Rebirth of England

"Your Highness the Duke, we have reached an agreement with NXP Semiconductors. They finally agreed to sell their shares in ARM. Of course, we need to pay some premium..."

In early February, Barron got the news during a phone call with Finn Hudson, CEO of Global Industrial Investment Fund (GII Fund).

In fact, as early as the end of last year, GII Fund tried to acquire their shares in ARM from NXP Semiconductors, but the other party has not let go of this acquisition.

Finally, when NXP Semiconductors' business revenue fell sharply due to the subprime mortgage crisis and they needed cash flow, they finally agreed to this acquisition.

The reason why we hope to acquire ARM is because this company in England is very important for the future development of smartphones - both Apple's IPhone phones and Android phones are based on ARM's chip architecture.

And in the future handheld smart device market, ARM architecture chips will account for more than 90% of the market share.

In Barron's previous life, SoftBank Group completed the acquisition of ARM at a cost of US$32 billion in 2016 - and later, Nvidia was willing to purchase ARM from SoftBank for more than US$40 billion, but this time The transaction was unsuccessful in the end.

Many people may have heard of this, but what many people rarely know is that in 2010, Apple tried to acquire ARM for more than $8 billion, but was ultimately rejected by ARM's board of directors...

In fact, there is a huge connection between Apple and ARM - Apple was the company's largest shareholder in the beginning, and it is not an exaggeration to say that ARM once saved Apple.

In the agreement reached this time, GII Fund will acquire NXP Semiconductors’ 28% stake in ARM for US$1.4 billion.

Even though it was affected by the subprime mortgage crisis, because Apple and Google's systems both use the ARM architecture, the total shipments of ARM chips reached 10 billion last year, so relatively speaking He said that even though the entire stock market is sluggish, ARM's decline has not been too high. Its current market value is around US$4 billion.

The agreement was reached at a premium of 20% for the shares of ARM acquired by GII Fund from NXP Semiconductors.

As for why NXP Semiconductors holds shares in ARM, we have to start with the history of ARM.

The predecessor of ARM is Acorn Company, which was established in Cambridge, England in 1978.

1The company's RISC machine project began to be implemented.

RISC, short for Reduced Instruction Set Computer, is a processor that is faster although it cannot process as many instructions as a regular CISC (Complex Instruction Set Computer).

The result is a processor that's powerful and fast enough to make up for the fact that instructions have to go through more steps to complete.

In addition to the features and speed advantages, the device also consumes very little power, which piqued Apple's interest.

In the late 1980s, Apple began working with Acorn.

Then on November 27, 1990, the two companies joined forces with chip manufacturer VLSI Technologies to form a company - Advanced RISC Machines (the most advanced RISC computer).

This was what became ARM, in which Acorn held 24%, Apple held 43%, and VLSI Technologies held the remaining 33%.

1The company is listed on the London Stock Exchange and NASDAQ at the same time...

At the same time, at this time, Jobs returned to Apple, which was on the verge of bankruptcy. In order to save Apple, they successively sold 43% of their shares in ARM after ARM went public, and obtained a profit equal to the initial investment. The capital returned more than 400 times, and with these funds, Jobs developed the iPod and successfully saved Apple.

This is why ARM once saved Apple.

This is also the reason why Apple’s subsequent products, including iPod and IPhone, all use RAM chips.

But what’s interesting is that more than ten years later, Apple once again wanted to acquire ARM for $8 billion, but was rejected...

Another company, VLSI Technologies, which held 33% of ARM's shares (diluted to 28% after its listing), was maliciously acquired by Philips for US$1 billion in the second year after the company's listing. acquisition.

Later, its semiconductor business, NXP Semiconductors, was spun off from Philips, and the assets of VLSI Technologies were also transferred to this company.

This is why NXP Semiconductors currently holds 28% of ARM's shares.

As for Acorn, the predecessor of ARM, it was acquired by a private equity firm in 1999 after its name was changed to Element 14.

At that time, almost all of the company's revenue came from its 24% stake in ARM.

But these shares have now been sold.

The reason why ARM has been able to develop to its current level is due to its special business model - they no longer produce chips, but instead transfer chip design solutions to other companies in a licensing manner, that is, the "Partnership" open model.

Specifically, ARM has three licensing methods: processor, POP and architecture licensing.

Processor licensing refers to authorizing cooperative manufacturers to use processors designed by ARM. The other party cannot change the original design, but can adjust the product's frequency, power consumption, etc. according to their own needs.

POP (processor optimization pack) licensing is an advanced form of processor licensing. ARM sells optimized processors to authorized cooperative manufacturers to facilitate them to design and produce processors with guaranteed performance under specific processes.

Architecture licensing means that ARM will authorize its partners to use its own architecture, so that they can design processors according to their needs (for example, Qualcomm's Krait architecture and Apple's Swift architecture were designed after obtaining ARM's authorization).

It is also relying on this technology licensing method that ARM architecture chips have occupied more than 90% of the market share of handheld smart device chips.

This is also the reason why ARM refused to be acquired by Apple in Barron's previous life, but later agreed to be acquired by Softbank.

After all, ARM mainly makes profits by licensing its chip technology to all companies. The board of directors is certainly unwilling to sell itself to Apple, a hardware device manufacturer, which will affect its independence and make its technology likely to be monopolized by Apple, thereby losing ARM's business model.

Softbank is not a device manufacturer, and does not need to worry about losing ARM's independence after being acquired.

As for the failure of Nvidia to acquire ARM later, this factor also played a role.

Barron's acquisition of ARM through the GII Fund will not be hindered too much. After all, Honor Electronics belongs to the Caesar Fund and has nothing to do with the GII Fund.

Therefore, after acquiring 28% of ARM's shares, the next goal of the GII Fund is to negotiate with ARM's board of directors and prepare to complete the acquisition of the company.

After reaching an acquisition agreement with NXP Semiconductors, Finn Hudson is about to fly back to England to start contacting ARM.