NVIDIA (NVDA) Falls After U.K. Begins Security Probe Into Arm Deal

Shares of NVIDIA Corporation NVDA fell 3.5% on Monday after the U.K. government initiated a national security probe into the graphic chip maker’s proposed acquisition of Arm Holdings from Softbank Group Corporation.

The probe was initiated after the U.K.’s digital secretary Oliver Dowden exercised his special powers under the Enterprise Act 2002 to intervene into a deal. The digital secretary issued a public interest intervention notice (PIIN) notice stating that he is intervening into the deal to ensure that no national security implications for the country are sighted.

Dowden has written to the U.K.’s antitrust agency, Competition and Markets Authority (CMA), for starting the phase one investigation on the transaction to find out any national-security implications. He has asked the agency to submit its report by Jul 30. Notably, CMA is already probing the NVIDIA-Arm deal on antitrust grounds.

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NVIDIA-Arm Deal Faces Multiple Probes

On Sep 13, 2020, NVIDIA inked an agreement to acquire Arm from its existing owner, Softbank, in a cash-and-stock deal worth $40 billion. The company aims to integrate its artificial intelligence (AI) computing platform with Arm’s expertise in a bid to create a premier computing entity.

However, the deal has caught the attention of competition regulatory bodies of several countries. This February, U.S. competition regulator, Federal Trade Commission (FTC) opens an investigation on grounds of competition.

FTC has sought more detailed information about the transaction from all three companies. It has also asked other relevant companies that might provide information regarding this deal.

In January, the U.K.’s CMA also initiated a probe into the deal. The CMA will ensure that the deal does not result in more expensive or low-quality products for consumers. The agency will consider whether or not Arm will withdraw, increase prices or provide lower-quality Intellectual Property (IP) licensing services to NVIDIA’s competitors.

European regulators are also gearing up for their own investigation. Moreover, the transaction is likely to face hurdles from the Chinese anti-trust agencies as well.

Other Tech Giants Opposing the Deal

Additionally, several tech companies, including Alphabet’s GOOGL Google, Microsoft MSFT and Qualcomm QCOM, have opposed the transaction and asked the U.S. anti-trust regulators to intervene.

These firms are arguing that the acquisition would provide NVIDIA control over Arm’s IP rights, which licenses chip designs and related software to whoever is willing to pay for the same, including rivals to one another. The companies are concerned that NVIDIA might limit the access to Arm’s technology for its rivals or raise the prices.

Arm’s Acquisition Synergies to NVIDIA

We believe the Arm acquisition would be a perfect fit for NVIDIA. While NVIDIA is the world’s largest graphic designer, Arm designs basic blueprints in 95% of the chips used in smartphones globally. Therefore, the transaction will help the graphic chip maker enhance its capabilities in chip designing and foray into newer business segments.

The acquisition of Arm is anticipated to aid NVIDIA in offering an end-to-end ecosystem of technology across the data center, IoT, autonomous vehicles and mobile domains. This Zacks Rank #1 (Strong Buy) company is now well poised to upscale its inference technology, drivers, and accelerators by utilizing Arm’s robust architecture and chip designs.

You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA has already developed its first central processing unit (CPU) based on Arm technology. The CPU — Grace — is specifically designed for data centers. The new processors will help NVIDIA better compete with its chief rivals — Intel INTC and Advanced Micro Devices AMD — which dominate the data-center market with their x86-based processors.

Moreover, NVIDIA intends to integrate its leading AI computing platform with Arm’s expertise in a bid to create a premier computing entity, and expand across large and high-growth markets.

Additionally, NVIDIA had earlier stated that the transaction would be immediately accretive to non-GAAP gross margin and non-GAAP earnings per share post the transaction’s closure.

Nonetheless, looking at the protest by major tech companies as well as the intensifying antitrust scrutiny by several regulators across the world, it would be a difficult task for NVIDIA to win an approval for Arm’s acquisition.

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