Softbank Stock Pummelled After ARM Deal

SoftBank Group Corporation's (SFTBY) shares plunged to a three and a half-month low Tuesday after investors were disappointed with the company's decision to acquire ARM Holdings plc (ARMH) for $32 billion. The stock price of the Japanese telecommunication giant was down by 10.32% as investors asked questions about their credit rating.

SoftBank announced on Monday that it would acquire ARM Holdings at ￡17 per share, which implies a premium of around 43% comparing it to ARM’s Friday close. SoftBank has been selling its assets to generate cash to pay its debt worth $100 billion. Hiroaki Hiwata, a strategist at Toyo Securities, said, “The deal on ARM is causing (the plunge), as the price was rather expensive which led to concerns over interest-bearing debt and possible downgrading of SoftBank's rating.” (See also: Japan’s SoftBank to Purchase ARM Holdings.)

Investors worried SoftBank’s fall of around 10.32% dragged on the overall gains of Japan’s Nikkei Index, which was up 1.37% at the time of writing. Masayuki Kubota, chief strategist at Rakuten Securities, said, “My first impression was that the purchase made investors worried about SoftBank being able to receive synergies from the purchase of ARM and collect all the cash it spent.”

Kubota is also worried that the motivation to acquire ARM Holdings may be entirely wrong. Some are questioning why SoftBank needs to buy a hardware company. He said, “The most important thing in IoT [Internet of Things] is not hardware, but software, such as deep learning, the brains of smart devices.”

SoftBank's chief executive Masayoshi Son said Monday that the ARM Holdings acquisition was a "paradigm shift" in the business and a recognition of the wide-ranging application of Internet of Things across all services and products in the coming future. (See also: Internet of Things Deal May Lift Skywork.)

On the other hand, some investors are concerned that ARM’s acquisition would hinder SoftBank’s efforts to turnaround Sprint, a U.S. based online carrier, which it acquired in 2013. Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management, said, “A push into the Internet of Things is positive in the long run. Mr. Son is right on that. But we’d rather have seen that after they figured out how to turn around Sprint.” Shares of Sprint were down by around 5% on Monday.

Investors have not only questioned the motive of the transaction but are also worried about the effect it will have on the company’s already weak balance sheet. However, the deal was highly appreciated by the U.K. Prime Minister and Finance Minister on Monday.

Chancellor of the Exchequer Philip Hammond, said, “Just three weeks after the referendum decision, it shows that Britain has lost none of its allure to international investors. Britain is open for business - and open to foreign investment. Softbank's decision confirms that Britain remains one of the most attractive destinations globally for investors to create jobs and wealth.”


By Shiv Mehta, CFA | July 18, 2016 — 9:22 PM EDT

ARM Deal July 18, 2016
Japan's SoftBank (NASDAQOTH: SFTBF) announced today it has struck a $32.2 billion agreement to acquire U.K.-based smartphone chip design leader ARM Holdings (NASDAQ: ARMH). Assuming conditions are met and shareholders approve the deal, it will be the largest tech-related acquisition ever completed in Europe. The all-cash deal is valued at $67.32 a share, a 43% premium above Friday's $47.08 stock price closing.

Additionally, ARM shareholders of record on Sept. 8 will receive an "interim dividend" of $0.05 per share. SoftBank said it intends to retain ARM's existing management team, as well as its existing 4,000 employees, and plans to double its U.K. headcount over the next five years. SoftBank also plans to keep ARM's headquarted in Cambridge, England. ARM shares were trading up nearly 42% in early Monday trading.

ARM's deal with SoftBank will boost its efforts to make headway in new, fast growing markets including the Internet of Things (IoT). "ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the Internet of Things," said SoftBank CEO Masayoshi Son.

SoftBank's offer is a huge bet that ARM will making a sizeable dent in IoT in the coming years, but the opportunity the skyrocketing market IoT represents is likewise massive. Industry watchers' estimates for the burgeoning IoT market vary, but virtually everyone agrees the upside is staggering. One report suggests that by 2020, there will be 24 billion connected "things" installed worldwide, producing a mind-boggling $6 trillion in revenue.