SoftBank (9984): Valuing the Firm after Acquiring ARM
Not too surprisingly, perhaps, given the premium and multiple paid, SoftBank’s shares slumped 10% on the day of news of its ¥3.15tril bid for ARM. However, it is interesting to note that despite Masayoshi Son, with tears in his eyes, talking about the wondrous nature of this purchase, SoftBank’s shares continued to weaken, only bouncing when the positive Sprint results came out (and even then not bouncing a lot). The suggestion is that the market is taking a second look at the deal and isn’t liking what it sees.
Acquisitions such as this one are always difficult to evaluate. It is quite possible that even in ten years’ time it won’t be clear whether SoftBank paid too much or too little. ARM’s profits in 2025 may well be four times higher than they were in 2015; however, that would still leave the company earning just 10% of its purchase price. As Son has correctly pointed out, ARM is a unique asset, and one well placed to be at the centre of the 5G / Internet of Things (IoT) revolution. Arguably, too, ARM needs to scale up to achieve its potential, and thus needs a big sponsor. Whether SoftBank with its debt and lack of experience in manufacturing is suitable to be that sponsor is a different and not unimportant matter.
While questions such as these are not answerable, what we can do is look at whether SoftBank’s shares now look “expensive” or “cheap”. It helps in this regard that SoftBank is a very large company; and the ARM acquisition in no way dwarfs its other businesses. This enables you to play around with assumptions for ARM and to see how the overall valuation stacks up. This report, then, attempts to do just that.
SoftBank Group is a holding company. Domestic Telecommunications business provides mobile communication services, mobile devices, broadband services to retail customers, and telecom services to corporate customers in Japan. Sprint business provides mobile communication services and fixed-line telecommunication services in the U.S. Yahoo Japan business operates Internet-based advertising and e-commerce business. Distribution business distributes mobile devices overseas, and sells software and mobile device accessories in Japan. ARM business designs microprocessor intellectual property and related technology. SoftBank Vision Fund & Delta Fund business is engaged in the investment activities.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
PSA produces both company and sector reports. The focus of PSA’s research is to identify winners and losers as new technologies impact the top and bottom lines of corporations. Critical to our research is the clear explanation of how these new technologies work and how they impact companies and industries.
The founding partners have worked closely together for twenty years and the team has more than doubled in size since 2012.
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