Did "China" Just Buy The Most Important Company In The World?

by Tyler Durden

Jul 18, 2016 9:59 PM

In the aftermath of last night stunning announcement that Japan's Internet giant SoftBank would acquire UK-based ARM Holdings, a company which makes chips present in virtually every mobile and "connected" device, for $32 billion, sending the semiconductor sector surging, questions emerged why the company is doing this.

On one hand, even the founder of ARM Holdings himself, Hermann Hauser said, told the BBC he believes its imminent sale to Japanese technology giant Softbank is "a sad day for technology in Britain". Hauser said the result of the Softbank deal meant the "determination of what comes next for technology will not be decided in Britain any more, but in Japan".

On the other, the stock of SoftBank has tumbled now that the Japanese market has reopened after a one-day holiday.

Bloomberg gave the trivial answer first thing this morning in a piece titled 'Why SoftBank Is Spending $32 Billion on U.K. Chip Designer ARM", which concluded the following: "Softbank Chairman Masayoshi Son sees ARM’s future in being inside the legion of products that are becoming internet-connected, from street lamps to air conditioners, washing machines to drones -- so-called “internet of things" devices."

Perhaps. However, a more provocative explanation has emerged courtesy of SouthBay Research, which when looking at the same deal, asks if China (yes China) "just acquired the most important company in the world? "

Here is SouthBay's explanation why:

ARM Holdings (ARMH) holds the keys to the future of electronics  That's not hyberbole.

Not only does ARMH dominate the world of mobile devices, it is rapidly penetrating all electronics: from consumer electronics to the computer network.

ARMH designs and licenses semiconductors.  Their designs are the core of the critical components of consumer electronics: smartphones, tablets, TVs, and so on.  For example, most of today's tablets and phones run on Qualcomm chips: they did $26B in sales last year.  These chips re-package ARMH designs.

As electronics continue to penetrate everything from cars to refrigerators, they use ARM designs.  The Internet of Things (IOT) uses ARMH technology.

Like a spider in the web, ARMH sits firmly at the heart of the future of all electronics.

I have reviewed ARMH two different times.

First, as the life preserver to save Intel.  Intel is unable to survive in the post-PC world and ARMH was a way to buy their way back in.  Unfortunately, anti-trust was probably a factor in preventing the buy.

Another time I mentioned ARMH was when discussing the future of China's semiconductor efforts.

After airplanes, semiconductors are a major capital outflow.  The South Korean and Taiwanese economies are driven by semiconductors.  Beyond economics, semiconductor strength enables national security strength (super computers).   For this and other reasons, the Chinese government has made a domestic semiconductor industry a major strategic goal.  Even going so far as to earmark $10B for intellectual property development.

The fastest path is acquisition, and ARMH embodies the future.  For China that presents two problems: price (ARMH was $19B last week) and politics (China buying the crown jewels of the internet touches some nerves in the Western world).

Today Softbank announced an offer to buy ARM Holdings.

Softbank = China

Softbank is a Japanese company best known for owning Yahoo Japan and Sprint. 
With their background in telecommunications and the internet, why would they want to buy a major semiconductor company?  And why, with $89B in debt, is Softbank adding another $31B?

The answer: Softbank is not what they appear.  What isn't as well known is that Softbank is actually a major player in China's internet economy.
For starters, they bankrolled Alibaba.  They control 32% of Alibaba, and through Alibaba, they dominate the Chinese internet economy because Alibaba has invested in the top internet companies in China: Weibo, for example.

Although based in Japan, Softbank is very much a Chinese company.

The fact remains that, despite the $10B budget, China has yet to land any major companies.

Perhaps Softbank on its own is front-running a bigger China budget.

Or perhaps Softbank was tapped to be the buyer, but not the ultimate buyer.  After all, who is lending them to $31B to close the deal?  And Softbank will earn a lot of political credits for doing a favor for the

Chinese government effort to ramp-up a semiconductor company.

Don't be surprised if we see an announcement in a year or two that ARMH is up for sale and the buyer is a major Chinese company.

This was a brilliant move.