Few companies have as many things going simultaneously in their favour today as the Silicon Valley processor maker Nvidia.
The company’s graphics chips are in furious demand as locked down households turn to video games in record numbers. The cryptocurrency boom has revived demand for high-powered mining rigs that use Nvidia’s technology. Skyrocketing internet use has led to huge investments in data centres, where its AI chips are increasingly becoming a fixture. And forthcoming technologies like driverless cars and delivery robots are also set to rely on its processors.
While not a household name outside the video game world, Nvidia has become one of the world’s most important and highest-valued technology companies, worth over $350bn. Last week it revealed a 61pc rise in sales that sent its shares to a record high.
But the company’s growing success and position in the tech industry could also be coming at precisely the wrong time.
Six months ago, Nvidia announced plans to pay $40bn (£28bn) for Arm, the Cambridge-based microchip designer currently owned by Japan’s SoftBank. The acquisition is the biggest ever involving a British technology company.
But as of today, it remains just a plan. Nvidia has said it expects the deal to take another 12 months to pass the required regulatory hurdles, which are considerable. America’s Federal Trade Commission (FTC) and Britain’s Competition and Markets Authority (CMA) have already opened investigations, while authorities in the EU, China and potentially Korea are also expected to scrutinise the deal. Competition concerns are one hurdle, but the deal could also face opposition on national security grounds and questions about investment in Britain.
In recent weeks, it has emerged that three of the world’s biggest tech companies, Google, Microsoft and Qualcomm, have voiced concerns about the deal.In February, Citigroup analyst Atif Malik put the chances of the deal happening at just 25pc, having previously given it a 60pc chance of passing regulators.
“This looks pretty tough,” says Jay Goldberg, a former chip executive and financial analyst. “Nvidia competes with a lot of Arm licensees, and the US is moving towards a more active regulatory stance towards antitrust.”
Arm Holdings timeline
Arm has a special status in the chip world. Often referred to as the “Switzerland of chips”, it does not make and sell processors, but licenses its designs and software to hundreds of customers such as Apple, Qualcomm and Nvidia itself, which put them in smartphones, laptops, data centres and games consoles. Its designs are especially suited to energy-efficient computing, making them useful for mobile devices but also the booming market for low-power internet of things devices and connected cars.
Listed on the London Stock Exchange until 2016, when SoftBank paid £24bn for it, Arm’s independence has meant any company can buy its designs. Crucially, it has also meant Arm’s customers giving the company sensitive insights into their own business. Under Nvidia’s ownership, some fear that will no longer be the case.
“What is going to be the impact of losing Arm’s neutrality?” says one industry source. “What is going to be their ability to outcompete rivals in gaming or automotive, where people depend on Arm and compete against [Nvidia].”
The FTC has sent legal requests out to Arm’s customers, asking for their perspective on the deal, while the CMA has also asked third parties to comment. The regulators are likely to collaborate with one another, as well as with the European Commission.
Nvidia, for its part, says it is confident the deal will proceed. Its chief executive, Jensen Huang, told The Telegraph that nothing since the deal was announced last September had changed the 18-month window Nvidia has said the takeover will take, and committed to maintaining Arm’s open business model.
“We expected the process to take about 18 months. Nothing has changed there. Our discussions with the regulators have been very constructive and consistent with our expectations,” Huang said.
“Every [customer] I’ve spoken to has not opposed it. They’ve all said that they want to make sure that the deal is open. And that Arm continues to be open. And we’ve assured everybody of that.”
Nvidia may point to the fact that Arm typically signs long-term licence deals, which will continue to be honoured should Nvidia buy the company. For the most part, Nvidia does not compete directly with many of Arm’s customers. It does not make smartphone processors, for example.
Nvidia CEO Jensen Huang
Credit: AP Photo/Chiang Ying-ying
Industry players who may oppose the deal may be seeking to protect their own market position. Qualcomm is the biggest player in smartphone processors, for example, and Intel which lost the smartphone wars to Arm designs, may fear that its lucrative data centre business is under threat.
Goldberg says the deal may look less innocent if regulators have an eye on markets of the future such as connected cars, where Nvidia is more likely to compete directly with Arm’s customers
“Nvidia has very strong ambitions there, as do Qualcomm and Intel and all the other big chip companies. I think it’s very reasonable that if I were an Arm licensee, I’d be very concerned about my ability to access arm [intellectual property] in the future, if I’m competing against their parent company.”
Huang has pointed to Nvidia’s smooth $6.9bn acquisition of Israeli chipmaker Mellanox, which it completed last year despite vociferous opposition from competitors. Regulators in China approved the deal after Nvidia pledged to let Mellanox continue working with other companies. A similar commitment may be required in Arm’s case.
However, there are other concerns than competition. The US has increasingly used microchips as a weapon in its trade war with China, barring American companies from dealing with entities such as Huawei.
Nvidia has promised to keep Arm’s headquarters in the UK, meaning its technology would, in theory, avoid jurisdiction, but regulators may see it differently. Chinese state media and industry representatives have criticised the deal.
Ministers in Britain have their own concerns about the future of Arm itself. The company has over 3,000 employees in the UK, most of them highly paid and skilled. While SoftBank made legally-binding pledges to increase Arm’s headcount, Huang has so far been reluctant to commit to a number. “I will hire as many Einsteins as there are,” he said.
The concerns may be understandable. The ambitious hiring pledges Arm signed up to in 2016 have been a challenge to stick to, and damaged profits. But the job losses that accompanied foreign takeovers such as Cadbury’s sale to Mondelez will loom large in ministers’ minds.
Huang is known as one of the tech industry’s great optimists. He will need more than force of will to win regulators over.
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