SoftBank’s Massive Bet On New Tech


Image source: Wikimedia Commons

What's going on?

SoftBank, the Japanese telecoms giant, has agreed to buy UK-based chip designer ARM Holdings for £24 billion (about $32 billion). It’s a massive deal for the tech industry and it’s a huge bet on the burgeoning Internet of Things (IoT).

What does this mean?

ARM became a big company by making the chips that power things like your smartphone. One of its biggest strengths is that it’s developed chips that consume relatively little power – and the intellectual property associated with that is hugely valuable.

SoftBank is particularly excited about ARM’s potential within the new IoT universe: one where all of your devices are connected to the internet (like “smart outlets” that allow you to turn off your oven from anywhere in the world). The demand for computer chips would probably be massive if virtually everything we use is connected electronically to a network – and that’s the shift that SoftBank is betting on.

Why should I care?

For the stocks: A big win for ARM’s shareholders – and a risk for SoftBank’s.

Softbank is paying 43% more than what ARM was worth when its stock closed on Friday. It’s a punchy valuation at about 50-times its current annual earnings (a.k.a. profit). But, if the growth materializes as SoftBank expects it will, it could prove to be a very attractive price over the long-term.

The bigger picture
: This deal doesn’t appear to have much to do with Brexit.

A few UK companies, like the Odeon cinema chain, have been bought in the immediate aftermath of the Brexit vote (partly because the pound has lost value and so it’s cheaper for foreign companies to buy UK ones). But in ARM’s case, its stock had risen almost 20% since the Brexit vote because its earnings come from outside the UK (and are denominated in US dollars). So, despite some of the media coverage, it’s probably better to believe SoftBank’s CEO when he says Brexit didn’t affect the decision nor did it bring SoftBank any discount.

Originally posted as part of the Finimize daily email.

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