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Nvidia Arms Up for Trouble — Heard on the Street

By Dan Gallagher 

Forty billion dollars will buy Nvidia a world-class semiconductor research and licensing business. It might also buy the rapidly ascending chip maker a whole new kind of trouble.

Nvidia confirmed Sunday that it would pay $40 billion to acquire Arm Holdings from SoftBank. The deal, which has been churning through the rumor mill for several weeks, is Nvidia's largest by miles, nearly six times as large as last year's acquisition of Mellanox. Fortunately, Nvidia's gravity-defying stock makes for valuable currency. The company is kicking in only $12 billion in cash, just a little above what was on its balance sheet as of two months ago.

But the main risk to this deal was never financial. U.K.-based Arm provides the basic designs for the low-power central processor chips that form the main brains of devices such as smartphones and tablets. Companies including Apple, Samsung and Qualcomm license those designs for their own chips. The upshot is that nearly every company that makes processors for mobile devices and other types of chips has a licensing relationship with Arm. And a lot of those are chip makers that either compete with Nvidia, or are likely to in the future.

As such, Nvidia will need to strike a delicate balance between running its own chip business and allowing Arm's a certain degree of independence--all while trying to fully realize the value of its $40 billion outlay. Both companies realize this. Nvidia Chief Executive Jensen Huang said Sunday that he plans to fully maintain Arm's "open licensing and neutrality," while Arm CEO Simon Segars added that it would be "value destructive to do anything else."

But that is easier said than done. Qualcomm's efforts to run both a chipset and licensing business have enmeshed the company for years in lawsuits and battles with regulators. And Nvidia's strength in artificial-intelligence computing that has made the company a Wall Street darling also makes it the name to beat for others targeting this lucrative field. In a note to clients Sunday night, Stacy Rasgon of Bernstein said Nvidia's "dominance will be extended into virtually every important compute domain" if it can complete this deal.

Therefore, even completing the deal is a big "if." The acquisition will need the approval of regulators across the globe. That includes the U.S. and China, where semiconductors have become a battleground in an escalating trade and technology war. It took Nvidia more than a year to push through its relatively uncontroversial acquisition of Mellanox. Mr. Huang wouldn't even put a rough guess on how long it would take to get the necessary signoffs for buying Arm. The chance of a long, drawn-out battle for approvals is high.

And the real risk for Nvidia is that getting the world's biggest governments on board may turn out to be the easy part. If the company can't find the right balance between reassuring Arm's licensees and making the most of its investment, the real winners from this deal could be the lawyers.

Write to Dan Gallagher at dan.gallagher@wsj.com

 

(END) Dow Jones Newswires

September 14, 2020 05:14 ET (09:14 GMT)

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