[ANALYSIS] SK hynix Arm acquisition plan may not be clever enough

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[ANALYSIS] SK hynix Arm acquisition plan may not be clever enough

SoftBank CEO Masayoshi Son speaks at a press conference on July 28, 2016. [AFP]

SoftBank CEO Masayoshi Son speaks at a press conference on July 28, 2016. [AFP]

 
The SK hynix plan to create a consortium to buy Arm is the best idea that might never happen.
 
While the proposed structure would reduce antitrust concerns, as the British chip designer would not be controlled by a single entity, competition regulators may still scuttle the deal.
 
Chinese authorities are especially likely to nix the transaction.
 
In late March, SK hynix co-CEO Park Jung-ho told shareholders that the company was considering working together with other companies to purchase Cambridge-based Arm. Efforts by SoftBank, the current owner, to sell it to Nividia for $40 billion fell through in February due to antitrust concerns.  
 
His comments were confirmed the next day in an electronic disclosure.
 
The company is seeking the property to protect its own interests and diversify its business, as SK hynix currently gets over 90 percent of its revenue from memory products.
 
"If a specific entity is to wholly benefit from the acquisition of Arm, it won't be acceptable in the semiconductor ecosystem," Park said.
 
Arm has been a problematic property because its designs for application processors are so widely used, and it is a risk for them to be monopolized, especially by a company that competes with Arm clients. The company also receives sensitive information from clients that could unfairly benefit a chip maker.
 
Antitrust regulators strongly disapproved of the sale to Nvidia, with the U.S. Federal Trade Commission (FTC) suing in February to stop the deal.
 
The plan developed by SK hynix seems to offer a solution that would allow the Korean company to get exposure to the company's business without creating the risk of market domination. As SK hynix primarily deals in memory chips, like dynamic random access memory (DRAM) and NAND flash, the company is not a licensee of Arm's chip design.  
 
The major clients of the chip designer are manufacturers of system-on-chips, such as Nvidia, Qualcomm, Samsung Electronics, Intel and Apple.  
 
Park said during the meeting that the Korean chipmaker may form "a consortium with strategic investors" to acquire Arm, without naming any of possible partners. Intel CEO Pat Gelsinger expressed interest in joining a consortium in February before Park revealed the idea March 30.  
 
The deal structure would ease antitrust concerns and provide the financing needed to complete the purchase. SK hynix held 5 trillion won in cash as of the end of last year and 3 trillion won in short-term assets that can be converted into cash in one year.  
 
Academics and others are raising questions about the SK hynix plan, arguing that it may not alleviate antitrust concerns altogether.
 
The legal environment for mergers is dangerously in flux at the moment. The U.S. government is becoming increasingly skeptical about combinations, especially in tech.  
 
"The proposed acquisition of Arm by Nvidia faced opposition from antitrust regulators because the deal constituted a vertical merger with the possibility of harming competition," said Lee Hwang, a professor at the Korea University School of Law and president of the Korea Competition Law Association.  
 
"Even if a consortium is formed by SK hynix and other chipmakers, that could create potential problems associated with horizontal and conglomerate mergers given the super-dominant position of Arm in chip design and the neutrality required for the company," he said.  
 
If even a single client is left out of the consortium, the argument for it may be open to challenges.  
 
"Given the sheer size and nature of the deal, interested investors will be existing licensees of Arm," said a source in the semiconductor business who spoke on the condition of anonymity."Unless all chipmakers partnering with Arm gather for the consortium, it is destined to face the same antitrust concerns as Nvidia's bid."  
 
Samsung Electronics has cash reserves topping $100 billion, but it denied reports in 2020 that it was taking a small stake in Arm. A spokesperson declined to comment further in the matter.  
 
Chinese tech companies and regulators in the country will likely raise red flags, according to multiple legal and semiconductor sector sources, because they won't be allowed in due to geopolitical tension between the U.S. and China.  
 
"Today, Arm's licensees — including Nvidia's rivals — routinely share competitively sensitive information with Arm," the U.S. FTC wrote in a 2021 statement detailing its suit to block what would have been the largest semiconductor deal in history.  
 
"Licensees rely on Arm for support in developing, designing, testing, debugging, troubleshooting, maintaining and improving their products," it said, "Arm licensees share their competitively sensitive information with Arm because Arm is a neutral partner, not a rival chipmaker. The acquisition is likely to result in a critical loss of trust in Arm and its ecosystem."
 
Going public always remains an option.
 
"We have consistently taken the view that the continued independence of Arm, and preferably as a public company again, is in the best interests of its ecosystem of licensees and partners," wrote Geoff Blaber, chief executive officer at CCS Insight, a British technology advisory, in a report.  
 
"We can't completely rule out the consortium approach because it will hand SoftBank better returns than a public listing," said Jeong In-seong, a semiconductor specialist who authored "The Future of the Semiconductor Empire."
 
"The sale can also allow SoftBank to dispose the equity holdings in Arm possibly at once, while the public listing won't do so," Jeong added.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]
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