SoftBank's $32 billion buyout of ARM, a company that only made around $1.5 billion in revenue last year, is a deal that many may conclude makes little sense for the buyer. SoftBank's shares plunged upon news of the acquisition as investors bemoaned further turmoil for the Japanese giant, while ARM soared as new British prime minister Theresa May optimistically hailed the news as evidence that Brexit might not be such a disaster after all.
But if things work out the way SoftBank hopes — using ARM's chip design chops as a springboard to make it a leader in the Internet of Things — its flamboyant, controversial founder and CEO Masayoshi Son will be able to add another big name to his list of successful long shots. And if they don't, well, it's actually still pretty hard to see too much of a downside.
SoftBank is often characterized as a telecoms company, which is true to the extent that the primary consumer business that carries its name is a Japanese mobile carrier, and the biggest news it's made in the West has been the acquisition of Sprint. But that doesn't quite tell the story of how Son has run the corporation through the past few decades, making countless risky investments that have often paid off big — and why ARM, with an influence on the technology industry that is difficult to overstate, is likely to be its next success.
After buying a 51 percent stake in Clash of Clans maker Supercell for around $1.5 billion in 2013, SoftBank recently sold off 84 percent of that company to Tencent for $8.6 billion. SoftBank also recently announced it had sold around $10 billion of its shares in Chinese e-commerce giant Alibaba; Son's initial $20 million investment gave SoftBank almost a third of a company now valued at over $200 billion.
SoftBank Mobile itself is a bet borne of an acquisition, with Son buying Vodafone's struggling Japanese arm for about $15 billion in 2006. That bet begat another as SoftBank went all-in on the iPhone in 2008, which other Japanese carriers ignored for years. With the benefit of hindsight, this looks like a myopic decision on their part, but it really would have been a leap of faith to step away from Japan's vibrant and established mobile ecosystem, as SoftBank did. And for a while, it honestly was a pain to use an iPhone in Japan despite its obvious advantages; it just didn't handle messaging, the web, data transfer, or even QR codes as well as native Japanese solutions.
Son was the only Japanese mobile CEO to recognize the iPhone opportunity
Son's insight was to realize that these were temporary drawbacks and offer the iPhone at steep discounts, ballooning SoftBank's subscriber count during the years that its competitors held out. NTT Docomo, Japan's largest carrier, only started selling the iPhone in 2014, yet Japan has been one of the phone's biggest markets for years. Son was the only Japanese mobile CEO to recognize the inevitability of the iPhone.
For all the lofty potential Internet of Things synergies espoused upon the deal's announcement, then, ARM could be an attractive target for SoftBank simply by virtue of being a solid investment. While the company isn't a huge moneymaker right now, its status as the provider of intellectual property essential to virtually all mobile devices means there's no way it's going to drop in value in the short term as the general shift to low-power, efficient, connected products continues.
The Internet of Things is certainly part of this shift, and even as the smartphone market plateaus there will be countless more applications for ARM's technology — it's so entrenched in its position that it's hard to even imagine who or what might take the company's place. SoftBank has pledged to let ARM run itself the way it always has while doubling its UK headcount and expanding in other areas; it's not hard to see the parent company increasing licensing fees somewhere down the line, but it seems unlikely. ARM's status as a neutral provider of low-cost yet essential IP to more or less the entire technology industry is a large part of its success, and SoftBank probably isn't interested in changing that any time soon. Assuming ARM continues to operate under these principles, it's a relatively safe investment.
Son's instincts don't always pay off
The direction of SoftBank, however, has been under close scrutiny in Japan following the high-profile departure of Son's right-hand man Nikesh Arora, formerly of Google and once considered likely to become the next SoftBank CEO. Arora was considered a steadying hand on Son's more reckless instincts, leading more modest investments in Indian startups like Snapdeal and Ola Cabs. The cashing out on the Supercell and Alibaba stock, for instance, was reportedly encouraged by Arora in an attempt to reduce the company's huge debts of around $115 billion. SoftBank had around $25 billion in cash before those sales.
Son's intrepid instincts don't always pay off. The protracted takeover of Sprint, for example, which cost SoftBank $22 billion in 2013 in an ambitious attempt to break into the US telecoms market, has turned out to be a failure — with T-Mobile leapfrogging it as the country's number three carrier since the deal was closed. Son said yesterday that he tried to sell Sprint last year but couldn't find a buyer, underlining the mammoth task facing anyone attempting to turn the beleaguered carrier around — whether that's Son or someone else.
ARM, on the other hand, is much less of a risk. Even though SoftBank is paying a 43 percent premium on each share, exchange rate movements mean it could likely make a multibillion-dollar profit simply by selling the company for the same yen amount in a few years — and that's the worst-case scenario for an acquisition that is seriously unlikely to see its relevance diminish any time soon.
From ARM's point of view, SoftBank is a relatively neutral buyer that shouldn't change much for its important customers, like Apple, Qualcomm, and Samsung. It's the kind of company that would find itself difficult to sell without compromising its business model, so an attractive offer from a company like SoftBank is about as good a return for its shareholders as it could hope for.
Son is a man who claims to have a 300-year plan for SoftBank, one element of which is investing in 5,000 companies by 2040, so it's reasonable to assume that he's truly interested in ARM for the long term. But even if he isn't, ARM won't be another Sprint. Far from a downtrodden consumer brand on its last legs, ARM is a low-key company happy to toil away behind the scenes and work on the future of the tech industry while growing in potential. By owning it, SoftBank instantly becomes one of the most important and impactful tech companies in the world — and really, that's just what Masayoshi Son always wanted.