A smartphone with the Arm Ltd logo displayed is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
TOKYO — The resounding success of Arm Holdings’ stock market debut makes it much easier for owner SoftBank Group to return to its natural state — hungry for acquisitions.
Shares of the British chip designer jumped nearly 25% in the first day of trading, propelling its value to more than double the $32 billion SoftBank paid to acquire it in 2016. The tech investment giant raised nearly $5 billion through Arm’s offering while retaining 90.6%. of the company.
READ: SoftBank arm soars nearly 25% in market debut to reach $65 billion valuation
Known for its debt-fueled acquisition waves, SoftBank founder and CEO Masayoshi Son signaled in June that the company was returning to “offensive mode” by highlighting the potential of artificial intelligence. This comes after a year of “defense mode,” in which tech valuations collapsed amid higher interest rates and global banking nervousness.
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Its chief financial officer, Yoshimitsu Goto, was more circumspect, however, saying last month that the company was timidly embarking on selected new investments.
Whether or not Son resumes a frenetic pace of acquisitions, having Arm shares publicly traded will make it easier for SoftBank to use the shares as collateral, likely improve its credit rating for better loan terms. borrowing and will help it take on the margin loans favored by Son, analysts say.
SoftBank declined to comment on its acquisition strategy.
Increasing the proportion of SoftBank’s net asset value (NAV) held in listed stocks is an important prerequisite for improving its sagging solvency, SemiAnalysis analysts said.
“They are hoping Arm’s stock price will be higher so they can increase their net asset value and help restore their credit rating,” they wrote in a note to subscribers.
SoftBank’s reputation took a hit when S&P Global Ratings lowered its long-term rating even further into junk territory in May.
The agency cited SoftBank’s growing exposure to unlisted companies – which are less easily valued – as it sold assets in state-owned companies, mainly Chinese e-commerce giant Alibaba, to stabilize its balance sheet.
SoftBank’s latest spending spree coincided with the 2021 tech bubble, the collapse of which caused the value of its Vision Fund 2 to plummet to $33.2 billion, compared to the combined purchase price of the assets of 51 .8 billion dollars.
Vision Fund 1 fares a little better with gains of 14 percent compared to acquisition costs.
READ: US IPO Market Poised for Strong End in 2023 Amid Listing Flurry
Good timing?
If Son were to give in to his acquisitive inclinations now, his timing could be fortuitous given depressed valuations and a relative lack of funding for the early-stage startups he typically targets, some analysts say.
SoftBank also benefits from being one of the largest funds in the market.
“They have some firepower behind them, unlike many venture funds,” said Kyle Stanford, a venture capital analyst at PitchBook.
“If they invest at an early stage, they will have a little bit of price elasticity to do the deals they think they need,” he said.
That said, analysts question whether Son, also known for failed moves like flexible workspace provider WeWork, can replicate the success he enjoyed with Alibaba.
Fervor towards AI has already reached impressive heights and, aside from chip company Nvidia, it is difficult to identify which companies will be the big beneficiaries of AI adoption. Few companies in SoftBank’s investment portfolio have demonstrated commercial utility in AI, analysts say.
There is also no guarantee that Arm’s shares will remain high, with some analysts warning that tech companies may now face a correction given that valuations fueled by enthusiasm for AI may have run their course.
“There are signs that technology is tired and overvalued,” said Amir Anvarzadeh, a strategist at Ametric Advisors.
Higher interest rates – benchmark US interest rates are 5.5% – also mean target companies must grow even more to justify acquisition costs, forcing investors to adopt a more thoughtful approach.
“This should also apply to SoftBank. But they have their own strategy,” said Stanford of PitchBook.
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