Why ARM? [Semiconductor M&A]

② ARM Supporting Samsung Electronics' Vision to Become No.1 in 2030 System Semiconductors
Helping Not Only Mobile AP but Also Strengthening Foundry Competitiveness

[Asia Economy Reporter Kim Pyeonghwa] "If a meaningful stake is secured, it would be a jackpot." This is the reaction pouring in from the industry as Samsung Electronics officially announced the ARM big deal. ARM is a semiconductor intellectual property (IP) company, and it is evaluated as a key card that can greatly enhance Samsung Electronics' weak system (non-memory) semiconductor competitiveness. Of course, since market opposition could be significant, the possibility of a consortium form or acquiring a minority stake rather than a sole acquisition is also being discussed.

ARM's revenue last year was $2.7 billion (about 3.8421 trillion KRW). Looking only at the revenue scale, one might question the acquisition price rumored to be as high as 100 trillion KRW. However, ARM's main source of income is royalties received from providing design blueprints to fabless (semiconductor design) companies. In the first quarter of fiscal year 2022 (April to June), royalties accounted for 64% of ARM's revenue ($719 million, about 1.0231 trillion KRW), amounting to $453 million (about 644.6 billion KRW). It is a subscription-based model, which is a hot topic across industries. ARM currently provides design blueprints not only for central processing units (CPUs) and graphics processing units (GPUs) but has recently expanded its business to include server architectures previously led by Intel, providing designs to most fabless companies and receiving royalties.

Especially in the mobile application processor (AP) market, known as the brain of smartphones, ARM's influence is dominant. Over 90% of mobile APs on the market are based on ARM designs. Companies producing mobile APs, such as US-based Qualcomm and Apple, Taiwan's MediaTek, and Samsung Electronics, are mostly ARM clients. Each company customizes ARM's designs to embed in their products or sell in the market. This is why the deal is considered very attractive for Samsung Electronics, which is struggling in the mobile AP business.

According to market research firm Omdia, Samsung Electronics ranked 5th in the global mobile AP market in the second quarter of this year with a 7.8% market share. Although Samsung holds the top spot in global smartphone sales by volume, it struggles in the crucial mobile AP sector. Qualcomm dominates premium smartphone products, while MediaTek holds the mid-to-low-end smartphone market, making it difficult for Samsung to expand its share. Samsung Electronics has its own mobile AP product line called the Exynos series, but due to performance issues and market preferences, Qualcomm's Snapdragon series outperforms it, leading Samsung to equip many of its premium smartphones with Qualcomm chipsets.

Professor Eom Jae-cheol from the Semiconductor Electronics Department at Youngjin College explained, "ARM sells licenses to multiple companies, so it can be seen as a universal IP. Samsung, Apple, and Qualcomm are all ARM-based, but differences in performance arise depending on how each optimizes the design. Therefore, if Samsung acquires ARM design know-how, it could gain significant advantages."

Some predict that if Samsung strengthens its fabless competitiveness by acquiring ARM shares, it could raise concerns among foundry customers. However, depending on the extent of Samsung's stake, it could actually benefit the foundry business. Samsung has announced a vision to become the number one system semiconductor company by 2030, including foundry, and ARM could provide momentum to pursue this goal comprehensively.

Photo description: Samsung Electronics Hwaseong Campus view [Provided by Samsung Electronics]

According to market research firm TrendForce, Samsung Electronics held a 16.3% share of the global foundry market in the first quarter of this year, ranking second. The top player, Taiwan's TSMC, holds 53.6%, creating a significant gap. TSMC started its foundry business earlier than Samsung and has secured numerous licenses through various semiconductor IP companies, including ARM, providing them to fabless customers and receiving orders tailored to its processes. The market views Samsung's lack of IP acquisition as one reason for its inability to close the market share gap with TSMC.

There is also an assessment that Samsung's acquisition of ARM shares could help strengthen the competitiveness of Korea's semiconductor industry, which is heavily weighted toward memory semiconductors. Nam Geon-wook, vice chairman of the Semiconductor Industry Structure Advancement Research Association, said, "Korea lacks original technology, so many domestic fabless companies design using ARM IP. If Samsung acquires ARM shares, there could be indirect benefits for the domestic industry."

From Samsung Electronics' perspective, acquiring ARM shares is advantageous in many ways, but a sole acquisition is considered difficult. Samsung's cash assets stood at 125 trillion KRW as of the second quarter this year, sufficient to cover the absolute cost of acquiring ARM. Although the maximum acquisition price is expected to reach 100 trillion KRW, SoftBank, ARM's parent company, is facing funding difficulties, which could lower the acquisition price to the previously estimated $40 billion to $60 billion (about 56 trillion to 84 trillion KRW). This means that if Samsung shows the will, the acquisition itself would not be difficult to pursue.

However, if a sole acquisition of ARM proceeds, it must undergo M&A reviews by regulatory authorities in countries such as the US and the UK, where the possibility of failure is high. Previously, Nvidia's attempt to acquire ARM in 2020 failed to clear regulatory hurdles due to antitrust concerns. Competitors like Microsoft (MS) and Qualcomm also opposed a sole acquisition by a single company, arguing that ARM technology is used by most semiconductor companies and should maintain a neutral status like Switzerland.

Especially since Samsung Electronics is the world's number one semiconductor company, regulatory and competitor opposition is expected to be stronger. This is why alternatives such as consortium forms or minority stake acquisitions are attracting attention. Intel (February), SK Hynix (March), and Qualcomm (May) have all expressed willingness to participate in a consortium to acquire ARM. The market is discussing options such as Samsung forming such a consortium to secure a major business position or acquiring a minority stake when ARM pursues an initial public offering (IPO).

Earlier, SoftBank, ARM's parent company, shifted toward an IPO after Nvidia's acquisition attempt failed earlier this year. It recently pursued listings on the London Stock Exchange and the New York Stock Exchange but, due to unfavorable conditions in the UK, plans to list ARM on the US Nasdaq in March next year. Some speculate that since ARM is based in the UK, it might still list on the London Stock Exchange. SoftBank and its Vision Fund hold 75% and 25% of ARM shares, respectively, but due to repeated investment failures by the Vision Fund, SoftBank is facing financial difficulties and may proceed quickly. SoftBank Chairman Masayoshi Son is scheduled to visit Korea next month to meet Samsung Electronics Vice Chairman Lee Jae-yong to discuss ARM-related matters. There is speculation that he may also meet with SK Hynix.