V is becoming a real threat for ARM, and may explain the YoY decrease in up-front IP license revenue... ARM will have to wake up and defend their market share (even if global IP revenue has rise, thanks to royalty)

Arthur Hanson · Jun 12, 2018

Governments typically have a terrible ROI and the Chinese government is about typical of this trend except on a larger scale. This is why a free society and capitalism win almost every time. When was the last time a government investment by any government was a stand out?

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SoftBank ARM cedes control of China ops to consortium for $775 million

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