Chip designer ARM Holdings has agreed to be bought by Japan’s SoftBank for about $32bn.
The offer in sterling equates to £17, in cash, per share—a premium of 43% to ARM’s closing price on Friday.
The news sent the stock as much as 47.3% higher on Monday, signalling that most investors see a good chance that the deal will take place.
Reports this morning have been incrementally removing the most obvious remaining potential impediments, such as public interest grounds.
We do not think it likely that the offer will invoke more than routine scrutiny from the Competition and Markets Authority (CMA).
The latest ‘public interest’ guidance to Parliament backed by the CMA (January 2015) defines strategic, competition, and security concerns clearly.
There is little public evidence that ARM can be deemed to be a ‘sensitive’ company in any of the above ways.
We note Prime Minister Theresa May and Chancellor of the Exchequer Philip Hammond were briefed about the offer over the weekend.
That leaves the main risk to the deal a potential counterbid, by a more integrated chip sector player such as Intel and Samsung.
Both firms are in more favourable positions in their cash flow cycles than acquisitive Softbank. It is the most leveraged with c. $88bn net debt after purchasing loss-making Sprint for $22.2bn in 2013.
Intel might be motivated to make a counter offer by its notable failure to penetrate deeply into the mobile components space.
Samsung might spy an opportunity to synergise and expand its own chip manufacturing business.
Both would, like SoftBank, be mindful of how rare the current steep discount on British companies will turn out to be, following the pound’s fall to 30-year lows.
However Samsung, Intel and even slightly lesser rivals like Qualcomm, would also face tougher global competition scrutiny than SoftBank.
The almost 54 times operating profit value of SoftBank’s offer would already have been a big ask for Intel and Samsung shareholders.
Outside of the larger players we note traders have scarcely needed much reason to bid up prices of smaller semiconductor designer and licensors, namely Imagination Technologies.
A confirmed bid in the same space has pushed Imagination up 10% and lifted chip-related stocks across Europe.
Without company-specific follow-through, such stock price surges are unsustainable.
As for traders who were not holders of ARM shares before Friday’s close, the risk-reward balance now depends mostly on the probability that Softbank’s bid might fail.
We do not see much chance of that right now, though the huge gap between Friday’s closing price and Monday’s lows might tempt.
Certain details of the takeover situation still bear some confirmation and that may make the 60 pence range between ARM’s highs and lows so far on Monday attractive to shorter term traders.
Existing holders of ARM might consider selling the CFD at those lows to help lock in gains in the event of slippage, though will need to ensure they calibrate the sale according to the correct basis risk.
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