Arm Is About to Find Out What It Is Really Worth

Chip designer Arm Holdings is kicking off its pre-IPO roadshow this week with an eye on pricing the initial public offering as soon as Sunday, with trading to begin on Monday, September 14. It is pretty clear already that the controlling stockholder, Softbank, will not reach its target valuation for the company of $60 billion to $70 billion.

Arm cost Softbank $32 billion in 2016. Three-quarters of the chip designer’s shares were kept by Softbank, and the other quarter was sold to Softbank’s venture capital subsidiary, the Softbank Vision Fund for $8 billion. Last month, Softbank purchased Vision Fund’s 25% stake for a reported $16.1 billion. At that price, Arm would be valued at around $64.4 billion.

The Arm IPO is not expected to reach that valuation. Softbank reportedly wants to raise between $5 billion and $7 billion by selling 10% of Arm in the IPO. That figure puts the value of Arm at between $50 billion and $70 billion, with $60 billion at the midpoint. Reuters reported Monday that Softbank wants an IPO price of $47 to $51 per share.

Softbank has persuaded some of Arm’s biggest customers (Apple, AMD, Cadence, Google, Intel, Nvidia and Synopsis) to invest $25 million to $100 million each in the IPO. That will certainly help line up more investors.

But enthusiasm for the IPO is tempered by Arm’s recent financial performance and worries about how the souring relationship between the United States and China will affect Arm’s business in the Middle Kingdom. Arm’s revenue dipped by 1% in its most recent fiscal year after jumping 33% in the prior year. That kind of movement makes it difficult to compare Arm to already listed firms, weighing on the IPO price.

The company’s operating margin has slipped, largely due to Softbank CEO Masayoshi Son’s fondness for investing heavily in research. And it is no secret that investors favor profits over spending these days.

A third headwind to the IPO’s pricing, according to Reuters, is the valuation multiple. Using Nvidia, Cadence and Synopsis to represent its peers, Arm has solid exposure in the currently hot AI space. The current enterprise value of the three firms is about 25 times their operating profit. If Arm had the same multiple, its enterprise value would be $33 billion, rising to $35 billion after net cash is added in.

So, Softbank just paid for 25% of Arm at a valuation of $64 billion, it appears to be willing to settle for a valuation of around $54 billion, and, by at least one measure, Arm’s value is around $35 billion. The investment bankers have their work cut out for them.

The four banks leading the IPO (Barclays, Goldman Sachs, JPMorgan Chase and Mizuho) will each receive 17.5% of the estimated $100 million in fees for the IPO, 70% of the total. The other 24 banks working on the IPO will each receive about 3% or less of the fee pool. They are all about to earn their money.

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