FTC makes Nvidia-Arm deal unlikely, Arm’s future uncertain

Analysts said the Federal Trade Commission lawsuit to block the Nvidia-Arm deal makes the merger far more unlikely than it already was while also casting more uncertainty on Arm’s future.

The pessimistic view is shared by several analysts, with GlobalData analyst Lil Read saying that Nvidia’s $ 40 billion deal to acquire British chip designer Arm “is on its last legs” and that a Citi analyst reportedly reduced the odds of the merger to just 5%.

[Related: Pat Gelsinger: Intel Will Be ‘More Ecosystem-Friendly’ Than Nvidia]

The FTC on Thursday announced legal action against Nvidia, current owner of Arm and Arm, Japan’s SoftBank group, saying the merger between the two chip companies “would hurt competition” in three global markets where Nvidia competes. using Arm-based products: high level advanced driver assistance systems for passenger cars, SmartNIC data processing units and Arm-based processors for cloud service providers.

A spokesperson for Nvidia told CRN on Thursday that he plans to challenge the FTC lawsuit and prove that “this transaction will benefit the industry and promote competition.” An Arm spokesperson deferred any comment on the FTC lawsuit to Nvidia.

Ben Bajarin, CEO and senior analyst at Creative Strategies, told CRN that the FTC lawsuit makes the Nvidia-Arm deal unlikely, although he is already pessimistic about it due to the scrutiny of the l ‘UK Competition and Markets Authority, which has launched a phase two investigation. in November, fearing the deal would significantly reduce competition in data centers and other markets.

“I didn’t think this was going to happen for a long time, but I think these points [made by the U.K. government] fed him. So that’s just, I think, the last straw, ”he said.

Bajarin said the Competition and Markets Authority and now the FTC have made a compelling argument that the Nvidia-Arm deal would be anti-competitive. That’s because Nvidia would have to find a way to cash in on the $ 40 billion it plans to spend to acquire Arm, which would likely conflict with Arm’s open license model and the assurances it would remain. fair to Arm licensees competing with Nvidia, Bajarin added.

“I think the challenge is, how could Nvidia monetize a $ 40 billion investment with a company making $ 1 billion a year? They won’t wait 40 years, ”he said. “So the concern of all [Arm] contributing partners, all governments, is purely [that Nvidia is] are going to use that to their own financial advantage and to some extent exclude competitors from markets they want to enter because they need the money and there is economic logic there. “

Nvidia is asking Arm’s licensees to believe it will keep the licensing model open and fair, Bajarin said, but this is not sufficient insurance for the US and UK governments as well as for licensees who have spoken out against the acquisition, including Qualcomm and, apparently, Microsoft and Google.

“I think the UK report brought out a number of criticisms which I think made it clear that a licensee cannot own it, largely because of the validation and approval required. by Arm for any architecture licensee on each of their architectures to validate before they ship, “he said.” I’m not saying Nvidia would do this, but they would have the option to block or force the change if they didn’t like anything an architecture licensee does with their design and validation. “

If the Nvidia-Arm deal fails, Bajarin said, there is concern that Arm does not have many attractive options for its future stewardship, as its current owner, SoftBank Group, remains keen to divest it as part of the deal. a campaign to sell businesses that don’t grow fast.

“Licensing companies are just not giant growth companies. The ramp is sometimes very small. It can take years for them to grow up. And unfortunately, in this situation, in order to develop, they need a lot of money because they have to invest in parallel categories beyond mobility, ”he said.

Nvidia has positioned itself as the answer to allow Arm to invest more deeply in new categories, like data centers and automobiles, but if the Nvidia-Arm deal is rejected, it seems unlikely that a Arm technology licensee be allowed to acquire chip designer. , according to Bajarin.

Reintroducing Arm to the stock market would not be a good idea either because Arm’s business model is not one that would do well under quarterly or annual pressure from investors: “When you are under pressure market, you do things that are not always good for your business, ”Bajarin said. The private equity route would also not be attractive for similar reasons, he added.

What would be more doable, according to Bajarin, is if a group of Arm licensees formed a consortium that would buy out the chip designer, an idea pioneered by Qualcomm CEO Cristiano Amon. However, turning Arm into what would essentially be a standards body owned by several competing companies would pose its own problems, he added.

“I understand how these get political and that things never happen because standards bodies take a long time,” Bajarin said.

Patrick Moorhead, president and senior analyst at Moor Insights and Strategy, further questioned the idea of ​​a consortium owning Arm.

“Can you imagine trying to get Apple, Nvidia, Qualcomm, Samsung, Amazon, Google, Huawei, etc. quickly agree on anything? The idea of ​​the consortium is not workable, ”he said on Twitter.

Lack of new investment for Arm would hurt ecosystem, analyst says

Daniel Newman, founding partner and senior analyst at Futurum Research, said he previously thought the Nvidia-Arm deal was a “draw,” but now he thinks he’s not having much luck with the FTC lawsuit in addition to existing review by the UK government and the European Union.

“It’s just the confluence of opinions right now,” he said. “Obviously, these multi-layered probes can be problematic and delay the conclusion of deals of this size. It is always difficult to get approval from China. The UK, of course, is looking at this very carefully, as Arm truly is one of its most important innovation and intellectual property assets.

Newman said he understands the arguments made by the FTC and other regulators, but worries that a major lack of investment in Arm could hurt the efforts of small businesses to compete with the two x86 chipmakers. industry, Intel and AMD, as well as Amazon. Web Services, Apple and other big companies that have the resources to make competitive silicon on a large scale.

“The real question is whether Nvidia and Arm can prove that they can create a more competitive and robust ecosystem by making the Arm offering more competitive with x86?” ” he said. “Because the challenge for Arm is that he lacks resources. SoftBank does not want to devote the resources to it. It does not have the size to invest in R&D to be competitive. And therefore, it depends on all its licensees to do its R&D in a way. “

The lack of more research and development dollars for Arm has mainly benefited big companies like Amazon and Apple, Newman said, which is why he thinks regulators should consider thinking about the competition concerns surrounding the Nvidia-Arm agreement from a different angle: Intel and AMD currently. have an oligopoly on x86 chip architectures, so he sees a better funded arm as a way to allow for a wider range of choices in the industry.

“When it comes to competition, who are we really trying to protect? he said. “I think that’s the question that needs to be asked here because are we protecting guys from the x86?” Are we protecting Arm licensees? Is strengthening the limited x86 ecosystem useful? I’m not saying no. I’m saying that’s the question that needs to be asked and answered.

Nvidia’s biggest challenge is that regulators don’t believe the company will maintain a level playing field for all Arm licensees, said Newman, which is based on the observation that large companies typically acquire intellectual property. to strengthen their own platforms.

But Newman believes regulators shouldn’t oppose the Nvidia-Arm deal on the basis of what they think will happen and should instead monitor the combined company closely when the deal goes through.

“Assuming that companies historically do wrong when they have the power to do it, there is a reason to feel skeptical that Nvidia would do the right thing. But based on current antitrust law and precedents, not allowing that based on what might happen is really not on the letter of the law, ”he said.

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