The red flags surrounding Arm’s IPO

In today’s newsletter:

• Pressure mounts on Arm’s mega IPO

• Microsoft refuses to give up on Activision Blizzard

• The SEC’s private capital crackdown

Arm’s IPO: the final countdown

The biggest US flotation in nearly two years has investors abuzz by the number of red flags in its prospectus.

SoftBank is racing ahead with the initial public offering of Arm, the UK chipmaker it acquired for $32bn in 2016. Prospective investors are struggling to get their heads around a document that underlines the UK chip designer’s exposure to China, with the company warning of “significant risks” in the country.

Managers at four separate funds considering the Arm IPO told the FT that the listing document confirmed some of their fears investing in the global semiconductor industry amid souring relations between Washington and Beijing.

“They are asking the market to buy what they admit are some pretty big China risks but at Nvidia multiples, and that will take some effort,” one manager weighing an investment in Arm said.

Among the risks is the fact that neither Arm nor SoftBank control the operations of its Chinese business, which accounts for nearly a quarter of its revenues.

The complexity around Arm China has raised eyebrows, particularly given the past troubles between Arm and the division. DD readers may remember Allen Wu, Arm China’s renegade chief who — despite being voted out by the board of Arm’s China joint venture in 2020 over “conflicts of interest” — wasn’t pushed out by Chinese officials until April of last year.

Wu remains in control of about 15 per cent of Arm China and he’s launched a number of lawsuits against the company, which if successful could force changes to the unit’s governance and management structure.

Arm China’s internal dramas come at a time when US chip export bans have made it increasingly tricky for Chinese groups such as Alibaba to source advanced foreign chips and designs. That has fuelled Arm China’s domestic competitors which are churning out lower-cost designs.

It’s hard to overstate the pressure SoftBank and its founder Masayoshi Son are under to pull off a premium valuation, as the FT’s Richard Waters has written.

Achieving Arm’s projected $60bn-$70bn valuation is a shot at redemption for Son, who has stepped back from SoftBank’s day-to-day operations to focus on Arm and the listing effort after a string of failed investments including WeWork, Greensill Capital and FTX.

SoftBank has also moved to sell nearly all of its stake in Alibaba, long considered its crown jewel, in an effort to raise cash.

Even with the surge in shares of chipmakers this year, analysts and investors also warn that Arm may struggle to make inroads in the hottest corner of the semiconductor market this year — creating chips for processing vast artificial intelligence models such as OpenAI’s GPT-4, a market dominated by Nvidia.

“It’s hard to see that Arm is going to see any significant growth in [mobile] beyond where they are today,” said Geoff Blaber, chief executive of tech research group CCS Insight. “Nothing is going to be as large as the iPhone, so Arm is a bit of a victim of its own success, in the same way that Apple is.”

Microsoft makes a sacrifice on the regulatory battlefield

Microsoft just won’t give up.

The tech giant has offered its biggest concession yet to British regulators in an attempt to get its $75bn acquisition of Activision Blizzard off the ground after the UK effectively banned the deal over worries that it would harm competition.

On Tuesday, Microsoft and Activision filed a fresh deal proposal to the UK’s Competition and Markets Authority that would grant exclusive rights to France-based games rival Ubisoft to distribute Activision games outside of the European Economic Area.

That’s a significant trade-off for Microsoft, which can no longer release Activision hits such as its blockbuster Call of Duty franchise solely on its cloud streaming service.

The revised deal comes after a controversial move by the CMA in May to block the deal just one day after it was cleared by the European Commission, which said it felt satisfied with the concessions offered. These included an agreement to license Activision games to any cloud game streaming service provider.

The months-long legal gauntlet has drawn the ire of Activision chief executive Bobby Kotick, who said the initial CMA decision meant the UK was “closed for business”, and fuelled concerns over the impact on future investment in the country.

Dealmaking proponents across the UK, including those for Vodafone and Three UK-owner CK Hutchison’s plans to create the nation’s largest mobile network, will no doubt be closely watching Microsoft’s latest attempt to revive the deal.

Still, Microsoft’s new efforts to see this transaction through shouldn’t be seen as a slam dunk for the tech giant. The EU said it is “carefully assessing” whether this new deal should be resubmitted for scrutiny in Brussels. Watch out for action in the US, too.

A private capital crackdown is coming

Private equity firms and hedge funds are gearing up for a battle with regulators over sweeping changes the US Securities and Exchange Commission intends to roll out as soon as this week.

First proposed early last year, the SEC is attempting to introduce new, far-reaching rules that could lead to tens of thousands of decades-old contracts between fund managers and their investors being renegotiated, as well as forcing investment firms to disclose more information around fees.

The reforms are aimed at providing investors with better protections by cracking down on secret side deals some firms strike with investors, as well as limiting charges they can pass on to their backers.

If the SEC adopts the rules at its open meeting on Wednesday, it would amount to the most significant overhaul in more than a decade for an industry that has largely remained off regulators’ radars.

The rules wouldn’t just affect US managers. They would also apply to investment firms across the world who raise money from US investors, including public pension funds and endowments.

Wall Street isn’t preparing to go down without a fight. Some industry groups are threatening to file a lawsuit, arguing that the SEC is overstepping and exerting too much control over terms agreed between sophisticated investors and investment firms.

“If the rules come out as proposed, we feel the SEC would be exceeding its statutory authority,” Jack Inglis, chief executive of the London-based Alternative Investment Management Association, told the FT’s Brooke Masters and Stefania Palma.

Consumer groups have supported the measures, arguing they would bring greater transparency to a $25tn industry that receives trillions of dollars from public pensions and is increasingly targeting retail investors.

For an industry already grappling with slowing investor appetite and higher interest rates, growing regulatory scrutiny is unlikely to be welcomed.

Job moves

• Apollo Global Management’s head of infrastructure Dylan Foo has been fired after “a thorough review determined that he behaved inappropriately towards an Apollo employee and violated firm policies”, an Apollo spokesperson told DD. Olivia Wassenaar, a partner and head of the firm’s sustainability and infrastructure group, has been named as his interim replacement.

• Separately, Apollo has named its longtime adviser David Moffatt as chair of Australia and New Zealand.

• Royal Bank of Canada has hired Credit Suisse banker Tim Perry as vice-chair.

• Michael Mylonas, Jefferies’ head of consumer, food and beverage investment banking in Europe, the Middle East and Africa, is leaving the investment bank, per Financial News.

Smart reads

Post-Hindenburg Billionaire investor Carl Icahn made his name and fortune by using hardball tactics. In May, he was on the receiving end of his own short seller attack. The New York Times reports on how Icahn is dealing with the fallout.

Shadow rule Serial entrepreneur Elon Musk has built a number of multibillion-dollar companies that make everything from self-driving cars to space satellites. The New Yorker reveals the influence he now wields over the US government. 

Texas two-step In July, US prison healthcare company Corizon was facing at least 475 active suits alleging medical negligence. Then the company used a controversial bankruptcy scheme that resulted in all of the cases being stayed, Business Insider reports. 

News round-up

Axel Springer settles lawsuit against former Bild editor (FT)

Northvolt secures investment from BlackRock (FT)

IBM sells weather business to private equity firm Francisco Partners (Reuters)

Thoma Bravo to close $2.3bn ForgeRock deal on DOJ nod (Bloomberg)

India’s wealth managers search out small-town millionaires (FT)

Find someone who loves you like hedge funds love Nvidia (Alphaville)