SoftBank Goes for the Knockout

The $32 billion price tag represents a generous valuation.
At Closing, June 18th
53.22 USD
At Closing, June 18th
188.74 USD

Potential rival bidders weighing a run at U.K. chip designer ARM Holdings have one sizable hurdle.

Surprisingly, it's unlikely to be the issue of "national interest." In fact, Apple, Samsung, Intel or any would-be buyer with the financial wherewithal to counter SoftBank's record $32 billion offer would likely experience a similarly warm reception from the new U.K. government, which labeled the Japanese company's planned purchase of ARM as "very much in the national interest." 

Rather, any counter-bidder will likely be deterred by the eyebrow-raising multiple being paid by SoftBank. Compared to other semiconductor deals, the Japanese conglomerate is paying 52.8 times ARM's trailing 12-month earnings before interest, taxes, depreciation and amortization, or 39.3 times its forward-12 month Ebitda.  That compares to the median of 19.2 and 17.6 applied to other deals in the sector.

Out of Reach?

SoftBank is not only offering a rich multiple for ARM as seen below -- the price also marks a 43 percent premium to ARM's closing price on Friday

Source: Bloomberg

To a degree, ARM should command more than conventional chip makers because of key differences in its business model. ARM doesn't actually make chips like Intel or Avago do; instead its army of 4,000 engineers create designs for chips or parts of chips that go into smartphones, tablets, and other gadgets. ARM enjoys a near monopoly in its area.

Paying an ARM (and a Leg)

SoftBank's generous offer for ARM will likely deter any counter-bidders

Source: Bloomberg

* Calculated using FY14 Ebitda

But as my colleague Nisha Gopalan pointed out, affordability isn't an issue for Masayoshi Son's SoftBank. Nor would it be for cash-rich Apple, although it would cause the tech giant to stray from its track record of No Big Deals (it dropped $3 billion on Beats, its biggest acquisition to date). Also, if Intel or Samsung made a run at ARM, they would have to contend with antitrust issues that Softbank doesn't face.

Any buyer willing to engage in a bidding war for the now supremely-expensive ARM Holdings would risk facing the wrath of their own shareholders -- an unpleasant prospect. And indeed, after initially trading above SoftBank's 1,700 pence-a-share offer, ARM's stock fell back below the offer price, suggesting investors aren't as sold on the idea of another bidder emerging. SoftBank's generous offer may well keep it that way.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Gillian Tan in New York at

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