SoftBank $32bn ARM acquisition a bet on IoT
ARM chips need to dominate the internet of things (IoT) in the same way as it has smartphones if the $32bn SoftBank paid for the the UK firm is to be justified. Processors based on ARM's architecture can be found in 95% of smartphones, according to the company's own estimates. However, global smartphone sales have levelled off this year with iPhone shipments declining for the first time. More than 50% of new licenses signed by ARM int he second quarter were for its Cortex-M class of processor, which is used in IoT applications such as smart homes.
SoftBank, one of the largest telecommunication companies in the world, just bid $32 billion to acquire ARM Holdings, designer of the chips found in everything from your iPhone to the Nest smart thermostat. On the surface, such an eye-popping number nearly sounds reasonable. After all, some 95 percent of smartphones have ARM-based chips, according to the company's own estimates. But as ubiquitous as smartphones may be, sales of new devices are slowing down. For SoftBank's bid to make sense, ARM will have to win the Internet of Things the way it did smartphones.

If ARM is unfamiliar, it’s because you don’t interact directly with ARM products. Its core business isn’t making the processors that are in your devices; it rose to prominence by drawing up the blueprints for them, and licensing those to outside companies. Its intellectual property is near-ubiquitous in mobile; by the company’s own estimates, ARM-based processors can be found in 95 percent of smartphones.

As you might imagine, being integral to the smartphone ecosystem has been a very good business over the last decade. ARM's stock price prior to the SoftBank takeover bid (which sent it shooting skyward by over 40 percent) had already more than quadrupled since 2010.

It’s tempting to see that dominance alone as validation of SoftBank’s aggressive ARM valuation. In 2016, however, the smartphone market has leveled off. Even sales of the iPhone have fallen. That’s potentially scary news for a company that designed the tech behind nearly nearly two billion mobile chips that shipped in the first quarter of this year alone.

So ARM may be getting out before the plateau turns into a cliff. But SoftBank isn't throwing $32 billion at a fading business.

“ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the ‘Internet of Things,’” said SoftBank Chairman and CEO Masayoshi Son in a statement announcing the acquisition bid.

In other words, SoftBank wants ARM not for the company’s most visible offering, but for its reach in across an entire class of products still in its relative infancy. It’s a huge bet, one that depends on the Internet of Things to pay out.

Kiyoshi Ota/Bloomberg/Getty Images

ARMs Wide Open

And it's not crazy to think it might work.

Smart home and embedded devices are still finding a foothold with consumers, but it’s a legitimate market, one that’s already generating revenue for companies like ARM.