<img alt="" border="0" width="1" height="1" src="http://track.ft.com/track/track.js?javascript=disabled"/> <img alt="" border="0" width="1" height="1" src="http://stats.ft.com/si/track.gif?WT.js=No"/>

Inside Business

July 24, 2016 5:21 pm

Arm sale is a case of a board seeking a cash premium

Boards have a duty to think more widely when it comes to bid approaches
Logos of ARM Holdings Plc and SoftBank Group Corp sit on a background during a news conference in London, U.K., on Monday, July 18, 2016. SoftBank Group Corp. agreed to buy ARM Holdings Plc for 24.3 billion pounds ($32 billion), securing a slice of virtually every mobile computing gadget on the planet and future connected devices in the home. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

ince SoftBank announced its £24bn bid for Arm Holdings last week, much of the talk has been about how the UK is too willing to sell its few world-class businesses.

The chip designer is far from the first iconic British company to fall to an overseas buyer. Its sale has prompted calls in some quarters for tighter controls on such takeovers. While welcoming Softbank’s bid, Theresa May’s new government plans to review future foreign deals under the umbrella of an industrial strategy. Some would like these to be subjected to a wider “public interest” test.

But there is a bigger question posed by the Arm deal: why the board sold the high-tech company to begin with? After all, Arm was not exactly crying out for disposal. It is not as if the company had any particular need for additional capital. Despite the needs of a growing business selling sophisticated chip designs primarily to makers of smartphones and handheld devices, the group throws off plenty of cash.

Nor was there any particular industrial advantage to be had by pairing up with the Japanese conglomerate. Softbank’s business has no real overlap with the UK chip designer’s operations and anyway it has undertaken to keep Arm as a freestanding operation. All the British group has really done is to swap a multitude of shareholders and put just one in their place.

It is hard to escape the conclusion that the business was not sold out of any pressing commercial necessity. The reason the board nodded through the takeover was principally to give the investors an immediate 40 per cent premium on their stock.

It is almost an article of faith among boards that when bidders come knocking, a deal should happen so long as the would-be buyer pays a reasonable “bump” on top of the prevailing market price. This reflects a culture that is preoccupied with short-term share price performance. It leads corporate bosses to think of themselves as what Professor John Kay has termed “meta fund managers”. They see their job as being to secure advantage through trading companies and assets, as much as building value through making and selling high quality products over the longer term.

It is an attitude that has turned Britain into one of the world’s most open markets for corporate control, and hence a prime conduit for foreign direct investment. Between 1998 and 2005, for instance, the UK managed to turn over companies with a value equivalent to 22 per cent of its gross domestic product — more than twice the US level.

But it is also one that leads investors to churn their holdings of shares too reflexively. The hyperactive M&A that results is not ultimately just a tax on productive capital through the fees scraped off by intermediaries. Poorly executed deals — of which there are many — can stub out innovation and lead to the loss of talented and valued staff.

Cash premiums are in any case not always the best outcome for the underlying beneficiaries — the individual savers and pension funds that invest in UK stocks. For instance, it can be hard to know whether they are cashing out at the right level. Market prices for corporate shares are, after all, set at any point by a small number of marginal buyers.

In the case of Arm, these holders have been focused on signs that its main market — smartphones — is slowing. Set against this insight is the huge amount of detailed analysis on value that Softbank’s chairman, Masayoshi Son, and his team will have been doing. They believe that Arm’s portfolio of low power-consuming chips means that it will seize a big share of networked infrastructure and the “internet of things”.

Nor does the premium necessarily compensate holders for the risk of finding a replacement for the disposed-of asset. Arm, for instance, offered UK investors some all-too-rare exposure to global technology markets. Not only did this provide welcome diversity in a market top heavy with commodity investments. Over the past decade, Arm has delivered average annualised shareholder returns of more than 30 per cent. That is way above the 6 per cent delivered by the FTSE 100 share index of which it forms a constituent part.

Takeovers and mergers play an indispensable role in capitalism, shifting assets into the hands of those who are most able to extract value from them. But they can also be a drug, offering fees to intermediaries and financial incentives to executives who prioritise the extraction of short-term value. In cases such as Arm, boards have a duty to think more widely when it comes to bid approaches. Before reaching for the easy solution of a cash premium, they should use a little more imagination and think about trading assets rather less.

Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

4 people listening


By submitting this comment I confirm that I have read and agreed to the FT Terms and Conditions. Please also see our commenting guidelines.

The reason for this deal happening is no secret. The key execs at ARM are getting life changing cash sums from this deal. That's why it's def going to happen. Multi-Generational, life changing cash in hand. 

ARM's share price fell from £13 at its 2000 peak to a 30p low when the feature phone boom ended, even though shareholders could see it would one day make a fortune from the Smartphone (then called the mobile Internet). The problem was there were many years between the end of the Feature Phone's growth era and the start of the Smartphone. The Smartphone's growth era has now ended and the 'Internet of Things' is more a story of slow and gradual adoption, IoT chips are also far simpler and lower price than cores for Smartphones, although one day the volume should be much higher. Had ARM remained independent, it might have faced a major sell-off as profits fell before the IoT business became big enough to make up for Smartphone business declining. Would Mr Son's massive due diligence be able to grasp this? Their record with Sprint does not suggest they always get everything right. Many other firms (like HP when it bid for Autonomy & Palm) don't necessarily get the right answer from their research either

This article misses the main point; the reason why SoftBank acted when it did and the seemingly fabulous sum it offered. It was because of the crash of Sterling. 

Apparently “regaining sovereignty” means helping foreigners seize our best assets.

I dare say that shareholders of Autonmy are rather glad they took the cash. Time will tell whether this is a good deal or not.

ARM is in a better situation than Autonomy was, but given the PE ratio of ARM I think they've sold out at the top and that this is arguably the better deal for shareholders.

@Bargain basement No question there is a good short term gain, but the point of this article is whether the short term gain outweighs the long term loss. For example, f ARM has been achieving 30% returns against an average 6% for the FTSE, how are pension funds going to replace this company with a company that can give the same returns within their investment portfolios.

Research shows that 80-90% of take overs do not achieve anything like the improvements in returns that are advertised. Usually the combined company losses market share, people lose their jobs and if the company goes to an overseas buyers, often corporate tax revenues fall.

In fact if the share price before the take over is a fair price, then surely a large percentage of the premium is unwarranted.

Since when did "sell at the top" become the wrong mantra for investors? And since when did the 'market', which is how stock prices are set, ever take a long term view? So should criticism of the Board really be directed at the short-termism of the 'market'? Hasn't the board behaved exactly as the 'market' forces it to?

As a long term ARM shareholder I think this is clearly a lousy deal. With both its low-power IoT chips and also forthcoming datacenter-grade, many-core chips from licensee vendors, ARM had the potential to keep growing fast for years to come. A quick selloff is therefore not in shareholders' interest, even if the share price had been stagnant for the past year. Technology investment requires a lot of patience to be profitable. And as the author rightly points out, it will be very hard to find a replacement investment that is the same quality as ARM.

Be interesting to see if rev growth has continued to slow in Q2 this week (was down to 14% in Q1). If so the Board might not look so clueless. If mobile continues to plateau IoT really had better work pronto. But just like ARM stole mobile from Under Intel's nose there is no guarantee ARM will rule the roost in IoT. As US tech giants compete to commoditise hardware to drive network traffic (when did you last buy a TomTom?) consider also the threat from open source. Could just as easilt be a Sprint rather than an Alibaba...

And there you go - rev growth slows to 9% from 14% - the stock would have been trashed today. Maybe he bought at the top. Respect to the Board : ) 

A 40% premium is about 2 years' worth of revenue growth at today's rates. For a company that has maintained that kind of growth rate for decades, and given the strategic importance of ARM to the technology sector, it's hard to conclude from these facts that the Board have extracted a particularly good deal for shareholders or shown the necessary resolve or far sightedness.  The company is cash generative, cash rich, with an unparalleled  set of strategic relationships and at the heart of the semiconductor industry.  So why sell to someone who from his reported comments seems to think he's getting a great deal, the attractiveness of which is amplified by the low exchange rate - as well as thereby depriving the UK of its leading and figurehead technology company?

As a shareholder in ARM I am frustrated at having to sell out. The company is very profitable and is on a growth trajectory. The share price - stuck at around £10 - has not moved in a way that reflects the the underlying business for some time, but I have taken the view that, given time, it would do so. A 40% bid premium is not much in the grand scheme of things for a company like ARM. I shall be sorry to have to say goodbye. I should have willingly stayed for the long term.

@Tribunus Plebis Do you have to sell ? Presumably you can always vote against the takeover ? Of course, if enough shareholders disagree with you, then SoftBank can force you to sell the minority interest, but I can see a valid reason why others would be on your side. It isn't entirely self-evident that Softbank's bid will triumph. 

@tb. I agree, not a done deal yet. Would have liked to see a bit more backbone from the ARM board.

@Tribunus Plebis There was none. They get a bonus for a takeover don't they? It's probably in the contract. Bring it up with the shareholders, see who is really benefiting the most, and if you can form a lobby group to stop it...then do so! 

Lobby UK markets for investment in the "internet of things" mentality instead. If you care it isn't too late. 

The biggest shareholders are probably just professional funds managing capital on behalf of clients though so therefore the 40% is what they will take. 

Short term success on the balance sheet reigneth supreme. 

it's not over until it is over, though.

In the worse case: it becomes a morality tale on the times we live in.

@Tribunus Plebis In the best case: The new owners love the company and create something wonderful. I wouldn't be quick to condemn it either, the proof will only be in the coming 20 years.

Will see what the history books say about that. 

Me personally: I cannot help but see this as purely about MandA clauses in board contracts since the takeover was needless. I would have thought, though, that if you are playing with "the best" of something in a specific country, you do not just sell it. 

fault of legal system too for not providing the checks and balances to stop any Tom Dick or Harry for making such decisions. 

Something like ARM should probably receive similar protection to BAE.

It seems the new crew at ARM are fools, pure & simple.  They were unfitted to take the decision for which they and they alone had responsibility.  A decision taken on a matter of national importance, in a regrettably short period of time more suited to deciding where to go for a weekend break.  

Are they are such fools that they believe themselves to be masters of the universe?

They have proceeded without the views of their employees being taken into account.  In that sort of business, the team is more important that the Board of Directors comprising just a few fat cats.

It remains to be seen if the shareholders are equally foolish, and sell up.  They do not have to.  If they are of sound mind, they should decline to sell, but decide to reinforce success.  And make sure they remove these ARM Board clowns whom they appointed in a fit of absent mindedness.

Professor John Kay's new book "Other People's Money" should be compulsory reading for all who hold a licence to operate in the City.


Sign up to #techFT, the FT's daily briefing on tech, media and telecoms.

Sign up now


Sign up for email briefings to stay up to date on topics you are interested in