ARM IPO: As British chip designer Arm prepares for its initial public offering (IPO), aiming to raise nearly $5 billion, concerns have arisen about its business ties with China, adding a significant point of tension.
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The Power-Packed Arm IPO and Its Impact on Tech Innovation
Amidst the growing technology-related disputes between Washington and Beijing, Arm, that is owned by SoftBank, has used numerous pages in its IPO prospectus to alert investors to the risks associated with its presentation in China.
Last month, its regulatory filing revealed that a quarter of its sales come from China, through an entity with unusual ties that it doesn’t control and with a complex history.
The company stated in its prospectus that Arm China operates independently from us and is there single largest licensee. They mentioned that, Neither they nor SoftBank Group, controls Arm China’s operations.
Arm, headquartered in Cambridge, also noted that its operations in China have turned “especially delicate” because of the strained relations between China and either the United States or the United Kingdom, which might worsen further.
The company has struggled in this region for a long time, significantly underperforming SoftBank’s expectations.
Arm attributed its slow revenue growth in China from its financial year through March to issues of “income recognition and national security matters,” but it increased in the following period.
Arm depends significantly on royalties, earning fees from every chip produced using its blueprints. The majority of the company’s income is through these royalties and licensing agreements.
On Wednesday, Arm announced that the price of its shares is set on $51 each, generating a total of $4.9 billion in funding. If bankers exercise an option to purchase additional shares, the total could rise to $5.2 billion, valuing the chip designer at $54.5 billion.
This is less than the $64 billion value SoftBank put on the company when it bought the remaining 25% stake in the firm from its Vision Fund unit last month.
Concerns about China are “already priced into IPO valuations, though the worst-case scenario of [additional] restrictions or trade sanctions might not be,” said Kirk Boodry, a strategist in Austrian investment firm SCL Advisory. “Chip tension isn’t going away,” he added. “Political and regulatory pressures are rising.”
On Tuesday, former US Securities and Exchange Commission Chairman Jay Clayton urged US lawmakers to require large public companies with significant China-related risks to disclose specific threats to the country, “and in doing so, they have laid out what that disclosure should look like. Suddenly, the devil’s in the details.”
While American authorities urge that they are not trying to break off their relationship with China. However, they have made it quite clear, the significance behind controlling their dependence on the world’s second-largest economy.
In its filing, Arm said it had only a “4.8% direct ownership interest” in Arm China, in which SoftBank’s controlled entities own 10% of the non-voting shares, making it a minority owner of the Chinese company.
Spire Invest founder and Chief Investment Officer Ivana Deluca said that although corporate structures like Arm China aren’t unique in China, “I think it’s very difficult. Investors are waking up to the risk of growing tensions among other companies.”
Arm China has faced trouble with the US in the past. In its filing, it said that it has been involved in several cases against Arm China in Chinese courts since April 2022, “challenging some aspects of Arm China’s corporate governance and actions by Arm China’s board of directors.” It said that as of August, the cases in favor of Arm China had been resolved, but appeals could be made.
It has not stopped the global tech giants from lining up to work with Arm. Big names like Google, Nvidia, AMD, Samsung, and TSMC have shown interest in collaborating with the company as key investors, as reported in filings from last week.
Deluca mentioned that the increase in interest from other major companies has clearly indicated, Arm’s standing in the current industry and its total worth to other tech giants. she said, “I’m confident it’s a good time for this IPO. Investors will need to price in the China risk only.”
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