SoftBank faces investor scepticism over $50bn price tag for Arm IPO

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Arm is kicking off the roadshow for its initial public offering in New York on Tuesday as top fund managers cast doubt that its owner SoftBank will justify a valuation of around $50bn. 

James Anderson, one of Britain’s best-known tech investors, has warned that the UK chip designer and Japanese conglomerate will face a tough challenge selling its growth story to potential backers this week, saying that it is “not clear that Arm is a critical player” in crucial growth markets such as artificial intelligence and cloud computing. 

Arm dominates the market for smartphone processor designs but plans to list on Nasdaq after reporting flat revenues for last year and a 50 per cent drop in profits for its most recent quarter, as the mobile market slumps. Its IPO is set to be the biggest in the US since November 2021.

“I’ll be very interested in how they sell a great growth story at the stage they’ve got to,” Anderson told the Financial Times. “They may find it more challenging than they thought, despite it being an important company for the [tech] ecosystem.” 

Cambridge-based Arm is targeting a valuation range of $48.2bn to $52.3bn, according to a filing with the US Securities and Exchange Commission on Tuesday. SoftBank paid $32bn to acquire Arm in 2016 but its latest target is below the $64bn valuation implied less than a month ago in a transaction with its own Vision Fund, the $100bn Saudi-backed investment vehicle that the Japanese conglomerate manages.

“I don’t find it compelling,” said another prominent investor who looked at the Arm IPO and doesn’t plan to invest in it. “The issue is what will the growth rate of the company be going forward. Even if you’re optimistic, the valuation doesn’t make a lot of sense. It’s hard to get above a mid-$40bn valuation.”

A third fund manager, who had spoken to senior Arm management within the past two weeks as part of pre-marketing discussions, echoed those concerns, saying that even a $40bn valuation looked generous. “They were convincing enough to show it was worth more than $35bn, but not higher than $40bn,” the fund manager said.

Anderson retired from Edinburgh-based Baillie Gifford last year and recently resurfaced at Lingotto Investment Management, which is owned by the Agnelli family holding company Exor, where he is launching a fund focused on innovation in both public and private markets.

At Baillie Gifford, Anderson and his team vocally opposed SoftBank’s takeover of Arm in 2016 but the asset manager couldn’t find enough shareholders to back an effort to keep Arm independent. 

“It seems like Arm missed quite a lot of opportunities in the past five years,” says Anderson. While the 2016 deal marked a big bet that Arm could help SoftBank become a leader in the internet of things, “the wave that needed to be caught was surely the cloud”, he added.

Arm says it has a 10 per cent share of the market for data centre processors, but it lacks the scale of incumbent Intel or the AI-fuelled breakneck growth of Nvidia.

Anderson added: “It’s not clear that Arm is a critical player in most of the areas of expansion. I don’t see it as having a particular area of strength in AI-type developments.”

He also pointed to Arm’s overwhelming dominance of smartphone processors, which the company warned in its IPO prospectus “may limit opportunities for future growth”. Anderson said: “I don’t really see the company as able to go beyond the phone world, about which I am increasingly sceptical.” 

Some prospective investors in the IPO have also raised concerns over Arm’s exposure to China after the company warned of “significant risks” in a region that accounts for about a quarter of its revenues.

Anderson said: “I would doubt whether, over time, Arm can retain its hold and independence in China.”