NVIDIA (NVDA) to Buy Arm for $40B in a Deal With Big Risks and Big Rewards

September 14, 2020 9:12 AM

NVIDIA (NASDAQ: NVDA) has agreed to buy Arm Holdings from SoftBank Group in a $40 billion deal. The tech giant will pay to SoftBank $21.5 billion in stock and $12 billion in cash, including $2 billion payable at signing. The deal is expected to close within 18 months.

Arm Holdings, a designer of chips for mobile phones, was purchased by SoftBank four years ago for $31.4 billion in 2016. Its chips are used in Android-powered mobile phones, as well as Apple’s iPhones. Moreover, Apple plans to shift from Intel (NASDAQ: INTC) to Arm in the near future for chips used in Mac computers.

“AI is the most powerful technology force of our time and has launched a new wave of computing,” said Jensen Huang, founder and CEO of NVIDIA. “In the years ahead, trillions of computers running AI will create a new internet-of-things that is thousands of times larger than today’s internet-of-people. Our combination will create a company fabulously positioned for the age of AI”.

“NVIDIA is the perfect partner for Arm,” said Masayoshi Son, chairman and CEO of SoftBank Group.

According to Needham’s analyst Rajvindra Gill, NVIDIA will have no problems to finance this deal.

“We believe the acquisition represents a big risk but with potential huge awards. From a financial perspective, this acquisition is the largest deal in NVIDIA's history. NVIDIA will use $12BN of cash/short-term investments on its balance sheet and issue 44.3MM shares to finance the deal.

“We are not concerned about the size of the deal because NVIDIA generated $4.3BN of free cash flow in FY20 and is on track to generate $5.2BN in FY21, and hence we expect it to make up the $12BN in cash fairly quickly, even without a contribution from Arm,” he wrote in a note issued to clients today.

All in all, Gill sees both short-term and long-term advantages of this deal for NVIDIA, therefore maintaining a “Buy” rating on NVDA, with a price target of $600 per share.

However, he is worried about anti-trust factors.

“Arm is the "Arms-dealer" in the semiconductor industry with a long list of customers, which include competitors, such as TI, MRVL, AMD, IFX, QCOM, AAPL, Samsung, NXPI, AVGO and others”.

Jefferies’ analyst Mark Lipacis sounds even more positive about the deal. He sees the latest acquisition as “transformative” for NVDA.

“We view the deal as transformative, positioning NVDA not just to capture 80% of the ecosystem value in the data center, but also unify the compute ecosystem between the edge and data center,” Lipacis writes in a note to clients.

As he believes that a merged company has a 5-year EPS power of $50. Therefore, he hiked NVDA price objective to $680 per share, and a bull-case to $1,000, while maintaining a “Buy” rating.

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