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SoftBank's plan to sell Arm to NVIDIA is hitting antitrust wall around the world

Experts also point to national security hurdles for the $40bn deal

SoftBank Group, whose CEO is Masayoshi Son, is seeking to sell British chip design company Arm. (Photo by Kei Higuchi)

TOKYO -- SoftBank Group's attempt to sell U.K. chip designer Arm to U.S. chipmaker Nvidia is hitting regulatory roadblocks in major markets, as the blockbuster deal has raised antitrust and national security concerns among policymakers.

SoftBank announced in September plans to sell Arm to Nvidia in a cash and stock deal worth up to $40 billion, generating buzz in the tech world.

It was clear from the beginning, however, that the sale of Arm, which is owned by the London-headquartered SoftBank Group Capital and the SoftBank Vision Fund, to the American semiconductor company, best known for supplying chips that render images in video games, would attract the attention of antitrust regulators and national security officials in the countries where it needs to be approved.

Experts well-versed in regulatory issues concerning international mergers and acquisitions say the deal has to clear regulatory hurdles set up to prevent anticompetitive practices and threats to national security.

In announcing the agreement, the two companies, citing a need to get the green light from regulators in many countries, including the U.K., China, the European Union and the U.S., said it could take 18 months to complete, a much longer period than the typical process of gaining regulatory approval for a corporate acquisition.

This indicates the two companies were keenly aware that it would be a formidable challenge to get their deal through regulators, experts say.

Arm, the world's leading supplier of semiconductor intellectual property, has been growing by licensing its technology to a broad array of semiconductor companies.

When it was acquired by SoftBank Group in 2016, the purchase did not raise an antitrust issue because the Japanese tech conglomerate did not have a chipmaking unit that competed with other customers of the British company.

On a joint website, Nvidia and Arm stress their merger's benefits for customers. (Screenshot from Nvidia and Arm website)

But Nvidia's acquisition of Arm is a different story because the U.S. chipmaker competes directly with such Arm customers as Qualcomm, Intel, Advanced Micro Devices, Taiwan's MediaTek and South Korea's Samsung Electronics.

While SoftBank Group's acquisition of Arm went through without a hitch because the group is seen as "something of an investment company," Nvidia's purchase of the company will "heighten concerns that it would distort competition among downstream players that buy technology licenses from Arm," lawyer Akira Kawashiro said.

When antitrust authorities decide that an M&A deal needs a formal review, they often interview corporate customers who could be affected. SoftBank's sale of Arm to Nvidia is likely to be a "tough sell" to antitrust regulators in both the U.S. and the EU, according to Kawashiro.

Overseas media have reported that companies like Intel and Qualcomm are lobbying regulators in the U.S. and other countries to shoot down the acquisition.

It was reported in late December that the Federal Trade Commission, the U.S. competition watchdog, had sent out a so-called second request to Nvidia, asking the chipmaker to submit detailed internal documents related to the proposed acquisition of Arm for an antitrust investigation.

A second request is issued when regulators think there is a reasonable probability that the deal in question could hamper fair competition, lawyer Takafumi Uematsu said. The FTC's move should be regarded as a sign that the deal will be "rigorously examined in the U.S.," Uematsu said.

In such cases, the companies may be required to pledge to not take discriminatory action against any other company or to take measures to address regulatory concerns, such as selling some businesses or assets. That could cause a serious delay in the completion of the transaction. "The first hurdle [for the SoftBank-Nvidia deal] to clear is the FTC's investigation," Uematsu said. "The results of the U.S. investigation is likely to affect regulatory actions taken in the EU, China and other markets."

China's response to the case will also attract much international attention, due in part to its bitter conflict with the U.S. Washington has introduced regulatory restrictions to prevent China's Huawei Technologies from obtaining semiconductors without a special license -- including chips made by foreign companies that have been developed or produced with U.S. software or technology.

Arm has decided to continue supplying Huawei, claiming that its chip technology is of British origin and would not breach U.S. restrictions on supplying the Chinese tech giant.

But its acquisition by a U.S. company could put Arm under stronger pressure and influence from the U.S. government.

China's antitrust watchdog, the State Administration for Market Regulation (SAMR), could also get in the way of the mega-deal because Arm owns 49% ofArm China, a local joint venture with a private equity company linked to the Chinese government. The acquisition needs to be approved by SAMR. 

There is an ominous precedent for Nvidia. In 2018, the SAMR effectively blocked Qualcomm's attempt to buy Dutch chipmaker NXP Semiconductors by failing to approve the deal by the deadline set by the two companies.

In 2020, Chinese authorities approved Nvidia's acquisition of Israeli chip designer Mellanox Technologies, which was also cleared by regulators in the U.S., the EU and Mexico, but the delayed regulatory process in China caused the transaction to take more than a year to be completed.

Lawyer Haseru Roku said the SAMR's investigation of Nvidia's plan to gobble up Arm could be a long, drawn-out process, as the government agency will likely try to figure out the China policy of the incoming U.S. administration of President-elect Joe Biden. While the SAMR tends to keep its antitrust policy in line with global trends, it is still a government arm that is vulnerable to the effects of China's foreign policy. Roku says there is little chance that the SAMR will approve the deal swiftly.

In a development that has huge implications for foreign businesses with interests in China, Beijing's new rules for reviewing foreign investments on national security grounds came into force on Monday. Similar to the system for security reviews of foreign investments by the Committee on Foreign Investment in the U.S. (CFIUS), China's new investment-monitoring regime covers foreign investments in military sectors and the acquisition of controlling stakes in such sectors as energy, natural resources, agriculture, internet technology and financial services.

Since semiconductor technology is viewed as a sensitive security issue in China, Nvidia's plan to acquire Arm could be subject to a review under the new system even though the transaction only involves foreign companies, Roku said, pointing out that Arm's stake in Arm China will be sold to the U.S. company.

Hermann Hauser, the co-founder of the Cambridge-based chip designer, has come forward to push against the deal. Hauser has created a website for his campaign, where his open letter to Prime Minister Boris Johnson was published.

In the letter, Hauser says, "Arm is the only remaining UK technology company, with a dominant position in mobile phone microprocessors." He also expresses concerns about the sale's impact on jobs in the U.K. and fair dealings with Arm licensees due to preferential treatment that could be given to Nvidia. Hauser also says the U.K. has suffered from American technology dominance by companies like Google and Apple and argues that "the UK will become collateral damage unless it has its own trade weapons to bargain with." He calls on the U.K. government to set three legally binding conditions for the deal to be allowed to go through, including job guarantees for Arm employees in the U.K. and an agreement that Nvidia must not gain any preferential treatment over other current Arm licensees. His open letter has collected more than 2,000 signatures. 

The Competition and Markets Authority, the U.K. antitrust regulator, announced on Jan. 6 that it will investigate the planned sale of Arm and invited "interested third parties to provide initial views" on the topic. The CMA said in the statement that it is likely to "consider whether, following the takeover, Arm has an incentive to withdraw, raise prices or reduce the quality of its IP licensing services to NVIDIA's rivals."

Andrea Coscelli, chief executive of the CMA, said in a statement, "We will work closely with other competition authorities around the world to carefully consider the impact of the deal and ensure that it doesn't ultimately result in consumers facing more expensive or lower quality products."

Lawyer Michihiro Nishi said the U.K. government may decide to "intervene in the acquisition since semiconductor technology is important also from the viewpoint of national defense."

The U.K. is just weighing a new law to tighten government control on foreign investments. The government on Nov. 11 submitted the National Security and Investment Bill to Parliament. If enacted, the law would give the government power to intervene in a wide range of takeover and investment transactions on national security grounds.

"Since even a transaction carried out by the time the law comes into force can be subjected to a review by the government under certain circumstances, the law could be applied" to Nvidia's takeover of Arm, Nishi said.

In a statement about Nvidia's planned acquisition of Arm published on a joint website, the two companies say, "With its proposed acquisition of Arm, NVIDIA will be able to turn new AI possibilities into realities much faster."

Nvidia also promises to ensure that Arm will "continue to operate its open-licensing model while maintaining the global customer neutrality that has been foundational to its success."

The statement stresses that Arm will remain headquartered in Cambridge and build a world-class AI research facility.

The site also has a link to a law firm's blog explaining how "the media coverage has amplified a series of particularly incorrect comments and fundamental misunderstandings about how these rules [CFIUS regulations] would affect NVIDIA's or any U.S. company's acquisition of a foreign company." 

There is still much uncertainty about the outlook for the deal. Clearly, however, selling Nvidia's acquisition of Arm to regulators and customers requires a well-designed public relations strategy as well as a convincing argument.

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