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This year’s blockbuster IPO is between a rock and a hard place: listing in New York or London won’t change Arm’s fortunes in brutal downturn

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The ARM PodcastArm was bought by SoftBank in 2016 for $32 billion.

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  • ARM is preparing for an IPO in 2023 that couldn’t come at a more tricky time.
  • The SoftBank-owned chip designer will enter the market during a brutal downturn.
  • The chip sector has particularly suffered as it continues to reckon with supply chain issues.

The listing of Arm on the stock exchange in 2023 is set to be one of the year’s standout IPOs – but the timing for a blockbuster public market entry couldn’t be worse. 

The UK chip designer, bought by SoftBank in 2016 for $32 billion, is being prepared for a return to the public markets this year by the Japanese conglomerate’s CEO Masayoshi Son in the midst of one of the most brutal market downturns in recent decades. 

An attempt by US chip giant Nvidia to buy Arm for $40 billion fell flat last year amid intense regulatory scrutiny.  This pushed SoftBank to reposition Arm for the public markets as the Japanese firm seeks to generate profits from assets that can offset losses in its venture capital business.

Arm’s re-listing isn’t quite as clear-cut as SoftBank would like, with UK Prime Minister Rishi Sunak upping efforts in December for a dual-listing involving London, according to the Financial Times. This triggered a tug-of-war with the US over a company considered the crown jewel of UK tech. 

But it’s a battle whose outcome is likely to prove futile either way for Arm, a chip firm behind proprietary designs that find themselves in the world’s leading smartphones and cars, with its fortunes even less clear-cut in a future fraught with risk.  

Squashed investor appetite for speculative tech firms and a brutal downturn for the chip sector means SoftBank’s attempt to steam ahead with listing Arm (to support its own balance sheet woes) in 2023 could prove to be more turbulent than it needs to be.

The IPO door remains (mostly) shut

Few other privately held tech companies itching for a public listing are rushing to market at a time when the IPO window appears all but shut. 

Figures from EY suggest that after a record year of listings in 2021, last year’s IPO market went into reverse mode. Deal volumes fell 45% and proceeds dropped by 61% in the face of reduced appetite for more speculative stocks against a backdrop of soaring interest rates.

There is no sign of that trend changing in 2023. 

On Saturday, after it emerged that fintech giant Ant Financial would no longer be under the control of Chinese billionaire Jack Ma, the company confirmed to Reuters that it had no plans to carry out an IPO. 

Its previous plans to raise $37 billion in an IPO in late 2020 fell over after Chinese regulators introduced new lending rules. Any future plans for an IPO in the near-term seem all but diminished as investors have become even more cautious around China’s creeping involvement in markets that are at their most volatile in more than a decade. 

Others are biding their time too. Tech darlings in the West have all been points of conversation in recent years when it comes to tech’s next big IPO, but few have signaled direct intent to go public as markets go through their rough and tumble moment.

A Klarna IPO had been talked up right until it was forced to take a significant down round that slashed its valuation from $46 billion to $6.7 billion. Meanwhile, Stripe, which filed plans with the SEC to go public in 2021, has been hesitant to make another move, having laid off 14% of its staff towards the end of last year. 

SpaceX is another big company around which IPO talks have been swirling, the rocket company led by Elon Musk. Given the challenges he’s enduring with Twitter and Tesla, adding to his headaches with a public listing for SpaceX seems unlikely (though anything is possible with Musk). 

Plans to publicly list Arm have already been pushed back from early 2023 over concerns surrounding a market gripped by fear But the company is still on course for an IPO this year, Ian Thorton, Arm’s head of investor relations, wrote in a letter in November. 

“Clearly, we want to IPO as soon as is possible. But given the current global economic uncertainty, given the state of financial markets, that’s probably now unlikely to happen before the end of March 2023,” the letter reportedly said.

Chip sector in turmoil

Arm’s other challenge with going public in 2023 lies in the state of the chip sector: it’s down. 

Chip stocks, in particular, took a bruising in 2022 as supply-chain crunches and shortages triggered by the Covid-19 pandemic continued through the year, with only some sign of let-up for the sector’s biggest players this year. 

Still, many are continuing to suffer. Last week, South Korean giant Samsung announced that its operating profits fell by almost 70% in its fourth quarter amid lower demand for chips, spurred by reduced consumer spending on electronics and a chip oversupply. 

Former Arm pursuer Nvidia, meanwhile, has seen its shares take a hit following new license requirements implemented by the US government. In an SEC filing, the company warned that the licenses would impact $400 million worth of sales to China in its third quarter last year.

Such export controls have already hit Arm, as it emerged last month that Alibaba was unable to buy chip designs from the British firm over fears that a license to sell high-performance designs to the Chinese tech giant wouldn’t be approved. Such events are likely to spook would-be public investors in Arm at a time when they are belt-tightening. 

There are some signs that Arm would be insulated from some of the market tumult: its growing focus on the car industry, for instance, has seen revenue for its automotive unit more than double since 2020 – a rare spot of subsisting demand, according to the Financial Times

But with chip revenue set to fall by almost 4% in 2023 to $596 billion, per projections by Gartner, it is hard not to think that any IPO of Arm may just be throwing it into treacherous waters.

Read the original article on Business Insider

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