CMA to investigate Nvidia’s takeover of Arm

Would regulatory intervention stop the indomitable rise of Nvidia in its tracks?

January 7, 2021

Nvidia is looking to buy the UK chip designer from SoftBank
But it is far from a done deal with regulatory hurdles across multiple jurisdictions

The Competition and Markets Authority (CMA) has announced plans to investigate Nvidia’s (US:NVDA) $40bn (£30bn) takeover of chip designer Arm Holdings. Ahead of launching a formal probe later this year, the watchdog has invited “interested third parties” to submit their views on how the merger could impact competition in the UK.

"The chip technology industry is worth billions, and critical to many of the products that we use most in our everyday lives," says CMA chief executive Andrea Coscelli. Indeed, Arm’s technology is used by 70 per cent of the world’s population – in everything from smartphones to cars – and its customer roster includes the likes of Apple (US:AAPL), Microsoft (US:MSFT) and Samsung (KR:005930).

Arm has traditionally been seen as a neutral blueprint provider and this merger could compromise its position as the ‘Switzerland of chips’. The CMA says it will assess whether the takeover would create an incentive for Arm to “withdraw, raise prices or reduce the quality of its intellectual property licensing services to Nvidia's rivals”.

Nigel Toon, chief executive of UK semiconductor start-up Graphcore, has been particularly scathing in his assessment of the deal, telling the Financial Times that it “smacks of anti-competitiveness”. Mr Toon believes that chipmakers would be less willing to work with Arm if it comes under the control of Nvidia: “If you were a chip company, would you want to go and share your road map for the next four years ahead with Arm, knowing that they are part of Nvidia and you’re effectively sharing your road map with Nvidia?”

Graphcore: eyeing up Nvidia’s crown

Hermann Hauser, co-founder of Arm, has suggested that rather than being sold to Nvidia, Arm could be combined with Graphcore to form a UK technology titan. Graphcore makes ‘intelligence processing units’ (IPUs) which are specifically designed to enable machine learning and artificial intelligence. The Bristol-based company believes its IPUs represent the next stage of development for processors and claims that its chips are up to 100 times faster than the latest graphics processing units (GPUs). Training its sights on Nvidia, Graphcore asserts that its IPU-M200 system “significantly outperforms” Nvidia’s A100 GPU.

The threat to Nvidia is not immediate as Graphcore is still in the start-up phase. The company’s most recent accounts show that it generated just $10m of revenue in 2019, and as it continues to invest in research and development and expanding its headcount, its operating loss widened to $100m. But its long-term potential shouldn’t be underestimated. Graphcore has already attracted the interest of some big names, counting Microsoft and Dell (US:DELL) as customers. It also recently raised $222m from investors including Baillie Gifford and Draper Esprit (GROW). The latest funding round values the company at $2.8bn, up from $1.95bn in February last year. An IPO could be on the cards, although Mr Toon says it is unlikely to go public this year as it focuses on growth. Whether it chooses to make its debut in London or New York remains to be seen.

Graphcore’s ascent comes as chipmaking giant Intel (US:INTC) wrestles with its future. Beset by delays and struggles to keep pace with customers’ needs, Intel has lost its edge to competitors in recent years. Indeed, while the production of its next generation 7 nanometre (nm) chip has been kicked back by six months , Taiwan Semiconductor Manufacturing Co (TSMC) (TW:2230) is already putting out a 5nm chip. It is little wonder that customers such as Apple (US:AAPL) are now shifting away from Intel to Arm technology, developing their own chips in-house and handing the manufacturing duties to the likes of TSMC.

This means that despite burgeoning global chip demand, Intel’s shares have been a comparative laggard as other semiconductor stocks take off.

As Intel looks to reinvigorate its fortunes, it is reportedly considering following in the footsteps of Nvidia and Advanced Micro Devices (US:AMD) and outsourcing more of its manufacturing activities. According to Bloomberg, it has held talks with rival foundries Samsung (KR:005930) and TSMC over outsourcing production for chips that would be released from 2023. The news comes as activist investor Third Point urges Intel to separate its design and manufacturing operations, which could help lower costs and make for a nimbler business. As we recently noted, such a move could prove beneficial to semiconductor equipment maker ASML (NL:AMSL). Intel chief executive Bob Swann is expected to lay out Intel’s outsourcing plans when the company reports its earnings on 21 January.

Will the Arm takeover proceed?

The scrutiny of the Arm deal is not unexpected. When the deal was announced back in September, Nvidia estimated that it would take 18 months to clear regulatory hurdles. The US Federal Trade Commission (FTC) has already initiated its own probe although Chinese regulators may be the hardest to appease as this takeover is another proxy battle in the US-China trade war. The deal hands a lot of power to an American company at a time when the US is trying to limit Chinese access to semiconductor technology.

Mr Coscelli says that the CMA “will work closely with other competition authorities around the world to carefully consider the impact of the deal and ensure that it doesn't ultimately result in consumers facing more expensive, or lower quality, products." The regulator may well be looking to flex its muscles post-Brexit, particularly as it has advocated taking a tougher approach to tech deals. In addition to a competition inquiry, the UK government could choose to intervene on national security grounds. The Arm takeover could be the test case for the new powers proposed in its National Security and Investment Bill.

Nvidia is looking to purchase Arm from Japanese conglomerate SoftBank (JP:9984) which scooped up the chip designer back in 2016. SoftBank’s assurances at the time were sufficient for the UK government to allow the takeover to proceed. Emulating that approach, Nvidia’s chief executive, Jensen Huang, went on a charm offensive last year, promising to keep Arm’s headquarters and intellectual property registered in the UK and to hire more engineers. An Arm executive told Reuters that Nvidia plans to set up firewalls to prevent it from accessing confidential information on Arm’s customers and gaining early access to Arm’s products.

As countries look to shore up their technological sovereignty, it isn’t out of the realm of possibility that the Nvidia-Arm tie-up will be blocked. While that would be a disappointment for Nvidia, the graphics processing specialist isn’t short of growth drivers. True, its momentum may not be as spectacular without the addition of Arm, but it will nonetheless play a pivotal role in the future of technology as we shift ever closer to the ‘Internet of Things’ and dawn of AI-based computing. Buy at $527.

Last IC View: Buy, $520, 26 Nov 2020