Nvidia's $40 billion ARM deal is all but dead

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Nvidia's $40 billion ARM deal is all but dead

Nvidia's NVDA $40 billion deal to purchase the U.K.-based chip developer ARM from SoftBank is all but dead. At least that was taken away by Susquehanna senior equity analyst Chris Rolland from Nvidia's leadership during the company's Q 3 earnings call on Wednesday.

Rolland told Yahoo Finance Live that some of the commentary on Wednesday put the final nail in the ARM coffin.

Nvidia made the $40 billion deal public in September 2020, with expectations that it would be completed within 18 months, or the first quarter or 2022. During the earnings call, however, it laid out the regulatory obstacles it needs to clear, including enhanced regulatory scrutiny in the U.K., where ARM is based. The deal would have to be approved by China and the deal.

In a Phase 2 review of the transaction's impact on competition, the regulators in the UK and the EU did not approve the transaction in Phase 1 of their review processes, and in the UK began a Phase 2 review of the transaction's impact on the UK's national security interests, the company said in a statement following its earnings report.

Although regulators and some ARM licensees have expressed concerns or objected to the transaction, we continue to believe in the merits and benefits of the acquisition to ARM, its licensees, and the industry. The tech industry players, including Microsoft MSFT Qualcomm QCOM and Google GOOG, GOOGL, have pushed back against the proposed deal.

ARM licenses its designs and software to third parties, including Qualcomm, Apple, Google, and Nvidia, which use those designs to develop their own custom chips. ARM is considered a neutral player in the tech industry because it partners with such a wide variety of companies. The fear is that if Nvidia purchases ARM, that neutrality will fade away. Nvidia has pushed back against that claim.

Nvidia CEO Jensen Huang told Yahoo Finance Live that the benefit of ARM being part of Nvidia is that we could accelerate their R&D scale. As you know, ARM is very successful in mobile devices. We could help them be more successful in all other areas of computing. If the deal is done, investors aren't bothered, as Rolland says. On Thursday, the shares of Nvidia jumped more than 8% after the company s blockbuster Q 3 earnings report, during which Nvidia announced revenue grew by 50% year-over-year.

Rolland said that the deal is not going to happen, because of the fact that it was already baked in the stock.

It is not as though Nvidia hasn't worked with ARM in the past and won't in the future. Nvidia had built its own ARM-based server, as pointed out by Rolland. Its Tegra CPU is the ARM-based chip that powers the Nintendo Switch console.

He said they could license this, and they have had some success on the CPU front in the past.

Rolland says that Nvidia is much better off than other chipmakers because of the fact that Nvidia is able to deal with the ongoing chip shortage and global supply chain crunch.

Nvidia is in a very fortunate position compared to its peers. That is because of its dual supply and sourcing strategy. They hit both Samsung and TSMC foundries for supply and put them in a much better position overall, Rolland said.

That doesn't mean Nvidia chips will be easier to get anytime soon. The chip shortage will limit supply over the next year, according to Huang.

Rolland says that it s largely justified as for Nvidia's sky-high valuation — the company's price to earnings ratio stands at 113.45% for the next 12 months.

He said that this is a company that has been consistently beating and raising and taking huge share in potentially huge markets, and that is what the excitement around the stock is about. None of the Nvidia CEO Huang said AI is the'most powerful technology force the world has known.

None of the Nvidia CEO: We don't have any magic bullets to deal with chip shortage.

Nvidia isn't the top of the world, but its rivals are gaining steam.

Email Daniel Howley at dhowleyyahoofinance.com via encrypted mail at danielphowley protonmail.com, and follow him on Twitter at DanielHowley.