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Arm IPO: Will investors pay an Arm and a leg?

UK chipmaker Arm, owned by SoftBank, has finally pulled the trigger on its US IPO, snubbing London and testing the appetite of the market for new issues at a time when sentiment remains cautious, even a little fragile given current trends of rising interest rates. 

Having originally been listed here in the UK as well as on the Nasdaq back in 1998, Arm Holdings was delisted in 2016, when SoftBank acquired it for $32bn. Now looking to list the business for a price tag which could be as high as $70bn, SoftBank hopes to draw a line under an acquisition that has undergone mixed fortunes over the past few years, as well as trying to raise cash at a time when a lot of the value of its recent investments has declined sharply, prompting a loss of $29.5bn in last year's accounts. 

Softbank needed to buy back the 25% of the business it didn’t own to push the IPO through, and having posted such a huge loss, appears to be looking to free up some cash, after five quarters of losses for its Vision Fund.

SoftBank initially tried to sell the business to Nvidia for about $40bn back in 2020, but that deal faced regulatory issues, particularly when it came to national security, as well as fears it could give Nvidia too much of an advantage when it came to controlling the IP for chip designs in everything from mobile phones to data centres. 

The UK-based chipmaker could certainly do with a greater degree of autonomy, with a mixed performance under the stewardship of SoftBank, and swinging to a $65.5m loss in Q1. Total net sales declined 10.8% in the quarter ended 30 June, coming in at $641m, with most of the fall being down to a 19.3% fall in royalty revenues. Arm generates a lot of its revenues from licensing its IP, and the slowdown in mobile phone and other electronic device sales impacted its revenues in the most recent quarter. 

As the chip sector becomes even more strategically important with the development of AI, Arm is looking to develop new chipsets targeted at machine learning. Earlier this year it introduced two new products, a CPU called Cortex-4, and a GPU called G720, which uses 22% less memory bandwidth than the chip it's replacing, as well as better performance.

There are risks, including with its China business which it has little control over, and these were outlined in the proposal document.

As a fully functioning business, there appears little risk that the company won’t do well when it comes to generating cashflow. The bigger question is what appetite there is for a company that is coming to market at a time when revenues have declined, and stock markets look toppy. Investors will certainly want a piece of a business that could see its revenues grow quickly as the enthusiasm for AI increases, and royalties grow quickly. The key factor will be getting the price right, as new investors may not want to pay 'an Arm and a leg'.

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