Arm’s IPO Pricing to Test Everything From AI Hype to China Risk

(Bloomberg) — Arm Holdings Plc’s long-awaited IPO is set for Wednesday, and investors will be watching to see how owner SoftBank Group Corp. fares in what is expected to be the biggest IPO of the year – and whether it helps restore the equity capital markets.

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The IPO touches on a number of hot-button issues for tech investors, including potentially overzealous enthusiasm related to artificial intelligence, as well as geopolitical risks involving China and its role in the chip wars. The offering even includes the world’s most valuable semiconductor company, Nvidia Corp., participating.

If all goes well, the debut could boost the reputation of Masayoshi Son, SoftBank’s founder, chairman and CEO. Despite Son’s bold proclamations of having a centuries-long investment horizon, shorter-term success has often eluded him, and many of the IPOs his firm has backed have floundered.

SoftBank, which bought Arm seven years ago for $32 billion, has helped grow the chip designer and change its business model. However, the company’s investment in Arm has not been smooth sailing.

Failed sale

In 2020, SoftBank tried and failed to sell the company to Nvidia for $40 billion. The move angered customers who didn’t want to see Arm, which supplies the core technology used by the cellphone industry, anger a single buyer.

With that deal off the table, Arm moved to an IPO with a plan to raise $4.87 billion and be valued at up to $54.5 billion, a 70% markup to the 2016 purchase price. Arm is now looking to exceed that fundraising goal by pricing the IP0 shares a dollar or more above the $47 to $51 target range, Bloomberg News reported.

The design of the stock market listing has been both unconventional and conservative at the same time. SoftBank is only looking to float up to 10% of the shares, which could cause investors to grab the stock.

In another unusual move, it is splitting underwriting fees evenly among the four investment banks leading the offering: Barclays Plc, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Mizuho Financial Group Inc. Raine Group LLC, in which SoftBank owns a stake, is also advising the company. This model was used by Alibaba Group Holding Ltd. almost a decade ago.

Scaling back

The company initially sought to raise as much as $10 billion and secure a higher valuation, Bloomberg News has reported, but scaled back those plans after SoftBank decided to buy the roughly 25% stake held by its own Vision Fund and to keep the float smaller. The shares that changed hands in that deal put Arm’s value at $64 billion, nearly $10 billion more than at the top end of the IPO.

Arm is setting aside more than $700 million of the stock in the IPO to be bought by some of its biggest customers, including Intel Corp., Apple Inc., Nvidia, Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co.

With just $14 billion raised in US IPOs this year, compared to $244 billion at this point in a record 2021, arranging anchor investments ahead of an IPO has also proved popular among other IPO candidates. Instacart Inc. and Klaviyo Inc. also places investors ahead of their IPOs.

The participation of anchor investors, combined with the smaller float, could deter funds from turning stocks into a quick selloff when they begin trading on the Nasdaq.

If Arm’s listing and those of Instacart and Klaviyo go smoothly, others such as software company Rubrik Inc. and the car-sharing platform Turo Inc. follow suit, Bloomberg News has reported. Bankers and other IPO observers say successful debuts by these firms or others this year could spur a fuller IPO comeback in the first half of 2024.

–With assistance from Ian King.

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