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ANALYSISWill Samsung join Arm's US listing process?

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'Amid chip downturn, SoftBank wants Samsung's financial help for Arm's successful US IPO'

By Kim Yoo-chul

SoftBank founder Masayoshi Son's plan to meet Samsung Electronics Vice Chairman Lee Jae-yong in Seoul comes just months after the global tech investor dropped plans for the London listing of British chip designer Arm due to the departures of investment minister Gerry Grimstone and digital minister Chris Philp following the resignation of of U.K. Prime Minister Boris Johnson. Grimstone and Philp played leading roles in talks with SoftBank over the U.K. listing.

Son is set to ask the Samsung chief to forge a strategic alliance with Arm, while the Korean chipmaker appears to be somewhat stumped, saying that it has no idea what Son's business proposal could be. Samsung didn't elaborate further.

After President Yoon Suk-yeol granted a pardon for the Samsung leader, the company's top executives are increasingly being asked to implement very detailed and applicable business plans to boost shareholder returns amid a slowdown in demand for memory chips. Samsung's share price fell some 30 percent from January to Sept. 23, while South Korea's benchmark KOSPI index was down 23 percent during the same period, according to data provided by the Korea Exchange (KRX).

Samsung Electronics had some 6 million minority shareholders as of today following its 50-to-1 stock split in 2018. Senior company executives said that Samsung, which is a leader in the global memory chip industry, is on track to explore acquisition opportunities in order to secure future growth engines.

However, despite repeated positive comments by Samsung executives over the progress of its corporate acquisition efforts, several sources familiar with the issues said chances are low that Samsung will pursue a sizable stake in the British chip designer.

"First, the departures of the two British ministers mean a lot because they were strong supporters in backing Son's idea for Arm's London initial public offering (IPO). SoftBank will pursue a direct U.S. listing of Arm. Its founder Son needs Samsung's support for Arm's successful U.S. listing process," a senior industry executive said via telephone, asking not to be named.

In June this year, Son told investors and shareholders that he was in favor of a U.S. listing because most of Arm's clients are based there. Plus, its CEO Rene Haas recently told the Financial Times that Arm wants to use the capital raised from its upcoming IPO to look at pursuing deals. "Arm executives are pretty confident the company can stand on its own two feet. The timing is good for us," Hass was quoted as saying.

The U.S. market is much better than London in terms of liquidity and the number of prospective larger investors. Meanwhile, Arm's battle over control of its China unit, earlier considered the biggest hurdle to pursuing an IPO, has been resolved.

Samsung could play role of financial investor

Simply put, SoftBank is in severe financial trouble because of the global sell-off of technology stocks. Gains made through its investment arm, Vision Funds, in tech startups including Alibaba, Coupang and Doordash were almost wiped out.

Samsung Electronics Vice Chairman Lee Jae-yong, left, and SoftBank Founder Masayoshi Son, right, arrive at the Korea Furniture Museum in Seoul, in this July 4, 2019, file photo, to attend a dinner with leaders of South Korean conglomerates. Korea Times file
Samsung Electronics Vice Chairman Lee Jae-yong, left, and SoftBank Founder Masayoshi Son, right, arrive at the Korea Furniture Museum in Seoul, in this July 4, 2019, file photo, to attend a dinner with leaders of South Korean conglomerates. Korea Times file

Son said he was ashamed of himself for being so elated by big profits in the past. Son drastically scaled back investments as Vision Fund spent $600 million in new investments in the first quarter of this year down from $20.6 billion in the same period, a year ago.

"While Samsung's cash reserves were at some 130 trillion won, as of August this year, it is unlikely for Samsung to serve as a kind of white knight to save SoftBank by purchasing major stakes in Arm because there's no need to do so," another executive said on condition of anonymity. The entire value of Arm is estimated at some 95 trillion won, at least.

Samsung has acquired 29 companies including seven in the last five years. A total of four acquisitions happened from private equity firms (PEFs). It also divested a total of seven assets. Samsung's largest-ever acquisition was in 2016 when the company bought Harman for $8 billion. It has acquired in seven different U.S. states and nine countries, while the company's most preferred target sectors include software products and software services, according to company disclosures.

"Recent failed attempts at blockbuster deal proposals were due to regulatory concerns regarding national security and competition. Samsung may take a role as a financial investor through the participation of Arm's U.S. IPO process by purchasing large volumes of new shares, for example," the executive added.

SoftBank owns a 75 percent stake in Arm with Vision Funds owning the remaining 25 percent. Son hopes to remain as the largest shareholder in it by only selling the stakes owned by Vision Funds, said sources close to the matter.

"SoftBank wants to ensure prospective Wall Street investors that its $60 billion valuation target for Arm is supported by major partners including Samsung. In fact, Son hopes to use his meeting with Samsung's Lee as a bar to boost the financial value of Arm in the eyes of other buyers," said an executive by telephone at a local PEF, who has previously handled sizable deals. "Investor sentiment for semiconductor stocks will recover from early next year."

ASML case, no huge synergy even for a part of Arm

Citing a top industry official,
The Korea Times was the first to report Samsung's plan to acquire between a 3 percent and a 5 percent stake in Arm as a way to reduce payable royalties.

The reports also went on to say that Arm will be acquired by a consortium led by multiple parties given the complex nature of Arm's shareholding structure. Samsung responded to this by saying the story was "groundless."

An ARM and SoftBank Group branded board is displayed at a news conference in London, UK July 18, 2016. Reuters-Yonhap
An ARM and SoftBank Group branded board is displayed at a news conference in London, UK July 18, 2016. Reuters-Yonhap

"As Samsung's major clients want to build up a consortium for a part of Arm because of antitrust concerns, Samsung may join on this as a gesture to show its backing of industry collaboration," said Lee Ju-wan, a researcher at POSCO Research Institute. Earlier, Qualcomm expressed its interest in purchasing a stake in Arm as part of an investment consortium, if necessary, in a way to allay regulatory scrutiny about competition.

One key trend seen in the global M&A industry is that there is a lot of pressure from governments on businesses to cooperate. While pursuing a deal via a strategic long-term partnership isn't the classic M&A formula, this would give industries and interested parties more flexibility in terms of tackling common challenges. In 2012, Samsung purchased minor stakes in ASML alongside Intel and TSMC as a financial investor. The stake acquisition did not include voting rights. Four years later, Samsung halved its holdings of ASML to 1.5 percent.

Citing the ASML case, market observers say Samsung may review the possibility of acquiring a part of Arm as the chip designer is aiming to push beyond mobile phone technology and deeper into components for next-generation vehicles, data centers, networking equipment and hardware underpinning the metaverse.

Arm is strategically important for Samsung. In the chip industry, with major consolidation off the table, industry officials say the small volume of transactions will become the norm, along with increased industry collaboration. Within that context, if Samsung joins the race for a part of Arm with Qualcomm, Apple and Intel, some say there won't be any huge monopoly and/or competition issues.

Citing Samsung's strengths in chip manufacturing, Jim Handy, a seasoned chip expert, claimed Samsung's total acquisition of Arm would not raise concerns when considered against the Herfindahl-Hirschman Index (HHI), a measurement of market monopoly that is used to determine market competitiveness. Handy added that because Samsung isn't a processor company, Samsung won't face severe antitrust issues unlike complaints and objections at the time of Arm's attempts to acquire Nvidia.

Nonetheless, because Arm's core strengths are based on mobile, buying large chunks is not in Samsung's best interests given its shift toward non-mobile businesses.

"Samsung wants to broaden its key business portfolios for corporate clients and that means avoidance of any conflict of interest with its clients is necessary for Samsung from a profit standpoint. If Arm is acquired by Samsung, then Arm's clients will have greater concerns over technology leaks," Lee Seung-woo, an analyst at Eugene Investment, said.

Arm generates its profit from licensing and royalty fees paid by its clients including Samsung, Apple and Qualcomm, which use its patented chip designs to produce their own hardware.

No powerful synergy effects are expected from Samsung's acquisition of Arm as Samsung aims to become the top foundry chip service provider by 2030, the promising market is currently led by TSMC of Taiwan.

"From Arm's standpoint, it wants to go beyond mobile and this is also true for Samsung; therefore, participating in Arm's U.S. IPO process as a financial investor might make sense for Samsung. But buying even a part of Arm via a consortium is an idea that needs to be developed and reviewed thoroughly," said Lee Jong-hwan, a professor of system semiconductor studies at Sangmyung University.

Kim Yoo-chul

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