Arm/SoftBank: delays on Chinese joint venture transfer will dent valuation

For SoftBank’s Masayoshi Son, the Arm listing and how much it can fetch matters more than ever. Ballooning investment losses at the Japanese tech investment group means the float of its portfolio company Arm offers an important source of funds — and a shot at redemption for Son after a string of failed investments. But execution risks are growing.

Beijing is perhaps the only other party as interested in the UK-based chip designer’s future as Son. Much has changed in the months since Son backed a future Arm listing in the US. US chip export bans issued in October means it has become increasingly hard for Chinese companies, such as ecommerce giant Alibaba, to source advanced chips and designs. This applies to Arm’s most advanced designs, used in the latest mobile devices and data centres around the world.

China has made some progress with homemade semiconductor designs. The number of Chinese chip design firms adopting the Risc-V open source architecture has grown rapidly. Local tech giants including Alibaba and Tencent have been investing in processors that could replace Arm designs.

Yet for now, Arm’s chip architecture dominates mobile devices in China. That may explain why China has delayed Arm’s plan to offload its local joint venture. Since May last year, Chinese officials have declined to process paperwork confirming Arm China’s transfer to SoftBank’s new Vision Fund entity.

The unit contributes plenty of revenue to Arm. Sales growth in China has been strong, up more than a third last year, despite slow exports and falling local demand for consumer devices amid strict lockdowns. Losing this income, which once accounted for around a fifth of total sales, would dent Arm’s valuation.

Regardless of the political issues, further delays create uncertainty over the timing of the listing, which Son cannot afford. SoftBank reported an investment loss of $5.4bn in the December quarter. Its share price has dropped a tenth in the past month.

SoftBank acquired Arm for $32bn in 2016. Now, given a chip industry downturn, even with the strong sales from the China unit, Arm would fetch less than $34bn when valued at an average industry multiple. SoftBank is reported to have expected a valuation of at least $60bn for Arm last year. Son and investors looking forward to the Arm listing should drastically lower their expectations.