ARM Primed For Acquisitions With Stock Rise, Record Cash

ARM Poised for Takeover With 12-Year High, Record Cash
ARM sells its chip blueprints to companies from Qualcomm Inc. of San Diego to Redmond, Washington-based Microsoft Corp. and receives royalties from shipments of semiconductors. Photographer: Chris Ratcliffe/Bloomberg

ARM Holdings Plc’s record cash and stock price near a 12-year high are giving the chip designer firepower for acquisitions to help keep a lead in smartphone processors and expand in more technologies.

Shares of ARM, which posted the biggest gain in the MSCI World Information Technology Index in the past five years, surged this month to the highest since 2000 after the Cambridge, England-based company posted record quarterly revenue and said its order backlog had never been bigger. Cash and short-term investments at ARM, which licenses technology that powers Apple Inc.’s iPhones, reached an all-time high of 442 million pounds ($710 million) as of Sept. 30, data compiled by Bloomberg show.

While a contract with Advanced Micro Devices Inc. is helping ARM secure a foothold in the market for semiconductors used in computer servers, IC Insights Inc. said an acquisition could help the $15 billion company accelerate the process. Ceva Inc., a chip designer with expertise in wireless communications technology, would help ARM bolster its position in mobile phones, International Data Corp. says. Cadence Design Systems Inc. and Mentor Graphics Corp. also would make sense as targets, according to Forward Concepts Co.

“When you have a lot of cash on hand, it opens up a lot of opportunities,” Jim McGregor, founder of Scottsdale, Arizona-based Tirias Research, said in a telephone interview. With computing technology in flux, ARM may seek to acquire companies with specialized intellectual property, he said.

Charlene Marini, a U.S.-based spokeswoman for ARM, declined to comment when asked whether the company is considering an acquisition.

Chip Blueprints

ARM sells its chip blueprints to companies from Qualcomm Inc. of San Diego to Redmond, Washington-based Microsoft Corp. and receives royalties from shipments of semiconductors. Its technology is used in smartphones, tablets and other devices including Apple’s iPhone and iPad.

Shares of ARM surged 7.7 percent on Oct. 23 after the company reported sales for the three months ended in September that exceeded analysts’ estimates and said it started the current quarter with a record backlog of orders. The stock, which closed yesterday at 675.50 pence to match an almost 12-year high set on Oct. 24, has gained more than fourfold during the past five years.

Today, ARM shares fell 1.6 percent to 665 pence.

ARM’s cash and short-term investments stood at 442 million pounds at the end of the third quarter, more than 36 percent higher than a year earlier and a new high for the company, according to data compiled by Bloomberg.

Server Technology

This week, the company introduced a new line of faster, more energy-efficient processors for use in handsets and to expand in the server market now dominated by competitor Intel Corp., which has a 95.5 percent share of that market, according to Mercury Research. Intel rival AMD will start using ARM technology in some of its products for servers in 2014.

With the company seeking to expand its market share in applications used in everything from cars to digital cameras, ARM may consider making an acquisition to aid in these efforts, said Rob Lineback, a Fort Worth, Texas-based senior market research analyst at IC Insights.

“ARM is expanding its core technology into a wide range of various servers, computers and embedded processing applications, from televisions to automotive,” Lineback said in a phone interview. “It wouldn’t surprise me to see ARM making acquisitions in specific applications.”

Ceva Synergies

Michael Palma, a San Mateo, California-based analyst with IDC, said it would make sense for ARM to purchase Ceva, the Mountain View, California-based designer of communications chips that allow cell phones and tablets to connect to the Internet and make calls.

Ceva has a similar business model to ARM’s and works with many of the same customers, Palma said. Its patents would let ARM grab more licensing and royalty fees per mobile device shipped, he said.

Ceva, with a market value of $342 million, is “already an IP licensing model, so there are nice synergies,” Palma said. For ARM, an acquisition of Ceva “would allow them to expand their revenue per customer.”

Richard Kingston, a spokesman for Ceva, said in a phone interview that “there are very good synergies” for ARM and Ceva, “but there’s nothing to talk about right now.”

“In general, in semiconductor IP, there should be some consolidation coming at some point,” he said.

Today, Ceva shares rose 0.2 percent to $15.15.

Design Services

ARM could expand the types of design services it provides by purchasing Mentor Graphics or Cadence Design, said Will Strauss, president of chip consultant company Forward Concepts in Mesa, Arizona. The companies -- Mentor Graphics with a market capitalization of $1.7 billion and Cadence Design valued at $3.6 billion -- provide software, technology and consulting services to makers of components and electronic systems.

Nancy Szymanski, a spokeswoman for San Jose, California-based Cadence Design, and Suzanne Graham, a spokeswoman for Wilsonville, Oregon-based Mentor Graphics, didn’t return phone calls seeking comment.

Today, Cadence Design fell 1.2 percent to $12.65, while Mentor Graphics rose 0.1 percent to $15.51.

MIPS Technologies Inc., another chip designer and direct competitor to ARM, also could be a target, said Gary Mobley, an analyst at Benchmark Co. The Sunnyvale, California-based company, with a market value of $390 million, hired Goldman Sachs Group Inc. to identify and negotiate with possible acquirers, Bloomberg News reported in April, citing people with knowledge of the situation.

‘Shopping Around’

“MIPS is shopping around its IP, and ARM wouldn’t want that IP to end up with a patent troll,” Mobley said in a phone interview. “For strategic reasons, it might make sense for ARM to buy MIPS to protect itself.”

Jen Bernier-Santarini, a spokeswoman for MIPS, declined to comment.

Today, MIPS fell 3.3 percent to $7.

Still, with its expansion into the server and PC markets already underway, ARM may be more inclined to focus on the growth it can achieve on its own, according to Aalok Shah, a Lake Oswego, Oregon-based analyst at D.A. Davidson & Co.

“They still have the wind at their back for a while,” Shah said in a phone interview. “They’re entering new markets such as servers so they don’t really need to do an acquisition.”

It may make more sense for ARM to invest in a start-up technology company, similar to its partial-ownership of closely held Calxeda Inc., which designs chips that are increasingly used in so-called cloud computing centers, said Vijay Anand, a London-based analyst at Espirito Santo Investment Bank.

‘Organic Growth’

“You might see similar types of strategies being deployed for other companies,” Anand said. “If you look at the business model, it lends more to organic growth rather than growth led by acquisitions.”

While ARM’s cash is at a record, its stockpile pales to that of technology giants Intel and Qualcomm. Intel, the world’s largest chipmaker, had $10.5 billion in cash and cash equivalents at the end of the third quarter. Qualcomm, the largest maker of chips for mobile phones, had $13.4 billion, according to data compiled by Bloomberg.

Still, while ARM may not make any “game changer” acquisitions, the company’s cash levels do position it to target smaller services and software companies that could increase its reach and capabilities, according to Chris La Jaunie, a New York-based fund manager at Victory Capital Management Inc., which oversees about $21.5 billion, including shares of ARM.

“You can buy companies for the $50 million to $100 million range that can enhance” the business, La Jaunie said in a phone interview.

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