Arm/SoftBank: float will not decide whether the City sinks or swims

The City of London is panicking. Some grandees believe its credibility will be badly damaged unless British chip designer Arm relists there. UK prime minister Liz Truss is wooing Arm’s Japanese owner SoftBank in a last-ditch effort to salvage a deal.

Sceptics should ask: if Arm was so great for London, why did investors sell it in the first place?

When SoftBank acquired the Cambridge-based company for £24bn in 2016, analysts and commentators cheered. This column applauded the 43 per cent premium, hailing the deal as a testament to British innovation.

Arm’s low-power chip architecture conquered smartphones and tablets. The consensus back then was that further growth might be difficult. Pundits argued for taking the cash.

Those judgments have aged surprisingly well.

True, Arm’s sales increased 35 per cent last year to $2.7bn, while ebitda hit $1bn. Vehicle electrification and connectivity are proving lucrative.

Yet Arm is still a relative minnow. Only 10 out of 76 companies in the US’s S&P 500 technology index have smaller revenues. This comparison matters because the company may go for a dual listing in the UK and US. Businesses that make chips are typically worth more than Arm, which just sells licences for designs.

If investors think Arm can keep on growing rapidly, it should achieve a premium valuation. At 10 times forward sales, Arm would have a $35bn price tag. That would allow it to squeeze into the bottom of the list of 40 biggest stocks in the index, though it is well below sluggish rival Intel’s $125bn enterprise value. The price would hardly be a ringing endorsement of SoftBank’s acumen.

It is debatable whether Arm can sustain its margins and growth. It is an important business, but it is valuable mainly because few others can do what it does. Its dominance is now under threat from Risc-V, an open source architecture that is gaining ground. Arm’s sale, not its return, might end up being the deal the City wants to be remembered for.

The Lex team is interested in hearing more from readers. Please tell us what you think about the Arm listing debate in the comments section below.