The initial public offering (IPO) of Arm followed the ideal scenario for its former sole shareholder, SoftBank, who sold 10% of its shares. While the company had set the starting price of the stock at $51, it closed at $63.59, a 24.7% increase! This operation values the giant of electronic chips, which is still owned over 90% by the Japanese company, at nearly $60 billion. This is the largest tech IPO since the Chinese Alibaba went public in 2014.
Behind this success, SoftBank and its founder Masayoshi Son breathe a sigh of relief. Over the past decade, the Japanese company has made risky investments, resulting in over $30 billion in losses in the last fiscal year. Thanks to this operation, the group is able to recover approximately $5 billion in cash, which will help alleviate some of its debts. Furthermore, it showcases a successful example of its investments to the public, despite missing out on the generative artificial intelligence wave. However, caution is advised for the future: the IPO has benefited from several financial mechanisms that could impact the long-term volatility of the stock price.
IPO atypique
« It is difficult to classify this introduction as a blockbuster. While it is a large amount and the valuation is significant, Arm does not have growth, its promises on AI remain uncertain, and the company was already expensive before being taken private by SoftBank. This is not a return to a position of strength, » summarizes Jacques-Aurélien Marcireau, co-head of equity management at Edmond de Rothschild.
Arm monetizes its chip architecture intellectual property, which is used in 99% of smartphones, embedded internet, and data centers. In summary, it is a prominent technological giant in certain sectors but not yet in the highly popular field of artificial intelligence, contrary to Masayoshi Son’s statements.
The decision to return to the stock market now seemed rather risky. The company is experiencing a slight annual decline with a revenue of $2.68 billion (-0.7%), despite record license sales. Although it is generating profits, they have decreased by half in the last quarter, amounting to $102 million compared to last year. Additionally, there are no major announcements accompanying the group’s IPO: no new architecture or mega-contracts. Essentially, SoftBank is simply introducing an already established company to the market.
Can short-term success be sustained in the long run?
Therefore, if some investors are betting on long-term growth, since Arm architectures are present in billions of chips, its valuation could be significantly overestimated. According to the Financial Times, which compares the company’s situation to the rest of the market, the true valuation of the British company would be around $30 billion, a value lower than the purchase price conceded by SoftBank in 2016. In 2020, Arm had accepted a $40 billion acquisition offer from Nvidia, but the deal eventually fell through in the summer of 2022 due to regulatory actions.
The success of Arm’s first day on Wall Street would therefore mean that the market is buying into SoftBank’s promise on AI and is benchmarking it against Nvidia’s astounding success. However, this first day could also be inflated by temporary conditions that will not be enough to sustain the stock price in the long run. « SoftBank could not afford for the IPO to go wrong, » says Jacques-Aurélien Marcireau. And for good reason, Masayoshi Son considers Arm to be the jewel in his portfolio of stocks and a company he wants to support in the long term. A failure would have impacted his credibility as an investor and potentially could have had a domino effect on the rest of his holdings.
SoftBank a fui les risques
Given the stakes, the Japanese company has implemented safeguards. First precaution: it ensured the support of Arm’s largest clients such as Nvidia, Samsung, Apple, and Alphabet (Google) prior to the operation. They committed to purchasing at least $735 million and up to $1 billion worth of shares. In addition to securing investments, these commitments allowed Arm to demonstrate its technological neutrality and its ability to unite the ecosystem.
Deuxième précaution : SoftBank n’a introduit que 10% des parts de l’entreprise, alors qu’en moyenne sur les dix dernières années, les entreprises introduisent entre 16% et 29% de leurs actions, d’après la plateforme financière Dealogic. Et encore, d’après le New York Times, Masayoshi Son visait plutôt autour des 5%, avant d’être contraint par ses créanciers, dont les collatéraux [l’actif déposé auprès du débiteur en cas de défaillance de l’emprunteur, ndlr] s’appuient sur ses parts dans Arm, à mettre plus sur le marché.
L’intérêt ? « Plus le flottant [la quantité d’actions disponibles sur le marché, ndlr] est réduit, plus l’entreprise a la possibilité de faire monter artificiellement le prix », rappelle Jacques-Aurélien Marcireau. L’exemple du constructeur automobile vietnamien VinFast, entré en Bourse pendant l’été, illustre bien la situation. En ne proposant que 1% de son capital aux marchés publics, l’entreprise a atteint 85 milliards de dollars de valorisation le jour de sa première clôture, soit plus que des géants sectoriels comme Ford ou General Motors malgré des performances financières moindres. Un mois plus tard, son action a chuté de plus de 50%, au point de descendre bien en dessous du prix fixé. En conséquence, la valorisation du groupe s’est effondrée. Le flottant introduit par Arm est plus important que celui de Vinfast, mais son faible volume comporte aussi des risques de volatilité du cours.
Finally, SoftBank could also hope for indirect support from investment bankers, these investment advisors who earn commissions based on their clients’ investments. More generally, a whole section of the financial sector had an interest in ensuring the successful introduction of Arm, in order to anticipate a revival of IPOs.
SoftBank, embourbé dans une suite d’échecs
SoftBank’s IPO provides some relief, but it is far from being out of the woods. The Japanese company achieved success in the early 2000s with excellent investments, particularly in the Chinese e-commerce giant Alibaba and local telecommunications. Building on this track record, the company created a more than $100 billion investment fund in 2017 to invest in future technology. The Vision Fund was established with several controversial actors, including the Saudi Arabian sovereign fund (with $50 billion). Following the short-term success of this initial fund, Masayoshi Son doubled down in 2019 with Vision Fund II, which had $108 billion. Meanwhile, his company continued to invest in its own funds.
The Vision Fund quickly faced its first major setback with the collapse of WeWork in 2019. This was followed by the downfall of pizza robot company Zume, Indian hotel chain Oyo, and the FTX fiasco. As a result, the Vision Fund incurred losses of $30 billion in the last fiscal year. Furthermore, the fund has yet to recognize all of its unrealized losses.
Alongside these disastrous bets, SoftBank has also missed the shift towards generative artificial intelligence. The Japanese company has made some moves in the field of AI, but mostly on a small scale, embedded in electronic devices. In 2018, Masayoshi Son even declared to investors that he was focusing on one theme, AI, as recalled by the Wall Street Journal. And since 2020, SoftBank has positioned itself as the « investment company of the AI revolution. »
In five years, the company has spent $140 billion on over 400 startups. The problem? According to PitchBook, SoftBank only has shares in one out of the 26 generative AI unicorns [startups valued at over a billion dollars]. The climax of the disaster: SoftBank had the good idea to buy $4 billion worth of Nvidia shares in 2017, which they sold in 2019 due to a downturn in the market, with negligible profit. Since then, the stock price has multiplied by eleven. Now, Masayoshi Son indicates that he wants to keep his stake « as much as possible, for as long as possible. » But his company’s finances could disrupt this plan.
