SoftBank to buy UK chip designer ARM in $32 billion cash deal

[July 18, 2016]  By Chang-Ran Kim and Kate Holton

TOKYO/LONDON (Reuters) - SoftBank Group Corp has agreed to buy UK chip designer ARM Holdings PLC in a 24.3 billion pound ($32.2 billion) cash deal, the two sides said on Monday, a bold bet on internet-connected machines that will transform the Japanese group.

ARM, the largest London-listed tech company by market value, is a major presence in mobile processing, with its processor and graphics technology used by Samsung, Huawei [HWT.UL]and Apple in their in-house microchips.

Components based on technology licensed by ARM are found in the vast majority of the world's smartphones, and the Cambridge-based group has branched into other connected devices as smartphone growth slows.

ARM stands to be central to the tech industry's shift to the 'internet of things' - a network of devices, vehicles and building sensors that collect and exchange data - a stated focus for SoftBank founder Masayoshi Son.

Monday's deal, Softbank's largest to date, marks a departure for the Japanese group, whose tech and telecom portfolio ranges from U.S. carrier Sprint <S.N> to a stake in Chinese e-commerce giant Alibaba <BABA.N> and humanoid robot 'Pepper' - but does not yet include a major presence in the semiconductor industry.

Under the offer backed by ARM's board, Softbank will pay 17 pounds for every ARM share - a premium of more than 40 percent to Friday's close.

ARM shares surged nearly 43 percent to 16.99 pounds by 0820 GMT.

"This is one of the most important acquisitions we have ever made, and I expect ARM to be a key pillar of SoftBank's growth strategy going forward," Son said in the statement.

The acquisition is the first for Son, 58, since he last month rescinded plans to retire - effectively pushing out his heir apparent, former Google <GOOG.O> executive Nikesh Arora.

Son, whose lucrative early investments include Alibaba, said then that he wanted to "cement SoftBank 2.0", turn around loss-making U.S. carrier Sprint <S.N> and "work on a few more crazy ideas".

Though he has a low profile outside Asia, Son has long been an unconventional, charismatic visionary in the often closed and clubby world of corporate Japan, turning profits from Japanese telecoms into bets on up-and-coming start-ups.

Not all have been a success: SoftBank's $22 billion acquisition of a controlling stake in loss-making Sprint in 2013 has left the group with hefty debts.

SoftBank had interest-bearing debt of 11.9 trillion yen at end-March, including 4 trillion yen at Sprint, and its net debt currently stands at 3.8 times core earnings.

"SoftBank's position as an entity outside the semiconductor industry allows ARM to retain its independence and protect existing customer relationships, while commitment to UK investment ensures management buy-in," Jefferies analysts said in a note. "It's difficult to see other suitors at this stage."

CEO of the SoftBank Group Masayoshi Son speaks at a new conference in London, Britain July 18, 2016. REUTERS/Neil Hall

LOOKING ABROAD

The ARM deal is one of Japan's biggest deals overseas, outranking even Sprint, as SoftBank joins a parade of Japanese companies seeking growth abroad as the domestic economy stagnates.

Softbank has raised nearly 2 trillion yen ($19 billion) in cash over the last few months through asset disposals, according to Son - including the sale of shares in China's Alibaba, unusual for a group that has rarely exited investments.

But analysts had expected it to use the cash to reduce debt or give shareholders a windfall by buying back its own shares.

Instead, Son appears to have leapt on the opportunity presented by a battered sterling following Britain's vote to leave the European Union last month, and a strengthening yen.

Though ARM has warned on the staffing impact of Brexit, its revenues are largely in dollars, and its shares have climbed almost 17 percent since the vote.

Under the offer on Monday, greeted by the UK government as proof that the economy is 'open for business', SoftBank said it was committed to keeping top managers, ARM's headquarters and to at least double the employee headcount in Britain.

Announcing plans to stay on last month, Son said he wanted to complete the transformation of SoftBank into a tech investment powerhouse. He has focused on what he calls the next 'paradigm shift' in technology, which includes artificial intelligence and the internet of things - both increasingly important for ARM as it weathers a smartphone slowdown.

This year ARM bought UK imaging specialist Apical, which specializes in technology to allow computers to analyze images - replicating human vision using software.

Analysts said on Monday that a counterbid was not impossible but also unlikely, as any rival bidder among ARM's customers or Chinese rivals could face regulatory challenges.

SoftBank shares were not traded on Monday, a market holiday in Tokyo.

(Reporting by Chang-Ran Kim; Writing by Clara Ferreira-Marques; Editing by Will Waterman)

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