Nvidia and SoftBank’s Arm Call Off Vertical Merger

Facing challenges from antitrust enforcers on three continents, U.S. microchip giant Nvidia Corp. has called off its acquisition of British computer processing designer Arm Ltd., owned by SoftBank Group Corp. of Japan.

The significance of this development is that it was a proposed vertical merger – involving two companies that operate in different parts of an industry’s supply chain – as opposed to a horizontal merger between two direct competitors. Historically, vertical deals have been more difficult for antitrust law enforcers to challenge.

SoftBank entered into a share purchase agreement to sell Arm to Nvidia on Sept. 13, 2020. The deal was valued at $40 billion. Given the uptick in Nvidia’s stock values, the deal would now be worth $50 billion. SoftBank will receive $1.25 billion from Nvidia for calling the deal off. SoftBank says it will issue a public offering of Arm before the end of its next fiscal year in March 2023.

ARM licenses microprocessor designs to Nvidia and other tech companies that use them to manufacture devices including smartphones, tablets, autonomous vehicle systems, and data centers. Arm-based processors are used in popular consumer products like Androids and iPhones. Apple has also started using Arm-based CPUs across its line of Mac PCs, moving away from their partnership with Intel, according to Gartner.

The U.K. Competition and Markets Authority reported to the U.K. Secretary of State in July 2021, which had moved to intervene in the merger review on national security grounds, that an in-depth investigation into the deal was warranted on competition grounds. The CMA expressed concerns that the merged business would have had the ability and incentive to harm Nvidia’s semiconductor rivals by restricting access to Arm’s intellectual property.

The deal was also reportedly meeting resistance in China, and the U.S. Federal Trade Commission filed a challenge in December 2021.

The FTC said the basis for challenge was that the deal would reduce competition in three worldwide markets where Nvidia competes using Arm-based products:

> Advanced driver assistance systems for passenger cars.
> Smart network interconnects used in data center servers.
> Chips used by cloud service providers.

The FTC’s complaint – a redacted version of which has been made public – explained that Nvidia competes with many of Arm’s other licensees. It profits when it closes a sale and loses when another Arm customer wins a contract, but the deal would have changed that.

Had the deal gone through, the FTC complaint said, “[T]he combined firm [would] not have Arm’s same premerger incentive to enable its licensees’ success in Downstream Markets. Instead, the combined firm [would have had] the incentive to engage in foreclosure strategies” which involve “withholding a critical input from rials, delaying or degrading access to the input (including delaying or degrading service and support), unfavorably changing the terms on which the input is made available to rivals, or otherwise using the critical input to raise their costs or disadvantage them.”

Nvidia is already motivated to win sales from its rivals, the FTC said, and would make more money in the downstream market than from continuing to “neutrally license” Arm’s processor technology. Nvidia would also have had more incentive to use Arm against competitors by preventing innovations in Arm’s technology, because that could have led to greater competition to Nvidia.

The FTC said the acquisition would further harm competition by giving Nvidia access to competitively sensitive information from Arm’s customers, some of which are direct competitors.

Bloomberg had reported that Broadcom Corp., MediaTek Inc., and Marvell Technology Group Ltd. were the first of Arm’s customers to publicly support the deal, while rival Qualcomm Inc. and tech giants including Microsoft Corp. said the deal would have enabled Nvidia to limit the supply of its technology to its competitors or raise prices.

Nvidia is a Delaware company based in California, generating $16.7 billion a year. Arm is a nearly $1.9 billion company based in the U.K. SoftBank of Japan purchased Arm in 2016. Arm’s chief competitors are IBM, Intel, and AMD.

Edited by Tom Hagy for MoginRubin LLP.

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