A test of Arm’s strength

The big story bubbling in public and private markets this week in the UK is the upcoming IPO of British chip designer, Arm. 

The history of Arm and its current investment story is interesting for a multitude of reasons, but central to the narrative is the fact that this year has been slow for IPOs. As global inflation cools, things are looking a touch more positive as we look towards Q4, so you can see the rationale behind the decision to go public now. 

But if we dig a little into the deal, examine the target price and look at who’s slated to participate, things don’t look quite so certain for Arm’s prospects. It’s a deal that could go either way. 

Second time’s a charm

IPOs have been hard to come by this year, but post-summer lull, there are signs of increased activity and Softbank-owned Arm has taken the decision to stand up and ride the wave.

This would be the second time in its history that the company has come to the public markets, as it first started trading publicly in the late 1990s. Softbank took the company private in 2016 for $32 billion, and a successful IPO today would be a good bit of business, much-needed given the investment behemoth’s recent heavily-publicised rocky performance. 

Arm’s market share is significant, and its technology is hot(ish), with its F-1 stating how it controls 49% of the chip and processor market and its products continue to be used in ubiquitous technology devices, such as Apple smartphones. So they hope they’re choosing an opportune time to attract investors, with significant potential and upside remaining.

The target price is… questionable 

This IPO is long-awaited, with the news first circulating earlier this year that the company had public plans. However, given global economic turbulence, it was delayed. 

Arm has set a price range of $47-51 per share, equating to a $48-52bn valuation. While the company will not be the only tech IPO that we see at the back end of this year, if it gets away at anywhere near the target price, it will almost certainly be this year’s largest in terms of cash raised and valuation. However, it’s worth noting that the IPO is on the small side, with only 10% of stock up for grabs, a fact some believe is designed to keep short sellers at bay. 

Further, the target price is below the $64bn valuation registered a month ago when Softbank bought a 25% stake in Arm from the Vision Fund, the $100bn Saudi-backed fund that’s managed by SoftBank itself. Clearly, early sentiment gathering since then hasn’t been as positive as they might have hoped, hence price expectations being set somewhat lower. 

Not so fast 

And much like in the general IPO market, the current feeling in the media doesn’t seem too positive. In fact, according to some, the company’s long-term prospects look less than rosy. 

As reported in the FT, James Anderson, one of the UK’s best-known tech investors, has warned that the Arm IPO will be a challenge, saying that it’s “not clear that Arm is a critical player” in growth markets such as cloud and AI. In fact, compared to incumbents with scale, such as Intel, or an AI moat, such as Nvidia, it’s hard to define what Arm is and where the upside comes from. 

“It seems like Arm missed quite a lot of opportunities in the past five years,” says Anderson, who also makes the point that the capabilities of Arm’s tech, when compared to rivals, looked limited: “I don’t really see the company as able to go beyond the phone world, about which I am increasingly sceptical.” Arm’s incredible strength in providing such a huge swathe of products to the likes of Apple is now being looked upon by some as its biggest weakness. 

The devil in the detail 

Despite the doubters, the company’s F-1 filing details numerous tech companies, such as Apple, Google, Nvidia, and Samsung, who are lining up to buy more than $700mn of stock as part of the offering. This sounds like a nice vote of confidence, much needed before an IPO of this significance, at this price and in this market. 

But as per a few of the most popular views in the FT Comments section, ‘anchoring’ an IPO not with institutional investors but with customers isn’t a great look. In fact, it leaves you wondering what these customers might be getting in return for their fealty. Hence, whether this IPO is a success or not depends on parties beyond Big Tech. It needs Big Finance to get involved, too, if it’s going to hit and stay above its price mark. 

A lot of questions are about to be answered about Arm’s tech, Softbank’s investment thesis, the appetite of public market investors and the general state of the capital markets. It feels as if this could be a case of wrong time, wrong price, but, fortunately, I’m no equity investor, so I’m happy to wait to see when the bell rings what the market makes of Arm’s strength.