Analysts: FTC Makes Nvidia-Arm Deal Unlikely, Arm’s Future Uncertain

Analysts say the new FTC lawsuit makes the Nvidia-Arm deal very unlikely and would leave Arm with few good options for its future. ‘Unfortunately, in this situation, in order to grow, [Arm needs] a lot of money because they need to be investing in parallel categories beyond mobility,’ one analyst says.


Analysts said the Federal Trade Commission’s lawsuit to block the Nvidia-Arm deal is making the merger seem much more unlikely than it already was while casting more uncertainty on the future of Arm.

The pessimistic view is held by several analysts, with GlobalData analyst Lil Read saying Nvidia’s $40 billion deal to acquire British chip designer Arm “is on its last legs” and a Citi analyst reportedly downgrading the merger’s chances of happening to a mere 5 percent.

[Related: Pat Gelsinger: Intel Will Be ‘More Ecosystem-Friendly’ Than Nvidia]

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The FTC announced its lawsuit Thursday against Nvidia, Arm and Arm’s current owner, Japan-based SoftBank Group, saying the merger between the two chip companies would “harm competition” in three global markets where Nvidia competes using Arm-based products: high-level advanced driver assistance systems for passenger cars, SmartNIC data processing units, and Arm-based CPUs for cloud service providers.

An Nvidia spokesperson told CRN Thursday that it plans to contest FTC’s lawsuit and prove that “this transaction will benefit the industry and promote competition.” An Arm spokesperson deferred any comments on the FTC lawsuit to Nvidia.

Ben Bajarin, CEO and principal analyst at Creative Strategies, told CRN that the FTC lawsuit makes the Nvidia-Arm deal unlikely, although he was already pessimistic about it because of scrutiny by the United Kingdom’s Competition and Markets Authority, which initiated a phase two investigation in November over concerns that the deal would significantly lessen competition in data centers and other markets.

“I haven’t felt this was going to go through for a long time, but I think those points [made by the U.K. government] were feeding it. So this is just, I think, the final straw,” he said.

Bajarin said the Competition and Markets Authority and now the FTC have put forward a persuasive argument that the Nvidia-Arm deal would be anti-competitive. That’s because Nvidia would need to find a way to profit on the $40 billion it plans to spend to acquire Arm, and that would likely conflict with Arm’s open licensing model and assurances it would remain fair to Arm licensees that compete with Nvidia, Bajarin added.

“I think the challenge is how could Nvidia a monetize a $40 billion investment with a company that makes a billion dollars a year? They’re not going to wait 40 years,” he said. “So the concern from all of the [Arm] partners who have chimed into this, all the governments, is purely [that Nvidia is] going to use this to their own financial advantage and, in some degrees, lock competitors out of markets they want to go into because they need the money and there’s economic logic there.”

Nvidia is asking Arm licensees to trust that it will keep the licensing model open and fair, Bajarin said, but that’s not enough assurance for the U.S. and U.K. governments as well as licensees that have spoken out against the acquisition, which include Qualcomm and, reportedly, Microsoft and Google.

“I think the U.K. report brought out a number of critiques that I think made it very clear that a licensee can’t own it, largely just because of both the validation and approval that’s required by Arm for any architectural licensees on every one of their architectures to be validated before they ship,” he said. “Not saying Nvidia would do this, but they would have the ability to then block or force change if they didn’t like anything that an architecture licensee does with their design and validation.”

If the Nvidia-Arm deal fails, Bajarin said, there is concern that Arm wouldn’t have many great options for its future stewardship because its current owner, SoftBank Group, remains keen on divesting it as part of a drive to sell off businesses that aren’t growing fast.

“Licensing businesses are just not giant growth businesses. The ramp is very, very small at times. It could be years before they grow. And unfortunately, in this situation, in order to grow, they need a lot of money because they need to be investing in parallel categories beyond mobility,” he said.

Nvidia has positioned itself as the answer for allowing Arm to invest deeper into new categories, like data center and automotive, but if the Nvidia-Arm deal gets swatted down, it seems unlikely any licensee of Arm technology would be allowed to acquire the chip designer, according to Bajarin.

Arm going public again would not be a great idea either because Arm’s business model is not one that would fare well under quarterly or yearly pressure from investors: “When you’re pressured by the market, you do things that aren’t always great for your company,” Bajarin said. The private equity route also wouldn’t be attractive for similar reasons, he added.

What could be more feasible, according to Bajarin, is if a group of Arm licensees were to form a consortium that acquires the chip designer, an idea that Qualcomm CEO Cristiano Amon has floated. However, turning Arm into what would essentially be a standards body owned by several companies that compete with each other would come with its own issues, he added.

“I understand how those become political and then things never happen because standard bodies take a lot of time,” Bajarin said.

Patrick Moorhead, president and principal analyst at Moor Insights and Strategy, cast even greater doubt on the idea of a consortium owning Arm.

“Can you imagine trying to get Apple, Nvidia, Qualcomm, Samsung, Amazon, Google, Huawei, etc. to agree on anything quickly? The consortium idea is not executable,” he said on Twitter.

Lack Of New Investment For Arm Would Hurt Ecosystem, Analyst Says

Daniel Newman, founding partner and principal analyst at Futurum Research, said he previously thought the Nvidia-Arm deal was a “coin toss,” but now he believes it doesn’t have much of a chance with the FTC lawsuit adding to existing scrutiny from the U.K. government and European Union.

“That’s just the confluence of opinion right now,” he said. “Obviously, these multilayer probes can be problematic and delay deals of this size from getting done. It’s always hard to get approval from China. The U.K., of course, is looking at this with great scrutiny because of Arm being really one of its most important innovation and intellectual property assets.”

Newman said he understands the arguments made by the FTC and other regulators, but he’s concerned that a lack of major investment in Arm could hurt efforts by smaller companies that want to compete with the industry’s two x86 chipmakers, Intel and AMD, as well as Amazon Web Services, Apple and other large companies that have the resources to make competitive silicon at scale.

“The real question is can Nvidia and Arm prove that they can create a more competitive, more robust ecosystem by making the Arm offering more competitive with x86?” he said. “Because the challenge for Arm is it lacks the resources. SoftBank doesn’t want to put the resources behind it. It doesn’t have the size to invest in R&D to compete. And so it’s depending on all of its licensees to kind of do its R&D.”

The absence of more research and development dollars for Arm has mostly benefited large companies like Amazon and Apple, Newman said, which is why he thinks regulators should consider thinking about competitive concerns surrounding the Nvidia-Arm deal through a different lens: Intel and AMD currently have an oligopoly over x86 chip architectures, so he sees a more well-financed Arm as a way to enable a broader set of choices in the industry.

“When it comes to competition, who are we really trying to protect?” he said. “It’s the question I think that has to be asked here because are we protecting the x86 guys? Are we protecting the Arm licensees? Does giving more strength to the limited x86 ecosystem help? I’m not saying it doesn’t. I’m saying that’s the question that has to be asked and answered.”

Nvidia’s biggest challenge is that regulators don’t trust that the company will keep an even playing field for all Arm licensees, Newman said, which is based on the observation that large companies typically acquire intellectual property to strengthen their own platforms.

But Newman thinks regulators shouldn’t oppose the Nvidia-Arm deal based on what they think will happen and should instead keep a close eye on the combined company when the deal goes through.

“On the premise of companies historically acting badly when given the power to do so, there’s a reason to feel skeptical that Nvidia would do the right thing. But based upon current anti-trust law and precedents, actually not allowing this to go through based on what might happen really doesn’t match the letter of the law,” he said.