Arm & NVIDIA – The unthinkable pt. IX

An EU investigation was expected.

• The EU is extremely likely to opt for a deeper investigation into the acquisition of Arm by NVIDIA in a move that was very predictable and, in my opinion, does not change the situation in any meaningful way.
• Reuters (see here) is reporting that the EU is ending its preliminary investigation into the deal on October 27^th and that it will extend its investigation by 4 more months to look at the deal in more detail.
• This follows on from the story that NVIDIA had attempted to head off this investigation by offering a series of remedies aimed at assuaging the concerns of the competition authorities.
• If this was the case, then I suspect that NVIDIA offered the same remedies that it offered to the UK Competition and Markets Authority (CMA).
• The CMA did not think much of these remedies stating: “The CMA does not believe any form of behavioral remedy would address the competition concerns identified to the phase 1 clear-cut standard”.
• In plain English, this means that the CMA did not think that NVIDIA had offered enough to ensure Arm’s independence and that further investigations were warranted.
• The culture secretary (whose portfolio also includes digital) will now decide whether to open a government investigation or to throw the ball back to the CMA for a phase II investigation.
• The fact that this will go forward for deeper investigation is not a big surprise and both Arm and NVIDIA have repeatedly warned that this would take some time.
• It looks to me like the EU is following the CMA’s lead on this one which means that when the CMA is happy, the EU will also be happy for the deal to proceed.
• Hence, this is more of a reiteration of the CMA’s position on the deal rather than any new concerns being raised.
• I continue to think that the competition issues are manageable as Samsung’s handset competitors have been purchasing memory, storage, and displays from Samsung for decades.
• Had there been any sign of unfair treatment with regard to the handset business then the business would have stopped in a heartbeat.
• The deal also has some good public support in the form of MediaTek, Broadcom, and Marvel which leaves Qualcomm, Intel, and Microsoft as the opponents.
• There will be further investigations, but I think that these have long been expected and come as no surprise.
• The case for acquisition is reasonably simple in that huge investments are required to develop both Arm’s and NVIDIA’s AI strategies and Arm won’t be able to afford these on its own.
• Furthermore, there is significant overlap meaning that under one roof, there will be synergies.
• The argument against is also very straightforward in that Arm flourished as an independent company and independent ownership was the route by which its long-term independence was guaranteed.
• Hence, the greatest independence of Arm will be achieved either through a completely neutral party (SoftBank) owning it or through a relisting on the London Stock Exchange.
• The simplest solution to SoftBank’s ownership of Arm is to put it back where it found it on the London Stock Exchange with a secondary listing in New York.
• I still think that the deal can close but it remains to be seen how the remedies that NVIDIA puts through to keep the regulators quiet impact the benefits and synergies of having the two companies under one roof.
• The regulators remain by far the biggest hurdle to getting the deal done as the CMA and now the EU continue to demonstrate.