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[HONG KONG] SoftBank Group Corp agreed to buy ARM Holdings Plc for £24.3 billion (S$43.4 billion), securing a slice of virtually every mobile computing gadget on the planet and future connected devices in the home.
The Japanese company is offering 1,700 pence in cash per share or a 43 per cent premium to Friday close, according to a statement Monday. The deal would be the biggest-ever for SoftBank, which under chairman Masayoshi Son became one of Japan's most acquisitive companies with stakes in wireless carrier Sprint Corp and Alibaba Group Holding Ltd.
SoftBank will gain control of a cash-generating mobile industry leader who gets royalties every time clients such as Apple Inc, Samsung Electronics Co or Qualcomm Inc adopt its designs, which are considered power-saving and efficient.
The deal is the biggest takeover of a British company since the country last month decided to leave the European Union and comes after the pound fell against the Japanese yen.
"ARM has what we view as an unassailable library of IP processor designs based on chip performance, size and power performance," Neil Campling, an analyst with Northern Trust Securities LLC, wrote in an e-mail.
"ARM is growing at 10x the rate of the semiconductor industry it serves and is increasingly the glue that binds the disruptive forces of the entire digital world, not just US$700 smartphones."
SoftBank pledged to keep ARM's headquarters in Cambridge and its senior management team, and to at least double employee headcount in the UK in the next five years. It will fund the acquisition partly through cash and loans, according to the statement. ARM's shareholders will get a dividend of 3.78 pence per share.
SoftBank approached ARM, which didn't run an auction process, two people familiar with the matter said before the announcement. SoftBank had been considering a purchase of ARM before the UK's decision to leave the European Union, and the so-called Brexit vote wasn't a factor in the Japanese company's decision to proceed, one of the people said.
"Just three weeks after the referendum decision, it shows that Britain has lost none of its allure to international investors," UK Chancellor of the Exchequer Philip Hammond said in a statement.
Beyond its sheer scale, the ARM acquisition is unusual for a company that's preferred to take control through hefty stakes in smaller companies, or those with high-growth potential.
The chip designer alone will account for more than a third of SoftBank's current total international holdings of 8.3 trillion yen (S$105.71 billion) as of July 15. Goldman Sachs Group Inc and Lazard & Co were the lead financial advisers to ARM on the deal, the company said.
Raine Group LLC, Robey Warshaw LLP and Mizuho Securities Co are acting as financial advisers to SoftBank, it said.
ARM has come to dominate the design of smartphone chips and is pushing into servers to challenge Intel Corp, evolving from a small lab in a converted barn to a company whose designs are found in 95 per cent of smartphones.
With the mobile phone market slowing, ARM is adding new customers in the automotive industry and targeting growth in processors for network equipment makers and servers. The company is also exploring chip designs to boost the graphics capabilities of phones.
Any deal for ARM comes less than a month after Nikesh Arora, Son's heir apparent at SoftBank, quit the company. The former Google executive was brought on board to spearhead a search for the next Alibaba, the Chinese e-commerce company SoftBank backed that went on to pull off the world's largest initial public offering in 2014.
SoftBank will now need to add to its massive debt load to see the acquisition through. The Tokyo-based company carried almost US$106 billion of total debt on its balance sheet at the end of March, but less than US$23 billion in cash and marketable securities.
However, the price tag may be justified because ARM's dominance in mobile computing translates into consistent cash-flow, and its hardware-light business model yields margins north of 95 per cent in every quarter since late 2014, Amir Anvarzadeh, Singapore-based head of Japanese equity sales at BGC Partners Inc, said in an e-mail.
"As much as we hated the decision of buying Sprint, we believe if Son wanted to bet on the sterling recovering he picked a great name in the tech sector," Mr Anvarzadeh said.
"The market will be seeing this acquisition in a positive light despite stretching its balance sheet further." ARM's model is based on the idea of spreading risk and profits. It does the underlying work and makes more money when its customers sell more things.
That means brands like Apple and Samsung can focus on higher-level innovations instead of grunt work, while custom chipmakers like Taiwan Semiconductor Manufacturing Co deal with actual fabrication.
Some smartphone players may dislike the loss of independence at ARM, which is held by mainly institutional investors at the moment, said Gartner analyst Roger Sheng. Japanese ownership may even hamper ARM's efforts to expand in China, where tensions with its neighbour run deep and the government is pushing local technology companies to come up with alternatives to foreign-owned technology.
"Their clients and partners are happy to see that ARM is independent because it works out better for the ecosystem," Mr Sheng said.
"The Chinese government has some political issues with the Japanese government so if ARM is acquired by SoftBank I believe China will invest more to develop their own architecture and maybe some Chinese companies will use other architectures."