The logic behind Softbank’s buy back of the 25% stake in Arm it sold
As the British microchip designer Arm Holdings limbers up for what is likely to be one of the year’s biggest stock market flotations, its current shareholder register is in a state of flux.
It was reported last week that the US chip manufacturer Nvidia – which had previously sought to buy Arm before it became clear regulators would block a sale – was in talks to take a stake in the business when it comes to market, along with fellow chip manufacturer Intel and a host of other tech giants, including Amazon, Google, Samsung and Apple.
Now it has emerged that the Japanese tech investor SoftBank, which controversially agreed to buy Arm for £24.3bn in July 2016, is in talks to acquire the 25% stake in the business that it does not currently own.
This is held at present by Vision Fund 1, the vehicle it manages for investors that include Saudi Arabia’s public investment fund (PIF), Apple and Mubadala, the sovereign wealth fund of Abu Dhabi.
SoftBank sold the stake to Vision Fund 1 in 2017 for $8bn.
Some may find this confusing. They may wonder why, if SoftBank is preparing to sell Arm to outside investors via a flotation, it is looking to buy back a stake in the business that it previously sold.
There is, however, a logic to the proposal.
Investors in Vision Fund 1 have suffered a torrid time in recent years after the fund was forced to write down the value of its stakes in a number of start-up businesses, including WeWork, the office space provider; Uber, the ride-hailing app and Didi Global, its Chinese peer.
Masayoshi Son, the founder and chief executive of SoftBank, first issued an apology to those investors when, in the three months to the end of September 2019, the fund reported a thumping loss of £6.9bn.
Since then, the losses have kept on coming, including another thumping one in the three months to the end of September 2021.
Even for investors as deep-pocketed as the PIF and Mubadala, who sank $93bn into Vision Fund 1 at its launch in 2017, these are non-trivial sums.
The losses racked up by Vision Fund 1 meant that, when SoftBank launched Vision Fund 2 in 2019, external investors refused to participate.
SoftBank and Mr Son himself ended up being the sole investors in the fund – whose $56bn value was precisely half the size that it had originally sought to raise.
Both funds have continued to rack up losses since as some investments continued to sour – most notoriously the collapsed German payments company Wirecard – although last week SoftBank reported that Vision Fund 1 had enjoyed a quarterly gain of $12.4bn on its $89.6bn worth of investments.
So buying back the stake in Arm would provide a little balm for those investors because it would crystallise a significant profit for Vision Fund 1.
SoftBank is seeking to achieve a stock market valuation for Arm of around $70bn – and, at that price, Vision Fund 1 would make a profit of $9.5bn.
A sale prior to the flotation would also give Vision Fund 1 certainty over the value of the stake. It would protect the fund from trying to sell Arm shares in the event of the share price falling after the IPO.
That may be one motivation for Mr Son.
Another might be to establish a price for Arm Holdings ahead of the IPO.
If SoftBank buys the stake at a price valuing the whole of Arm at closer to $70bn, that would better justify pushing for a higher valuation at the IPO, the investor roadshows for which start shortly.
That is important given some of the valuations that the tech giants (and Arm customers) potentially interested in investing are said to put on the company.
Nvidia, for example, was reportedly only interested in buying a stake at a price that would value Arm at between $35-$40bn.
And SoftBank will also be hoping to attract interest from financial institutions in the IPO as well as from Arm’s customers.
A third motivation for SoftBank may be that Mr Son is thinking of launching a Vision Fund 3 at some point in the near future.
A big profit for Vision Fund 1 on its Arm stake would improve its performance no end and make it easier for Mr Son to bring in outside investors again.
At the very least it would help prop up sentiment at a time when there is doubt over whether one of the fund’s biggest investments, WeWork, is on the brink of bankruptcy.
The latest developments highlight just how important Arm’s flotation is to SoftBank – which resisted UK government entreaties to pursue a secondary stock market listing in London and opted to list solely on the Nasdaq instead.
Its image as the world’s most successful tech investor has been severely tarnished during the last decade and a successful IPO would go some way towards restoring its credibility.