Arm’s stellar listing sets the stage for more SoftBank acquisitions

A smartphone with a displayed Arm Ltd logo is placed on a computer motherboard in this illustration taken March 6, 2023. REUTERS/Dado Ruvic/Illustration/File photo

TOKYO  -The roaring success of Arm Holdings’ stock market debut makes it much easier for owner SoftBank Group to revert to its natural state – acquisition-hungry.

Shares in the British chip designer jumped almost 25 percent on its first day of trade – propelling its value to more than double the $32 billion SoftBank paid to acquire it in 2016. The tech investment behemoth raised nearly $5 billion from Arm’s offering while retaining 90.6 percent of the firm.

READ: SoftBank’s Arm soars nearly 25% in market debut to $65-B valuation

Known for debt-fueled acquisition sprees, SoftBank founder and CEO Masayoshi Son flagged in June that the company was shifting back into “offense mode” as he highlighted the potential of artificial intelligence. That’s after a year of “defense mode” when tech valuations crashed amid higher interest rates and global banking jitters.

READ: Global mergers & acquisitions plunged in Q2 but dealmakers see green shoots

His chief financial officer, Yoshimitsu Goto, has been more circumspect in tone, however, saying last month that the company was timidly embarking on selected new investments.

Whether or not Son resumes a feverish pace of acquisitions, having shares in Arm publicly listed will allow SoftBank to more easily use the stock as collateral, will likely improve its credit rating for better borrowing terms and help it take out the margin loans Son favors, analysts say.

SoftBank declined to comment on its acquisition strategy.

Boosting the proportion of SoftBank’s net asset value (NAV) held in listed shares is an important prerequisite for lifting its flagging credit standing, analysts at SemiAnalysis said.

“Their hope is that Arm’s share price will be higher so they can mark up their NAV and help repair their credit rating,” they wrote in a note to subscribers.

SoftBank’s reputation was dented when S&P Global Ratings downgraded its long-term rating deeper into junk territory in May.

The agency cited SoftBank’s growing exposure to unlisted companies – which are less easily valued – as it has sold down assets in public companies, principally Chinese e-commerce giant Alibaba, to stabilize its balance sheet.

SoftBank’s last spending spree coincided with the 2021 tech bubble, the collapse of which has knocked down the value of its Vision Fund 2 to $33.2 billion compared to the assets’ combined purchase price of $51.8 billion.

Vision Fund 1 has fared a bit better with gains of 14 percent over acquisition costs.

READ: U.S IPO market poised for strong finish in 2023 amid a flurry of listings

Good timing?

If Son were to indulge his acquisitive leanings now, his timing could be fortuitous given depressed valuations and a relative lack of funding for the early-stage startups that he typically targets, some analysts say.

SoftBank also benefits from being one of the largest funds in the market.

“They have some firepower behind them that a lot of funds in venture capital don’t,” said PitchBook venture capital analyst Kyle Stanford.

“If they’re investing in early stage they will have a little bit of price elasticity to get into the deals they believe they need to be in,” he said.

That said, analysts question whether Son, also known for picks that flopped like flexible workspace provider WeWork, can replicate the success he saw with Alibaba.

Fervor over AI has already surged to impressive peaks and chip firm Nvidia aside, it is hard to identify firms that will be big beneficiaries of AI adoption. Few companies in SoftBank’s investment portfolio have demonstrated commercial utility in AI, analysts said.

There’s also no guarantee that Arm’s shares will stay high, with some analysts warning that tech firms may now be due for a correction given valuations fueled by AI enthusiasm may have run their course.

“There are signs that tech is getting tired and overvalued,” said Amir Anvarzadeh, a strategist at Asymmetric Advisors.

Higher interest rates – U.S. benchmark interest rates are at 5.5 percent – also mean that target companies need to grow that much more to justify acquisition costs, forcing investors to take a more considered approach.

“This should also apply to SoftBank. But they run their own playbook,” said PitchBook’s Stanford.