US Firm Nvidia has announced it is looking to acquire UK company ARM for $40bn from current Japanese owners SoftBank Corp.
What is ARM and why does it matter?
ARM, based in Cambridge, is a world leader in the design of computer chips and the software that controls them. ARM operates an open-license business model, licensing its intellectual property (IP) to third parties rather than manufacturing and selling the computer chips themselves. Hundreds of companies licence its IP, including Apple, Samsung, Huawei and Qualcomm. To date, ARM says manufacturers have produced 180 billion chips based on its designs.
The chips developed by ARM are particularly important for consumer electronics and for emerging technologies such as artificial intelligence (AI). As AI becomes more influential in all facets of business and society, the manufacturers and developers of its components will become increasingly important from a geo-political, economic and strategic perspective.
What is Nvidia and what are the wider consequences of the proposed acquisition?
Nvidia is a world leading manufacturer of graphics processing units (GPUs), used in gaming, mobile, automotive and AI applications. Currently Nvidia only manufactures GPUs, but its competitors manufacture computer chips as well as GPUs.
There are concerns by some that following the takeover, Nvidia will end ARM's open-licensing business model. Such a move would give Nvidia an advantage over its traditional GPU competitors such as Intel and AMD, and may prevent smaller businesses that rely on using ARM's chip designs from innovating.
At a more macro level, there are concerns that the proposed acquisition may diminish the UK's international technology standing. ARM's co-founder Hermann Hauser has described the deal as "an absolute disaster for Cambridge, the UK, and Europe". Nvidia has stated it intends to preserve ARM's UK headquarters and to invest millions to create a state-of-the-art supercomputer centre in Cambridge.
Might the UK Government intervene?
The concept of the UK Government seeking to block 'undesirable' disposals of strategically important corporate assets is not new – see examples below. Until recently, the grounds on which the UK Government could intervene or block a takeover were relatively narrow - based on four specified public interest considerations: national security, media plurality, financial stability and most recently, to combat a public health emergency.
In 2014, U.S. pharmaceutical giant, Pfizer attempted to takeover UK heart-drug manufacturer AstraZeneca. The deal faced fierce opposition from politicians, but ultimately it was commercial reasons, not political interference, that killed the deal.
In 2017, the UK Secretary of State for Business, Energy and Industrial Strategy issued a "public interest intervention notice" in relation to the proposed purchase of Sepura, a UK supplier of professional mobile radios of Hytera Corporation, a Chinese-based manufacturer. The UK Government accepted statutory undertakings that it claimed were sufficient to protect British interests in this matter.
In 2018, GKN, one of Britain's oldest engineering firms, was sold to US based Melrose Industries in a hostile takeover. The transaction was cleared by the UK Government only after Melrose made binding undertakings on the future of GKN’s defence business, aimed at ensuring that the headquarters remained in the UK, the majority of the board of directors remained British and to provide a binding commitment to research and development spending in the UK.
In January 2020, Global private equity firm Advent International completed its £4bn takeover of Cobham, a world leader in air-to-air refuelling technology, despite calls from the family of the founder to block the takeover. Prime Minister Boris Johnson said at the time that "it's very important that we should have an open and dynamic market economy".
However, the UK Government has been expanding its powers to scrutinise and intervene in mergers and takeovers in sectors of the economy that it considers central to national security and strategy. In June 2018 it was granted expanded powers to scrutinise and intervene in the mergers of relevant enterprises, whose activities include owning, creating or supplying intellectual property relating to computer processing units. In July 2020, its remit was further expanded to include companies whose activities include the research, development and supply of artificial intelligence.
To date no transaction has ever been blocked on public interest grounds by the UK Government.
What next?
Recent history tells us that the UK Government may seek to obtain statutory undertakings from Nvidia in respect of its promises to keep ARM's headquarters in Cambridge and to invest millions into research and development. It fact, it did the same when Softbank purchased the company in 2016.
Jensen Huang, chief executive of Nvidia, has already promised to make legally binding commitments to keep the headquarters of ARM in Cambridge and to grow its presence with a new artificial intelligence centre in the city.
Looking to the future, the current administration has stated its commitment to making the UK an open market economy and an attractive jurisdiction for foreign investment. It will be interesting to see how this commitment is balanced with UK Government's expanding powers to scrutinise and intervene in mergers and takeovers.
We look forward to following developments with interest.