By Katy Welsh, Law Writer at KCL M&A Society
When NVIDIA announced their proposed $40 billion takeover of chip designer Arm back in September, respective CEOs Jensen Huang and Simon Segars braced themselves for a gruelling 18-month battle to obtain regulatory sign-offs and complete the deal. Sure enough, just a couple of months later, the transaction has run into its first regulatory roadblocks in the form of antitrust and national security concerns.
NVIDIA, a California-based company that specialises in graphics processing units (GPUs) and AI, is acquiring British tech group Arm from Japan and SoftBank in a bid to create the “premier computing company for the age of artificial intelligence [1] ” and expand into new markets. In exchange, Arm will benefit from increased R and D capacity at its Cambridge headquarter and will be able to enlarge its IP portfolio by utilising NVIDIA’s technology. Whilst this is a seemingly sweet deal for both parties involved, there is circulating doubt as to whether the merger will actually go ahead, with AI investors Nathan Benaich and Ian Hogarth even including the deal falling through as one of their 2021 predictions in their annual State of AI Report [2].
Antitrust law (or competition law in the UK) aims to promote healthy competition by limiting the market power of a company and preventing the formation of monopolies. Whilst horizontal mergers, where one business directly acquires its competition, raise obvious antitrust concerns, vertical mergers such as NVIDIA’s acquisition of Arm still raise red flags by reducing marketplace competition in a less direct way. Arm’s chip architectures are currently used in over 95% of the world’s smartphones, including products from tech giants such as Apple, Samsung and Amazon. Crucially, under its current operating model, Arm acts as the
‘Switzerland [3] ’ of the semiconductor industry and grants licences in an even-handed manner to any company wanting to buy their technology. Google, Microsoft and Qualcomm [4] have all voiced concerns over the effect that the takeover will have on the neutrality of Arm, and whether NVIDIA will limit their rivals’ access to the technology and raise the costs of licensing, whilst having full access themselves. There are also fears that the acquisition will lead to the relocation of British-based Arm to the US, resulting in job losses for up to 3,000 UK employees. In an open letter to the Financial Times [5], Huang said that NVIDIA has “no intention to ‘throttle’ or ‘deny’ Arm’s supply to any customer,” as well as communicating the company’s plan to stay registered in the UK. Whilst his statement could not be much more unequivocal, it does little to calm the nerves of NVIDIA’s competitors. Although Huang made it clear in his letter that he is willing to enter into legally binding agreements, these have been neither drafted nor signed and so are completely unenforceable.
Antitrust watchdogs across the globe have announced that they are launching investigations into the deal and have invited interested parties to submit their views at the preliminary stage. In the US, NVIDIA may face challenges following the recent election. Democrat Rebecca Kelly
Slaughter currently sits as acting chair of the Federal Trade Commission (FTC) and has publicly voiced her support of a more aggressive oversight for vertical mergers [6]. Following Biden’s win, even more power will shift to the Democrats and may make gaining regulatory approval tougher still. China poses an even greater obstacle for NVIDIA. Thanks to Arm’s 49% ownership of joint venture Arm China, China’s antitrust regulator (the SAMR) will also need to authorise the proposed deal. The ongoing trade war between the US and China has resulted in the SAMR both delaying and completely rejecting previous regulatory approval to US companies, including the proposed $44 billion takeover of Dutch company NXP by Qualcomm in 2018 [7]. Again, the new Biden administration may affect the US-China relationship, but the SAMR’s track history of scrutinising US deals doesn’t bode well for NVIDIA. The UK’s competition regulator, The Competition and Markets Authority (CMA) said in a statement in January that it was “likely to consider whether, following the takeover, Arm has an incentive to withdraw, raise prices or reduce the quality of its IP licensing services to Nvidia’s rivals.” The $40 billion price tag of the deal is arguably enough of an incentive by itself, and it is unclear how NVIDIA plan to generate a return on this investment if not by changing Arm’s open-licensing policy and redirecting resources to maximise profits. The EU Commission is also expected to begin probing in the coming months.
What are the alternatives?
Although obtaining approval from global regulators, particularly from China, is far from certain, all is not lost for NVIDIA’s competitors. Hermann Hauser, co-founder of Arm, has even called for the UK government to directly intervene and block the deal, or at least place clear and legally binding conditions on the transaction [8]. This has been echoed by the Labour Party, with Ed Miliband saying the government should obtain from NVIDIA “legally binding assurances” that Arm would remain in the UK, as well as proposing expansion of the Enterprise Act to take public interest and industrial policy considerations into account when deciding whether to approve an acquisition [9]. Hauser also suggested that, as a complete alternative to the sale, the UK government should act in the national interest and once more make Arm a publicly traded company on the London Stock Exchange, acting as the anchor investor. If all else fails – that is, if NVIDIA gain authorisation from regulatory bodies and the UK government fails to intervene – it does not mean that NVIDIA will totally monopolise the market. Much of Arm’s value lies in its independence and neutrality, so if this is compromised it will be reflected in its stock price. Furthermore, although Arm’s architecture currently dominates the market, it is not the only option. In an interview with CNBC [10], former Qualcomm CEO Paul Jacobs discussed how possible attempts by NVIDIA to restrict customers’ access to Arm architecture may simply result in power and energy being refocused to new alternative ecosystems such as RISC-V.
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References:
[1] NVIDIA Press Release, ‘NVIDIA to Acquire Arm for $40 Billion, Creating World’s Premier Computing Company for the Age of AI’ (NVIDIA Newsroom, 13 September 2020)
<https://nvidianews.nvidia.com/news/nvidia-to-acquire-arm-for-40-billion-creating-worlds-premier-computing-company-for-the-age-of-ai?ncid=afm-chs-44270&ranMID=44270&ranEAID=kXQk6*ivFEQ&ranSiteID=kXQk6.ivFEQ-eIvQ11i8FLnuZYO58bB0vQ> ; accessed 20 February 2021.
[2] Nathan Benaich and Ian Hogarth, ‘State of AI Report 2020’
<https://www.stateof.ai> accessed 20 February 2021.
[3] Ian King, “NVIDIA Deal Threatens Arm’s Role as the Switzerland of Chips” Bloomberg (15 September 2020).
[4] David McLaughlin, Ian King and Dina Bass, “Google, Microsoft, Qualcomm Protest Nvidia’s Acquisition of Arm Ltd.” Bloomberg (12 February 2021).
[5] Jensen Huang, “Letter: Nvidia is ready to give Arm legally binding assurances” Financial Times (13 October 2020).
[6] David McLaughlin, Ian King and Dina Bass, “Google, Microsoft, Qualcomm Protest Nvidia’s Acquisition of Arm Ltd.” Bloomberg (12 February 2021).
[7] Sherisse Pham, ‘China kills Qualcomm’s $44 billion deal for NXP’ CNN Business (26 July 2018).
[8] Hermann Hauser, ‘Arm is being sold to Nvidia. Help Stop it.’ (Save Arm, 14 September 2020) <https://www.savearm.co.uk> accessed 19 February 2021.
[9] Jasper Jolly, “Labour calls for UK jobs guarantee in potential Arm sale to Nvidia” The Guardian (10 September 2020).
[10] Sam Shead, “Qualcomm objects to Nvidia’s $40 billion Arm acquisition” CNBC (12 February 2021).
KCL Mergers & Acquisitions Society
The KCL M&A Society (KMA) was founded with the goal of providing students with valuable information and opportunities regarding the field of Mergers & Acquisitions. KMA aspires to provide students with a platform to learn and improve their skills whilst delving into the synergies of law and finance.