Shares in SoftBank are down more than 10% after the Japanese telecommunications and internet firm announced that it plans to acquire UK chip architect ARM for £24.3 billion.
SoftBank shares crashed to 5,387 yen (£38) on the Tokyo Stock Exchange on Tuesday — the lowest they have been in around four years — as investors struggled to make sense of the acquisition.
Masayoshi Son, SoftBank’s founder, is hoping that ARM’s chip designs, which can be used to build chips that connect everyday devices to the internet, will prove to be a worthwhile investment for his company.
ARM-designed chips are already found in most smartphones, including Apple’s and Samsung’s. But the Cambridge-headquartered firm also wants to put them in cars and other household appliances so that everything can talk to everything else via the internet. It’s likely that Son sees this as the future, hence the big punt.
But investors fear that SoftBank may be paying too much for ARM. Indeed, the company plans to pay £17 a share for the company — 43% more than ARM’s closing share price on Friday and 41% more than ARM’s all-time high closing share price.
SoftBank also had debts in excess of $100 million (£76 million) at the end of March and it will have to borrow more cash in order to close the ARM deal, according to Bloomberg.
Dan Ridsdale, an analyst at Edison Investment Research, said: “ARM has always traded at a significant premium rating because it’s competitive position in its core market is so secure and because growth is locked in as the company’s IP penetrates new domains — such as automotive and IOT [Internet of Things].
“The company’s dominant position and IP business model also mean that there is no obvious cap on how far margins can expand. However, there is a psychological limit on how far the multiple can expand on the public markets. There may be some cost synergies, but In paying this multiple, SoftBank is, primarily pricing-in much more of the growth from these new applications that the markets have ever been prepared to do.”
Elsewhere, SoftBank’s US outpost Sprint Corp saw its shares fall 5% on Monday amid concerns that it won’t get as much support from SoftBank in the future.
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