Nvidia Scraps $40 Arm Deal: Why So Many Tech M&A Deals Fail?

Graphics chipmaker Nvidia has officially scrapped its $40 billion bid to buy UK mobile chip technology powerhouse Arm from SoftBank after persistent objections from regulators. Following the announcement ARM’s CEO Simon Segars stepped down to be replaced by Rene Haas.

The California-based firm says it wasn’t able to persuade regulators that the deal won’t affect ARM’s free licensing model and even offered to set up a separate entity that will hold the chip design licenses. As a result of the failed deal, SoftBank, which is the current owner of ARM, will get $1.25 billion break fee.

Why Nvidia failed to buy Arm?

The takeover was announced back in September 2020, with both firms saying it will create the “world’s premier computing company for the AI age.”

Nvidia, known for graphics cards in the video game industry, saw its sales soar during COVID-19 induced lockdown as gaming exploded in popularity. When the merger plan was announced, Nvidia said it would accelerate innovation and “create the premier computing company for the age of artificial intelligence.”

However, rivals had several issues with the acquisition, primarily was around access to Arm’s innovative chip designs, which licenses its “architecture” to hundreds of companies around the world. Apple uses them in iPhones and iPads, Amazon uses them in Kindles, and car manufacturers use them in vehicles.

In an interview with Computer World, Mario Morales, a senior vice president with research firm IDC, said companies that license Arm’s chip technology were lobbying against the sale. “If you look at Apple, Google, Microsoft, Qualcomm and Samsung, these are large licensees of Arm that didn’t see this deal positively,” he said. “That was underestimated by the two companies trying to make this deal happen.

Arm was spun out of a computing company called Acorn Computers in 1990. The company’s energy-efficient chip architectures are used in 95% of the world’s smartphones and chips designed in China. With 6,000 staff globally and 3,000 in the U.K., Arm is widely regarded as the jewel in the crown of the British tech industry.

Experts believe that the deal has faced intense scrutiny and pressure from the start. It is therefore not surprising that regulators in the U.S., the U.K. and China were investigating the deal from all angles, leading tech investors and analysts to speculate that the acquisition would never gain approval.

Why tech acquisitions fail?

As Nvidia-Arm mega deal collapses, it brings us to the oft-asked question: Why so many tech acquisitions fail? According to a recent Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70% and 90%. That is a remarkably high figure. While the reasons continue to vary, most acquisitions typically fail when either the integration is weak, the culture of the companies clash and/or when there is poor execution.

Tech M&A failures are not surprising and there have been many in the past. When Google made its $12.5 billion deal with Motorola in 2012, which ideally seemed to initially make perfect sense, turned out to be a massive failure and got entangled in patent

Competing against the then big phone manufacturers such as Samsung, HTC Corp., and Sony  – all faithful users of Google’s Android operating system, probably wasn’t a good idea. The smartphone market may be too mature for Google to make a difference. As Chief Executive Larry Page wrote on the company blog, the market is “super competitive, and to thrive it helps to be all-in when it comes to making mobile devices.” As a result, in 2014, Motorola was divested for just US$2.9 billion.

Another tech M&A disaster was Microsoft and Nokia which happened a year later in 2013. Although once the world’s biggest handset manufacturer, Nokia had failed to keep up with developments. By the time it closed down in 2015, Microsoft had written off $7.6 billion and laid-off over 15,000 Nokia employees.

Intel’s acquisition of antivirus software maker McAfee too suffered majorly, as the semiconductor giant agreed to sell a majority stake in its $7.7 billion acquisition to a private equity firm at a price that showed that McAfee’s assets had increased only marginally.

There are many more examples. Experts believe that tech acquisitions typically fail or flourish because of one of three things: the reason behind the deal, the cultures of the two companies or execution.

The weak integration among parties for example is the key reason why tech deals fail. Success often depends on whether the acquiring company wants to keep the new company as a standalone division or integrate it into the corporation. Again. Executives fail to distinguish between tech deals that might improve current operations from those that could dramatically grow the company. Companies then pay the wrong price and integrate the acquisition poorly.

Acquisitions also fail when executives do not have a specific mission and targeted goals. After the denounced HP-Compaq merger, Mark Hurd had said, “Without execution, vision is just another word for hallucination.”

The other factor is culture. Even though companies recognize culture as a key factor in the M&A’s success, most of them fail to conduct cultural due diligence before they finalize the deal.

What’s next?

The deal – had it been successful – would have been the biggest in chip history. Arm, which licenses designs to Google, Apple, and others, now faces increased competition. However, the deal’s collapse is a blow to Nvidia, which had hoped to expand its empire beyond chips specialized for graphics and artificial intelligence, and to SoftBank, which acquired Arm in 2016.

Apparently, Arm still seems to occupy an enviable position. The company’s flexible, power-efficient, general purpose designs are used in most smartphones, as well as in cloud computing systems operated by Google and Amazon, laptops from Apple, and even Tesla’s cars.

And yet the disintegration of the Nvidia deal leaves the chipmaker with a more challenging road ahead, according to some. Dan Hutcheson, vice chair of Tech Insights, a semiconductor analyst firm, says many people believe Arm has “gone soft” since SoftBank bought it. Additionally, the combination may have spurred investment in an alternative chip architecture.

Softbank said that it will now plan to list Arm Ltd on the stock exchanges in 2023 in an attempt to recoup part of the expected cash inflow from the failed sale. “Arm is becoming a center of innovation not only in the mobile phone revolution, but also in cloud computing, automotive, the Internet of Things and the metaverse, and has entered its second growth phase,” said Masayoshi Son, Representative Director, Corporate Officer, Chairman & Chief Executive Officer of SoftBank Group Corp.

“We will take this opportunity and start preparing to take Arm public, and to make even further progress,” he mentioned.

Industry watchers believe the public offering would be better for the Arm ecosystem in that the access to Arm’s intellectual property does not face the threat of being restricted for use by other players including Nvidia’s rivals. We need to watch out this space!