FTC investigation of Nvidia/Arm deal will only hurt Arm

The proposed Nvidia-Arm merger had another roadblock thrown in front of it when the US Federal Trade Commission’s filed a lawsuit objecting to the $40 billion deal last week.

The acquisition met with almost immediate opposition from UK entities when it was announced in September 2020. Now, 15 months laster the FTC weighs in and has set an administrative trial for Aug. 9, 2022.

“Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets,” said Holly Vedova, director of the FTC’s Bureau of Competition in a statement. “This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.”

This is similar to the objection from UK opponents.

Arm designs chips and licenses the designs for others to build. Nvidia also designs chips but manufactures them, too. If Nvidia succeeds in buying Arm and then tries to undermine its rivals by restricting Arm’s designs, it would be acting in a way that is not only detrimental to its own interests but completely wreck what makes Arm so successful in the first place.

Arm has hundreds of licensees and if Nvidia were caught playing favorites and/or hindering competitors it would be suicide, and with an emerging competitor in open-source RISC-V instruction-set architecture, might drive many customers away.

“If Jen-Hsen [Huang, Nvidia CEO] did anything to favor Nvidia, it would irreparably harm Arm, which is not his goal. It plays into RISC-V’s hands,” said Bob O’Donnell, president of TECHnalysis Research.

“Yes there are concerns about competitiveness,” said Jim McGregor, principal analyst with Tirias Research, “but in my mind it would be foolish to mess with Arm’s position in the marketplace, and its whole value is its being that third-party open-IP [intellectual property] provider. If you take that away there is no value in Arm.”

Kevin Krewell, also with Tirias, thinks the problem is a little more nuanced and personal rather than business. While most tech CEOs are subdued and temperate in public, occasionally you get a few like the late Steve Jobs, Marc Benioff of Salesforce, and Huang who have all the subtlety of a sledgehammer. That may be to Huang’s detriment.

“Everyone who competes with Jen-Hsen knows he’s a tough competitor. As much as he says he has to play fair or it will harm Arm, he has not gotten the trust of the Arm ecosystem. It comes down to personality,” Krewell said.

For its part, Nvidia vows to fight on. “As we move into this next step in the FTC process, we will continue to work to demonstrate that this transaction will benefit the industry and promote competition,” a spokesperson said in an email statement.

“Nvidia will invest in Arm’s R&D, accelerate its roadmaps, and expand its offerings in ways that boost competition, create more opportunities for all Arm licensees and expand the Arm ecosystem. Nvidia is committed to preserving Arm’s open licensing model and ensuring that its IP is available to all interested licensees, current and future.”

Arm and SoftBank lose

Another thing the analysts agreed on is that if the FTC and UK parties get their wish,  Arm and its owner, SoftBank, are hurt the most, which is counter to the objectors’ stated concerns. It certainly doesn’t hurt Nvidia; it would continue on its way, dominating the markets it is already in.

SoftBank has made it clear it wishes to divest itself of Arm. One way or another, Arm is going. The question is where. An IPO is the most obvious choice, but it won’t get SoftBank the $40 billion Nvidia has offered.

“Softbank is the big loser if this fails,” said O’Donnell. “One challenge that has faced Arm is they are grossly underappreciated by the market. If they do an IPO it will be less than what Nvidia would offer them.”

Arm also loses because it won’t get the big financial infusion Nvidia is promising. And nothing can kneecap a company like a drawn out acquisition. The wrangling has already gone on for a year, and now it looks like the FTC could draw it out another year. When Oracle’s purchase of Sun Microsystems got dragged out more than a decade ago, IBM capitalized on it big time and used the uncertainty to steal customers left and right. Arm is in the same boat.

“The longer this goes on the more difficult it is for Arm to negotiate deals,” said McGregor.

So it seems the people purporting to support Arm are doing it considerable damage.