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Analysis: Arm CEO replaced as ‘unwanted’ sale to Nvidia cancelled

Analysis: Arm CEO replaced as ‘unwanted’ sale to Nvidia cancelled

Business news |
By Peter Clarke



As had been expected, the deal for SoftBank Group to sell processor architecture licensor Arm to graphics chip vendor Nvidia has been cancelled. Instead SoftBank is preparing Arm for an initial public offering of shares under a new CEO.

Simon Segars, who had led Arm since 2013, resigned as the news broke that Nvidia and SoftBank had cancelled a deal that had escalated in value from $40 billion to $80 billion. The value rise was due to Nvidia’s rising share price. Segars is replaced by Rene Haas, with immediate effect. Haas has been the leader of the IP products group (IPG) within Arm since 2017 and joined the company in 2013.

Meanwhile SoftBank has said it is preparing Arm for an IPO sometime within the fiscal year to March 31, 2023. The disappointment of Masayoshi Son, founder chairman and CEO of SoftBank, at the failed deal will be alleviated by the fact that SoftBank will retain the $1.25 billion pre-paid by Nvidia under the terms of the agreement.

The first hints that the deal might be dropped came earlier this year even as Nvidia and Arm were jointly submitting a defence of the deal to the UK Competition and Markets Authority. The CMA is just one of several regulators that were taking a long hard look at the deal (see Report: Nvidia prepares to abandon Arm deal and Nvidia-Arm plays “strong-Intel” card in UK deal probe).

Nvidia’s deal was announced in September 2020 (see ARM sale to Nvidia agreed at $40 billion) but was immediately met with criticism. This mainly took the form that Arm’s independence from all its licensees was an essential part of its business model. Nvidia being both a user of Arm architecture and owner would give it an advantage that would eventually drive licensees to switch to the open-source RISC-V or other processor architectures, the argument ran.

From the beginning Jensen Huang, CEO and founder of Nvidia, had laid out arguments, assurances and spending promises, that were intended to persuade observers, politicians and regulators. He argued that the deal was necessary to bolster and accelerate Arm in competition against processor leaders Intel and Advanced Micro Devices and the rising stars of artificial intelligence processing.

But the assurances did little to comfort the broader intellectual property ecosystem that has evolved around Arm. Several high-profile licensees including Google, Microsoft and Qualcomm, were public in their opposition to the deal. And the fundamental argument was not overcome, which was there was little that Nvidia could acquire by ownership that it could not pursue as an Arm licensee.

Huang has now been forced to flip back to the licensee rhetoric. In the statement announcing cancellation of the deal he said: “Arm has a bright future, and we’ll continue to support them as a proud licensee for decades to come. Arm is at the center of the important dynamics in computing. Though we won’t be one company, we will partner closely with Arm. The significant investments that Masa has made have positioned Arm to expand the reach of the Arm CPU beyond client computing to supercomputing, cloud, AI and robotics. I expect Arm to be the most important CPU architecture of the next decade.”

Next: The most important part of comedy

But in many ways the deal was a victim of the most important part of comedy – timing.

As the use of AI in the data center took off Nvidia did very well and its rising share price gave it a major opportunity to make a big-play for scale. That data center business was further accelerated by the lockdown and work-from-home instructions that rippled round the world with the Covid-19 pandemic. But just about the time the deal was announced chip shortages were becoming apparent (see Volkswagen faces massive chip shortages).

Suddenly politicians in multiple governments were being made very aware of the strategic importance of technology and semiconductors. Nvidia and Arm have been trying to sell the deal to regulators in the UK, Europe, China and the US and have made little to no progress in the 17 months since the deal was announced. At the outset Huang had stated that he hoped to get the deal done with 18 months, which had become impossible.

The final piece of bad timing was a turn in the semiconductor market supercycle. The semiconductor market has always been one of boom bust but the latest cycle has been drawn out as chip manufacturers sought to resist over investment. But in the last couple of years leading and not-so leading chip manufacturers have started ramping capital expenditure and it is now predicted that the chip market will tip into recession around the end of this year 2022 (see Chip market recession coming: ‘on-shoring’ production is major threat).

As we indicated last month SoftBank was coming under time pressure. If the deal was not going to pass scrutiny with the regulators it would be better to stage the IPO while semiconductor stocks are still attractive. A change to an oversupply of manufacturing capacity and collapse of average sales prices (ASPs) would likely hit the revenues and market valuations of companies across the chip sector.

Although SoftBank has given itself a whole year to get the IPO deal done I expect it to come sooner rather than later.

And after a couple of years distraction as potentially the biggest deal in semiconductor history we may see a return to the status quo ante with the major change being the departure of Segars. Segars, who had spent 30 years with Arm and had risen from graduate engineer, will continue in the short-term in an advisory role to allow for a smooth transition to Haas.

Next: How did Segars do?

Segars’ tenure at Arm was accompanied by tremendous growth in sales and technical breadth. But we had become used to that sort of progress at Arm and his time in charge now appears characterized by a few mis-steps.

It was Segars that took the meeting with Masayoshi Son, founder chairman and CEO of SoftBank, and allowed the rapid sale of Arm to SoftBank in summer 2016 for about $32 billion. The CEO and the board of directors of a company have a fiduciary duty to the shareholders to consider any credible buy-out offer. But what is in the short- or long-term best interest of the company and its shareholders is often open to interpretation. So Segars was obliged to consider, but not necessarily embrace the SoftBank offer. The deal took Arm private and was ushered through while the UK politicians were on summer recess. By the time they came back the deal was done. It was also in a time when, in the UK at least, there was less awareness of the strategic importance of technology.

It is also on Segars’ watch that Arm has managed get itself into state of confusion about the control of its Chinese subsidiary (see Reports: ARM China makes independent move in autonomous driving and ARM’s China struggle threatens Nvidia deal). For those that need a refresher Arm has tried to remove from office the CEO of its Chinese subsidiary and found it impossible to do so. This has led to concerns over the control of funds and licensing in China. I refer to it as Arm getting mugged in China. That is not to say that it could not have happened to another CEO. But the situation has been allowed to persist and is a headache that awaits incoming CEO Rene Haas.

And finally, Segars got on-board with Huang’s idea of a greater Nvidia built on Arm design expertise. For a company that has always emphasised the importance of the design ecosystem it is strange that Segars did not foresee that ecosystem’s ability to oppose the deal.

But we should not be too concerned. Segars can go on to great things, possibly as a technology CEO elsewhere, but more likely as a director and venture capitalist. He can be part of the cycle of renewal of technology entrepreneurship. We may hope he will do that in the UK and Europe but Segars has always seemed very comfortable in Silicon Valley.

In the announcement of his departure Segars stated: “Arm has defined my working life, and I am very thankful for being given the opportunity to grow from graduate engineer to CEO. I’m very bullish on Arm’s future success under Rene’s leadership and can’t think of any anyone better to lead the company through its next chapter.”

Next: London or New York

Haas will now be responsible for returning Arm to being a public company. Already the arguments are starting to rage about whether that should be on the London Stock Exchange or the New York Stock Exchange. UK politicians, awake to opportunity, are already pressing for London, to try and keep ownership domestic.

The decision may ultimately be SoftBank’s and they could go for a joint listing in both New York and London. That’s the way Arm was configured prior to 2016.

Under the leadership of Haas, Arm’s intellectual property group has achieved record royalty revenue, licensing revenue and profits in the current financial year. Before joining Arm Haas held several applications management, applications engineering and product engineering roles, including seven years at Nvidia as vice president and general manager of its computing products business.

The Nvidia-Arm saga may not yet be done but Huang-Haas/Nvidia-Arm will cooperate as licensee and licensor and it seems that is the outcome that most people wanted.

Related links and articles:

www.nvidia.com

www.arm.com

www.group.softbank

News articles:

Report: Nvidia prepares to abandon Arm deal

Nvidia-Arm plays “strong-Intel” card in UK deal probe

ARM sale to Nvidia agreed at $40 billion

Volkswagen faces massive chip shortages

Chip market recession coming: ‘on-shoring’ production is major threat

Reports: ARM China makes independent move in autonomous driving

ARM’s China struggle threatens Nvidia deal

US sues Nvidia over ARM deal

UK orders more scrutiny of Nvidia-ARM deal

Europe set to extend investigation of Nvidia-ARM deal

UK intervenes in Nvidia-ARM deal on national security grounds

Google, Microsoft, Qualcomm object to Nvidia-ARM deal

Jensen Huang’s defence of the Nvidia-ARM deal

 

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