Softbank [TYO:9984] will have to descend from its lofty USD 60bn-plus valuation expectations for Arm if it is to price a successful IPO, said two investors and two bankers following the deal.
The British chip designer, reportedly seeking to raise as much as USD 10bn at a valuation of at least USD 60bn-USD 70bn, should be valued at around USD 40bn, according to the investors studying the file.
Buysiders and bankers away from the deal cited Arm’s slow revenue growth and its peers’ multiples as key factors for the much lower valuation.
“A valuation of around USD 40bn seems sensible and would be more in line with its peers,” said one US-based fund manager, adding this would allow the syndicate to attract “smart money”.
A second investor, who has also been looking at the deal, concurred with the USD 40bn figure. He said he feared Arm’s USD 64bn valuation, reached by the internal Softbank sale, is forcing a price rather than letting the market come to its own assessment.
Softbank reportedly purchased the remaining 25% stake of Arm that it did not already own from its own Vision Fund at a valuation of USD 64bn.
This was far higher than the valuation in its 2023 annual report, released on 3 August, which put Softbank’s stake (75%) in Arm at JPY 2.9tn (USD 19.9bn). Softbank paid USD 32bn for Arm in 2016.
Slow growth, AI promise
Both investors pointed to Arm’s reliance on the mobile phone market, for which it is the global leader in chip design, as a problem for the company, given slowing global sales of new phones as consumers hold on to older handsets.
Arm’s IPO documentation, filed with US regulators earlier this month, showed a decline in its revenue in the 12 months ending in March 2023, down to USD 2.67bn from USD 2.7bn in the previous 12 months.
“All the bits that are growing are a very small mix of the business today. Telecoms growth is going to be hard, and it will take a lot of time to generate growth through the smaller bits of the business, like AI,” said the second investor. “It is selling itself as a proxy investment for AI,” he added.
The first investor said the numbers were “not the kind of profile that justifies a premium valuation.” He noted that Softbank's track record with IPOs, for instance the disastrous listing of WeWork, was not an encouraging sign.
Softbank’s spokesperson declined to comment.
While the peer list for semiconductor firms is large, this news service has used Taiwan Semiconductor [TPE:2330], Intel Corp [NASDAQ:INTC], Nvidia [NASDAQ:NVDA], AMD [NASDAQ:AMD], Broadcom [NASDAQ:AVGO], and Qualcomm [NASDAQ:QCOM] as possible comparables.
The 2022 EV/sales range for the peers is 44.6x (Nvidia) to 3.1x (Qualcomm) with an average of around 12.5x.
On this metric, and based on sales of USD 2.67bn, Arm would be valued at around USD 33.4bn; a USD 70bn valuation would translate to a multiple of around 26x sales, a discount to Nvidia, but a significant premium to all the other semiconductor peers.
If Nvidia were excluded from the peer set, given its dramatic 244% share price rise year to date, the average 2022 EV/sales is 6.1x which would imply a hypothetical USD 16bn valuation for Arm.
Expectations vs. Reality
A source close to the deal acknowledged that USD 60bn-USD 70bn is high and management will likely come down from that number. But several potential cornerstones and anchors in the deal can provide significant momentum, he countered.
There should be a large discount factored into the touted Arm IPO price, since underwriters want to see a 20% to 30% pop, said a second source close to the deal.
“The IPO will be priced at a discount to recognise risks, but it’s also important for short-term messaging and employee morale to see a price pop,” said this source. “That’s how the world gauges whether an IPO is successful or not. So, yes, there is a discount that needs to be baked into the rumoured price.”
Deal sources said the transaction was gaining momentum in initial meetings, with the deal slotted to go ahead in September.
While banks were putting out an incredibly bullish tone, an IPO without a significant valuation concession could lead to a fragile IPO, said one of the investors, likening the deal to Facebook’s hyped flotation back in 2012.
All eyes are on the IPO, with much of the global IPO pipeline depending on its success, said the same investor.
Softbank did not respond to a request for comment. ARM declined to comment.