NNeconium drops its pursuit of Arm

NNeconium drops its pursuit of Arm

Wall Street was surprised by the news that Nvidia Corp. will drop its pursuit of chip designer Arm Ltd.

Since the deal was announced, Raymond James analyst Chris Caso wrote Tuesday morning that the deal was unlikely to be completed - a view that we believe was widely accepted due to regulatory or competitive factors.

Nvidia NVDA and Arm owner SoftBank Group Corp. 9984 announced late Monday that the deal would be called off, with SoftBank preparing to take Arm through an initial public offering and Nvidia preparing to pay more than $1 billion.

A graphics-chip specialist stated in a Securities and Exchange Commission filing that it would take a $1.36 billion breakup charge that included a $1.25 billion prepayment to Arm. If the deal didn't close by September 2022, the breakup charge would have automatically been triggered.

The final nail in the coffin was seen by the U.S. Federal Trade Commission's unanimous decision to sue to block the deal in early December. Regulators in the EU and the U.K. were also investigating the deal.

All the news: SoftBank plans to IPO for ARM after Nvidia calls off the largest chip acquisition in history.

The move was roundly expected and did not change the view of the stock, as shown by the shares of Nvidia last up around 1% in afternoon trading. The deal was widely regarded as dead in January, and all that remains was for Nvidia to publicly admit it. Before the late-January reports, the shares were nearly 7% above their level.

Another sign that the news was so widely expected: many analysts did not even bother putting out notes on the news, and those that did say, well, yeah, of course. Citi Research analyst Atif Malik, who has a buy rating and $350 price target, said Wall Street was largely expected that the deal would not pass regulatory muster while Nvidia plans to move into CPUs, which was announced at about the same time as the Arm merger.

Nvidia plans to launch its CPU, Grace, in 2023 and with the 20-year ARM license, Malik said it can pursue this strategy without owning Arm.

Others said that pursuing the deal showed Nvidia's commitment to play more of a role in the CPU market dominated by Intel Corp. INTC and Advanced Micro Devices Inc. AMD, with its Grace CPU, and that with a 20-year license from Arm, Nvidia didn't need to own the chip designer.

The most important part of the initial announcement that Nvidia was pursuing Arm was that it signaled Nvidia's intention to participate more fully in the CPU market, thereby increasing Nvidia's total addressable market, said Raymond James Caso, who has a strong buy on Nvidia.

Stacy Rasgon, who has an outperform rating and $360 price target, said he was not sure if anyone expected the deal to close at this point.

As far as Nvidia goes, while owning Arm could have been wonderful, we don't believe they had to have it either, said Rasgon. The deal was designed to help create and drive a broader ecosystem for Arm particularly in the datacenter, according to our opinion. Nvidia presumably can and will continue their stand-alone efforts, although it is possible that these efforts could have been accelerated by owning the asset, according to Rasgon.

The stock is up 73% over the past 12 months, compared to a 14% gain in the PHLX Semiconductor Index SOX, a 16% rise in the S&P 500 index SPX, and a 1.5% gain in the tech-heavy Nasdaq Composite Index COMP. 35 of the 44 analysts who cover Nvidia have buy weighted ratings, seven have sell ratings and two have an average target price of $345.21, according to FactSet data.