U.K. government to block $40 B chip deal with Nvidia

The U.K. considering blocking a takeover of Arm Ltd. by Nvidia Corp. due to potential risks to national security, according to people familiar with the discussions.

Nvidia, the largest chip company by market capitalization, announced in September a $40 billion contract to purchase Arm from Japan's SoftBank Group Corp. as part of an effort to spread its reach in the rapid semiconductor market. SoftBank has been selling assets to raise cash for buybacks and fresh investments in startups.

In April, U.K. Culture Secretary Oliver Dowden asked competition and market authority to prepare a report on whether the deal could be regarded anti competitive, along with a summary of any national security concerns raised by third parties.

The assessment, delivered in late July, contains worrying implications for national security and the U.K. is currently inclined to reject the takeover, said a person familiar with government discussions. The U.K. is likely to conduct a deeper review into the merger due to national security issues, a separate person said.

No final decision has been taken, and the U.K. could still pass the deal alongside certain conditions, the people added. Dowden is to decide whether the merger needs further examination by the U.K. s competition authorities.

'We continue to work with the U.K. government through the regulatory process, said an Nvidia spokesperson in a statement. 'We look forward to their questions and will resolve any issues they may have.

Shares in Nvidia were little changed on Tuesday, while SoftBank fell 1.5% to Tokyo on Wednesday.

If regulators do block the deal, it will impede Nvidia's ability to dominate the computing chip market, but we believe investors already had low expectations that the deal would be completed.

A spokesperson of the CMA declined to comment. A United Kingdom official declined to comment.

Arm owns the most widely used set of standards and designs in the $300 billion chip industry. Its technology is at the heart of many mobiles and it is finding an increasing role in computing, including in server machinery that runs corporate and government systems.

The Cambridge-based company acted as a major party, which licenses chip blueprints and sells its standards to a wide range of neutral technology companies, many of whom are fierce competitors. The ownership by Japan's SoftBank, which acquired it in 2016 and which doesn't overlap with Arm's customers, has preserved the neutrality.

It is unclear how the proposed switch from Japanese ownership to Americans will affect U.K. national security. Since SoftBank's acquisition, however, the semiconductor technology has become a new focus for politicians.

The chip industry became a central part of the US President Donald Trump's trade war with China and the U.S. has taken action to restrict that country's access to know-how which is mainly owned by the United States companies that dominate the industry in one area or another. U.S. government restrictions on the sale of chip technology to China already govern some of Arm's inventions, as the company has operations there.

Newport Wafer Fabric Ltd. based in Wales is currently under review from the U.K. Government after it agreed to be sold to a Chinese manufacturer for around 63 million pounds.

Prime Minister Boris Johnson has moved to protect critical national infrastructure including locking out Chinese-owned Huawei Technologies Co. and he is also planning to press ahead with a flagship nuclear project without Chinese funding, according to a person familiar with the matter.

Arm's position at the heart of the chipmaking industry means the deal has already raised concerns, because Nvidia directly competes with Arm's customers like Qualcomm Inc. Intel Corp. and Advanced Micro Devices Inc. Others have publicly endorsed the change of ownership.

Some of Nvidia rivals have said they would be ready to buy Arm to help it continue independently if Nvidia isn't permitted to invest in the company. The deal is also subject to regulatory approvals in Canada, the European Union and the U.S.

Nvidia has pledged to invest heavily if takeover is complete and maintain it's reach. But any takeover deal is likely to attach conditions such as maintaining the 3,000 U.K. staff and keeping company headquarters in Cambridge.

Av Arm chief executive Jensen Huang has said he remains confident regulators will approve the company's acquisition of Nvidia.

Ever since SoftBank acquired Arm for $32 billion in 2016, its founder Masayoshi Son has positioned the chip designer as the cornerstone of his strategy of investing in AI-driven startups. Arm accounted for about 10% of SoftBank's net asset value as of the end of March, its third-largest shareholding after Alibaba Group Holding Ltd. and the Vision Fund investment unit.

Son has been backing startup investments via his Vision Fund and the money from the Arm sale could help finance that effort. SoftBank has committed to paying $2 billion whether the acquisition goes through or not.

If the deal is blocked by regulators, SoftBank is likely to pursue an IPO of ARM, according to two people familiar with the matter. ARM CEO Simon Segars said in July of his blog: "The combination of Arm and NVIDIA is a better outcome than an IPO.