The handshake that sealed the $40b deal between Nvidia and Arm Holdings.

On Sept. 13, Nvidia announced a $40b deal to buy Arm holdings, designer of microprocessing chips that powers ~90% of the world’s smartphones. For those investing in chip makers (i.e. Intel, Qualcomm and other semiconductor businesses), this is the largest chip deal in history and will likely change the entire competitive landscape in the industry.

Match made in heaven

This deal will turn Nvidia into a dominant player in the smartphone chips industry due to Arm’s technology and expertise. In return, Arm will gain access to Nvidia’s resources and world leading research & development knowledge. In short, there’s a lot to like:

• Fast growth in Nvidia’s data center business… The deal will strengthen Nvidia’s capabilities to develop chips to power large-scale data centers, Nvidia’s fastest growing business segment.
• Market expansion into nearly every segment… A combined Nvidia-Arm, will give Nvidia entry into market segments where it struggled or didn’t operate in before (e.g. personal computing, internet of things, smartphones, etc.).
• A larger and more profitable unit… Arm is already profitable and will instantly benefit Nvidia’s income statement and balance sheet.

Good things don’t come easy

In order for the deal to close, it must go through regulatory approvals in the US (Nvidia’s headquarters), the UK (Arm’s headquarters) and China, who owns a stake in Arm China’s joint venture. Any of these parties can try to block the deal or demand stipulations to be added.

• UK complications… To protect UK jobs, the deal will likely include requirements to keep Arm’s headquarters and office within the UK.
• China complications… China, who’s already in the middle of a tech battle with the US, will likely push back against the deal. Arm’s chips are an important component for many Chinese smartphones and China won’t be happy with the US owning “their” technology.

Understanding an acquisition’s effect on stock prices

The acquiring company’s stock can either go up or down depending on how investors perceive the potential benefits of the purchase. In most cases, the company being acquired is paid a premium on top of their current value, which will send their stock price up. In Nvidia’s case, the stock jumped over 7% after the deal was announced, a sign that investors saw the deal as positive for Nvidia. The deal is expected to close by Mar. 2022 but realistically anything could happen to the deal within the next 18 months.