TOKYO/TAIPEI -- SoftBank Group has agreed to sell U.K. chip designer Arm Limited to U.S. chipmaker Nvidia in a cash and stock deal worth up to $40 billion.
The sale of Arm, which SoftBank bought in 2016 for $31 billion, is the latest in a string of major asset sales by the Japanese conglomerate. Announcing the deal on Monday, SoftBank said the combination of Arm and Nvidia will create a computing company "that will lead the era" of artificial intelligence.
"Nvidia is the perfect partner for Arm," said Masayoshi Son, SoftBank chairman and CEO. "Since acquiring Arm, we have honored our commitments and invested heavily in people, technology and R&D, thereby expanding the business into new areas with high growth potential. Joining forces with a world leader in technology innovation creates new and exciting opportunities for Arm."
The sale of Arm, which is owned by SoftBank subsidiary SoftBank Group Capital Limited and the Vision Fund, is expected to face intense regulatory scrutiny and could take 18 months to complete.
SoftBank will receive $12 billion in cash, including $2 billion paid to Arm at signing, and $21.5 billion in Nvidia stock. Another $5 billion will be paid to SoftBank in cash or stock if certain Arm financial targets are met, while $1.5 billion in Nvidia shares will be issued to Arm employees.
SoftBank and the Vision Fund will end up with a stake of between 6.7% and 8.1% stake in Nvidia.
Shares in SoftBank rose 9% in early trading in Tokyo, buoyed also by reports that executives were exploring the possibility of taking the Japanese tech conglomerate private.
Nvidia is the world's leading graphic processing chip group, serving a wide range of customers in the PC sector. It wants to become a leader in A.I. computing, where graphic processing becomes more important in fields such as facial recognition and could be used in a wide range of segments from data center cloud servers to automobiles.
Nvidia recently surpassed Intel to become the most valuable U.S. chip company by market capitalization.
The deal highlights SoftBank's shift towards owning minority stakes in liquid assets, after it struggled to generate returns from bold bets in private companies.
When SoftBank bought Arm in 2016, Son called it a "crystal ball to foresee the future." He drove its expansion into new segments like the "Internet of Things" -- connecting up machines and appliances -- as well as a software business based on data collected from Arm-embedded devices.
But the aggressive investment failed to take off, squeezing Arm's margins. It logged a profit of $276 million in earnings before interest, taxes, depreciation and amortization in fiscal 2019, only around a third of what it had in fiscal 2016.
SoftBank was also hit with losses from a series of soured bets, including WeWork and Uber Technologies, raising concerns over the value of its non-listed assets.
"There were concerns over whether SoftBank could exit Arm," said Tomoichiro Kubota, senior market analyst at Matsui Securities. The lack of investor confidence widened the gap between SoftBank's market value and what Son believes is the sum of its investments.
By taking a minority stake in publicly-traded Nvidia, SoftBank and its Vision Fund will have more flexibility to sell the shares if market conditions worsen. SoftBank has already began trimming its stakes in its telecommunications assets T-Mobile and SoftBank Corp. after its stock price plunged in March.
"To maximize our value as an investment company, we must make an objective decision to abandon our past emotional attachment," said a SoftBank executive.
Jensen Huang, CEO of Nvidia, told a press conference on Monday that his company would not change Arm's licensing business model and was willing to expand the licensing to even Nvidia's own technologies.
He predicted big growth opportunities for Nvidia and Arm in the server CPU market, which is currently dominated by Intel and Advanced Micro Devices.
To clear regulatory concerns Huang said Nvidia and Arm were "completely complementary" to each other. "Nvidia does not design CPUs (central processing units), Nvidia does not license IP to semiconductor companies and unlike Arm, Nvidia does not participate in the cell phone market...so in many ways we are not competitors and we have the intention to add more IP to it," Huang said.
Arm has also been locked in a bitter boardroom fight with its Chinese unit, Arm China, since late May. Arm's CEO Simon Segars said the disagreement in China was under control and would not affect the Nvidia deal.
"The JV in China is a separate company that we are a minority owner of. When the deal closes, Nvidia will own a minority. In order to push ahead for this [deal], we did not need to get permission there," Segars said.
"China remains an important part of our business and we intend to continue working closely with our JV like we have done and continue to explore the Chinese ecosystem."
Arm's intellectual property is behind more than 90% of the world's mobile chips, meaning Apple, Samsung and other chip users need to acquire its technology on licence. Segars said Arm was in the early stage of notifying major customers and partners about the deal.
Arm has also started talks with the U.K. government about its commitment to expand in the country, including a plan to open an A.I. research center at Cambridge.
"We have really exciting plans for UK and Cambridge . . . Arm has some of the finest computer scientists the world's ever have and we have to grow from that base," Huang said.
Arm's Internet-of-Things services group, which includes cloud and software businesses, will be spun off and is not part of the deal. The business had "very little to do" with Nvidia's strategy, Huang said.
Geoff Blaber, an analyst at CCS Insight, said he believed Arm's existing clients would be hostile to a sale to Nvidia.
"A huge diversity of businesses from Apple to Qualcomm are dependent on Arm and will be motivated to unite in opposition," he said. "Nvidia has a mountain to climb in securing regulatory clearance. This process will take months if not years with a high chance of failure. This process would be damaging to all parties and the uncertainty alone would hurt Arm regardless of the outcome".
Additional reporting by Yifan Yu in Palo Alto