IPhone Makes ARM Most Expensive Chip Takeover Target: Real M&A
ARM Holdings Plc (ARM)’s stock has rallied so fast that the designer of chips that help power Apple Inc. (AAPL)’s iPhone is now the most expensive takeover target in the semiconductor industry since 2006.
ARM’s shares rose 151 percent in the past 12 months through yesterday, about double the next best performance in the MSCI World Information Technology Index, as demand surged for semiconductors in mobile devices such as iPhones and iPads and speculation grew that Apple, Oracle Corp. (ORCL) or Intel Corp. (INTC) will try to buy the Cambridge, England-based company. The gains left ARM valued at 59 times earnings before interest, taxes, depreciation and amortization, more than the multiple for any semiconductor takeover since ATI Technologies Inc. in 2006, according to data compiled by Bloomberg that includes net debt.
While increasing shipments of mobile handsets helped push ARM’s gross margin to the highest level of any global semiconductor company, a takeover would now cost at least $11.3 billion, in line with the combined total spent in all chip acquisitions in the past year, data compiled by Bloomberg show. Even as technology companies sit on $276 billion in cash, ARM’s Chief Executive Officer Warren East says any deal would destroy shareholder value because the chip designer’s success stems from its neutrality.
“If anyone was interested in buying ARM, why would they have waited, when you could have had it” cheaper before, said Paul Morland, an analyst at Peel Hunt in London. “ARM has done better than people expected, but not 10 times better. The bulls on it are looking out 10 years to the growth of mobile devices.”
ARM fell 9 percent to 522.5 pence in London trading today, the biggest slump since October 2008, data compiled by Bloomberg show.
ARM, which has a market value of 7.03 billion pounds ($11.3 billion), was created out of a venture with Cupertino, California-based Apple in 1990, according to the company’s website. Founded as Advanced RISC Machines, ARM was spun out of Acorn Computer Group Plc, which made personal computers.
The U.K. designer now sells its chip blueprints to companies from Qualcomm Inc. (QCOM) of San Diego to Redmond, Washington-based Microsoft Corp. (MSFT) and receives royalties from shipments of semiconductors. A total of 1.8 billion processor chips with ARM’s designs were shipped last quarter, according to a statement last month.
ARM’s earnings increased 113 percent last year to 86 million pounds as global smartphone shipments climbed to 297 million units. That’s more than double the 122 million reported by Stamford, Connecticut-based market research firm Gartner Inc. in 2007, when Apple introduced its iPhone.
Net profit at ARM may rise 40 percent to 121 million pounds in 2011, analysts’ estimates compiled by Bloomberg show.
ARM retained about 94 cents per dollar of revenue after subtracting the cost of goods sold, the highest gross margin of 29 global semiconductor companies with market values greater than $5 billion. Intel, the world’s largest semiconductor maker, has a margin of 65 percent, while Suwon, South Korea-based Samsung Electronics Co., which makes chips that help power the iPad, has a margin of 29 percent, Bloomberg data show.
The surge in ARM’s earnings hasn’t been enough to keep pace with the 151 percent gain in its share price in the past 12 months through yesterday. ARM’s rally was more than twice the 75 percent climb for F5 Networks Inc. (FFIV), the Seattle-based maker of software used for managing computer networks that posted the second-best performance in the MSCI World gauge of 153 technology companies.
‘Flush With Cash’
ARM traded at 87.7 times profit, more than twice as high as Woburn, Massachusetts-based Skyworks Solutions Inc. (SWKS), the second- most expensive global semiconductor company with a ratio of 35.2. Intel was valued at 10.5 times earnings, the data show.
“I would be surprised to see an ARM acquisition due to their high valuation,” said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees $90 billion in client assets. “A technology company that is flush with cash could acquire another company on extreme valuation only if that gives them great competitive advantage.”
Yesterday’s share price of 574 pence gave ARM an enterprise value, or equity and debt minus cash, of 59 times Ebitda of 126.9 million pounds for the previous 12 months. At that level, even without any takeover premium, ARM would be more expensive to buy than any semiconductor acquisition of more than $500 million since ATI Technologies four years ago, data compiled by Bloomberg show.
Advanced Micro Devices Inc. (AMD) of Sunnyvale, California, offered 3,137 times Ebitda for Markham, Ontario-based ATI in a $5 billion deal that closed on Oct. 25, 2006. AMD’s shares slumped 39 percent in the next year, the worst performance in the Standard & Poor’s 500 Information Technology Index.
Speculation that ARM will be a target for takeovers has helped inflate its valuations. The company’s shares jumped as much as 32 percent on June 10 on optimism that Apple was looking to buy ARM, traders said. Apple has about $10.7 billion in cash and $16.2 billion in short-term investments, data compiled by Bloomberg show.
Steve Dowling, a spokesman for Apple, declined to comment.
“It doesn’t make any sense for Apple to buy ARM since Apple is a consumer electronics company and ARM is a semiconductor company,” said Nick James, an analyst at Numis Securities in London. “Apple is not really in business to become a semiconductor” company, he said.
ARM climbed 6.1 percent on Sept. 24, outpacing the 4 percent gain in the Philadelphia Semiconductor Index, after Oracle CEO Larry Ellison said at the Redwood City, California- based company’s annual meeting in San Francisco that it may buy semiconductor companies. Didier Scemama, a London-based analyst with Royal Bank of Scotland Group Plc, wrote in a note to clients at the time that a takeover of ARM by Oracle “would make sense.”
Deborah Hellinger, a spokeswoman for Oracle, declined to comment. The world’s second-largest software maker has “no synergies” with ARM, James said.
Oracle has $10.4 billion in cash and $14.4 billion in short-term investments, data compiled by Bloomberg show. The company is rated A2, the third-highest level of investment grade, by Bloomberg’s Company Credit Ratings, which analyze borrowers based on their indebtedness, profitability and other financial ratios.
ARM shares climbed 8.6 percent on Aug. 31, the day after Intel agreed to buy Neubiberg, Germany-based Infineon Technologies AG’s wireless unit for about $1.4 billion to grab a foothold in the mobile-phone business it has struggled to crack.
‘Influence and Dominate’
A takeover of ARM, whose technology dominates the market for processors that run smartphones, to further Intel’s inroads would only drive ARM’s partners away, said Lewis Kaufman, a money manager at Thornburg Investment Management, which oversees about $79 billion in Santa Fe, New Mexico, including ARM shares.
They wouldn’t be “enthusiastic” about an acquisition of ARM, “because of the way that Intel in particular has sought to influence and dominate the trajectory of future technology transitions,” he said.
Laura Anderson, a spokeswoman for Santa Clara, California- based Intel, said the company doesn’t comment on speculation.
Any takeover would potentially damage ARM’s value, according to the company’s CEO.
“We’re the Switzerland of the semiconductor world,” designing chips for multiple manufacturers, East, 49, said in an interview on Feb. 16 at the Mobile World Congress in Barcelona, Spain. ARM offers its technology “at a fraction of the cost” for each company to create its own designs, he said.
“Our customers are making ever bigger commitments to this architecture,” he said. “They want us to be around with a roadmap for 20 years time.”
Overall, there have been 4,412 deals announced globally this year, totaling $428.1 billion, a 11 percent increase from the $386.2 billion in the same period in 2010, according to data compiled by Bloomberg.