The stock to watch in Asia for the rest of this year is pretty clear: It's SoftBank Group T:9984 and (SFTBY) .
In fact, there are two stocks involved, but one is yet to trade. SoftBank is preparing the initial public offering for Arm Holdings, the British chip designer. It's the most-anticipated stock debut this year, and should be the largest on U.S. markets in two years.
Demand has been strong for the offering. That may allow SoftBank to price the listing, due to take place on Thursday, at the high end of the US$47 to US$51 range it has been seeking in discussions with investors. The underwriters are due to close their books today.
The IPO should also restock the warchest for SoftBank, which is set to embark on another buying spree to invest in new tech, with a particular focus on Artificial Intelligence. The stock launch could provide SoftBank with dry powder to the tune of US$65 billion, allowing it to start playing "offense" once again, as founder Masayoshi Son puts it.
SoftBank established a valuation of US$64 billion for Arm, but with a transaction that was anything but at arm's length. SoftBank set that price by buying back the 25% stake held by the Vision Fund that SoftBank operates. The deal suited both sides, with the Vision Fund getting full value for its stake at once, rather than having to trickle out stock in sales after the listing. And SoftBank got to set a lofty price, conveniently exactly double the US$32 billion that it spent to buy Cambridge-based Arm in 2016.
There was concern that SoftBank would have to set its sights a little lower, and a US$51 price would lead to a market value of US$54.5 billion. Now SoftBank is in talks with investors to see if it can push the price higher than the solicited range, with a decision based on whether expressions of interest on the stock are really confirmed.
SoftBank will retain 90.6% of its holding in Arm, so it is also able to keep the price high due to the relatively small free float. It should raise US$5 billion with the offering. The IPO valuation is substantially higher than the US$40 billion price tag that SoftBank had set when it attempted to sell Arm to Nvidia (NVDA) , one of its key customers. That deal was in February 2022 by pressure from antitrust regulators.
Besides Nvidia, other top customers have also expressed interest to be cornerstone investors in the offering. Apple (AAPL) , Advanced Micro Devices (AMD) , Google's parent Alphabet (GOOGL) and Samsung Electronics KR:005930 are keen to get their hands on the shares but equally keen to establish a continued - and perhaps preferential - pipeline for Arm designs.
Arm doesn't make chips itself but sells its semiconductor blueprints to chipmakers. With an increasing number of electronics companies attempting to make their own chips, they have an expanding customer base.
For now, Arm's bread and butter is designing chips for smartphones. But with phone sales down, that business is tapering off, resulting in a 1% slide in sales last fiscal year. It also appears to have limited room for growth. So, with SoftBank directing the company to reinvest all profits in new business lines over the course of its years of ownership, Arm is now exploring expansion into chip designs for uses in new tech fields such as Artificial Intelligence and cloud computing.
While revenue fell from US$2.7 billion to US$2.68 billion last fiscal year, the royalties it recoups from selling chip designs continue to rise. They increased 7.7% from US$1.56 billion in the prior year to US$1.68 billion last year.
Arm's IPO will be the largest since 2021, when the electric SUV and truck maker Rivian Automotive (RIVN) listed at a valuation of US$66.5 billion in November 2021. While Rivian's shares took off on debut, climbing from the listing price of US$78 north of US$100 on the first day of trade, they've sunk back following a string of scandals, and now stand at just US$23 and change, giving the EV maker a market cap of US$22.4 billion.
Arm's business is much more time-tested than that of Rivian. The concern is whether it can successfully expand away from smartphones and into AI as well as chips for vehicle operating systems. Another worry is Arm's exposure to China, which generates 24.5% of sales. Arm China, an independently operating business, is in fact the British company's biggest customer, and risks being caught in the crossfire as both the United States and China restrict investment in and access to tech companies, particularly chips.
Arm sold more than half of Arm China to Chinese state-linked investors in 2018, leaving it with a minority position. It then went through a bizarre episode where Arm China's board attempted to remove the CEO of the Chinese company over what it called conflicts of interest, only for him to refuse to leave. That CEO, Allen Wu, kept hold of the company chop necessary to formalize his dismissal, and hired security to prevent any replacement taking office. He was finally replaced after two years of confusion.
Wu still has lawsuits pending against Arm China, but the overhang while he remained in place has been removed. The Arm listing will recharge SoftBank's dry powder since it will be able to borrow against its Arm stake, with banks keener to lend once a firm market price is established.
SoftBank has already built up US$35 billion of that potential US$65 billion stash through a string of asset sales, most notably its shares in Alibaba Group Holding HK:9988 and (BABA) . It was an early-stage big bet on Alibaba that gave SoftBank, originally a software distributor, its original fortune to allow it to switch gears and become the largest tech-focused venture-capital investor in the world. A US$20 million stake placed in Alibaba in 2000 turned into a US$60 billion position at the time BABA listed in 2014.
Borrowings against the BABA position helped SoftBank rapidly ramp up its investments, ultimately leading it to become the largest tech-focused venture-capital investor. It will be looking to deploy its newly generated capital into next-gen investments over the course of the next few years.
After the pronounced selloff in tech, Son was worried he had lost his touch. A string of bad bets on the likes of WeWork (WE) and DiDi Global (DIDIY) left the company reeling, and caused the Vision Fund to realize a massive US$32 billion loss for the year that ended this March. It has since returned to profitability, as I explained in early August.
Thanks to the prospects of the Arm listing, SoftBank shares are up by almost one-third (31.6%) since late May. But they remain more than one-third lower than the peaks they set in early 2021, before the "tech winter" set in.
Look for the Arm listing to give SoftBank a boost, but more importantly to give it the bank balance necessary for its next round of investments. I've called SoftBank the "most exciting company in Japan" before, and these new developments ensure that it should be once again.