Arm Targets a $55 Billion IPO Valuation

Arm Ltd., a prominent British chip designer, is currently contemplating an initial public offering (IPO) that is poised to be a significant event in the financial landscape. The company aims to attain a valuation range between $50 billion and $55 billion, making it the most substantial IPO of the year. In preparation for its debut on the Nasdaq exchange, scheduled for the following week, Arm is scheduled to commence discussions with potential investors as early as Tuesday, as confirmed by sources knowledgeable about the matter.

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SoftBank Group, the owner of Arm, is anticipated to divest approximately 10% of its total outstanding shares in this IPO. This landmark transaction will serve as a litmus test for the resurgence of the IPO market, following the successful albeit smaller public debuts of entities like the restaurant chain Cava Group and the direct-to-consumer makeup brand seller, Oddity Tech.

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It's noteworthy that SoftBank acquired Arm, renowned for its chips used in the majority of smartphones and mobile devices, for a sum of roughly $32 billion in 2016. Subsequently, a quarter of the business was divested for $8 billion to the Vision Fund, a subsidiary of the Japanese tech conglomerate. However, Arm's targeted valuation range falls short of the $64 billion implied by SoftBank Group's recent acquisition of the remaining 25% stake in Arm from its Vision Fund unit.

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Nonetheless, it is imperative to acknowledge that this lower target valuation remains subject to alteration. Anticipated strong demand during Arm's investor roadshow may lead to an upward adjustment of the offering price. In many highly anticipated IPOs, companies and their underwriters initiate with a conservative valuation target, only to subsequently command a significantly higher price.

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The Arm IPO provides SoftBank with an avenue to gradually reduce its stake in the chip designer. In the event that the stock's performance demonstrates an upward trajectory in the ensuing months, this divestment could yield a more substantial return for the Japanese investor, who has been diligently addressing debt obligations by liquidating aged investments.

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This strategic move underscores SoftBank's desire to secure fresh capital for its renewed focus on sizeable investments in the field of artificial intelligence. Notably, SoftBank previously sought to sell Arm to Nvidia for $40 billion, but regulatory hurdles led to the deal's demise.

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Arm occupies a pivotal role in the global semiconductor industry, serving as a supplier to prominent technology companies such as Apple, Qualcomm, and Advanced Micro Devices. The company prides itself on maintaining a neutral stance within the chip sector, offering its designs to all without favoritism.

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In its IPO prospectus submitted to the Securities and Exchange Commission, Arm reported a decline of over 50% in its recent quarter's profits, primarily attributable to the deceleration in smartphone sales. Nonetheless, Arm's expansion into more powerful chip technologies and the burgeoning interest in artificial intelligence augur well for potential sales growth. The company disclosed that it shipped over 30 billion Arm-based chips in the last fiscal year, marking a 70% increase over the past seven years.

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Nevertheless, Arm's exposure to the Chinese market presents a substantial risk that may influence its final valuation in the IPO, given the ongoing tensions between the United States and China. Approximately 25% of Arm's revenue derived from China in its most recent fiscal year, rendering it susceptible to economic and political factors affecting the country. Arm has projected a decline in royalty revenue from China, citing economic challenges and export controls imposed on the nation.

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Recent developments underscore China's ability to influence the U.S. chip industry, as exemplified by its refusal to approve Intel's proposed acquisition of Israeli contract chip maker Tower Semiconductor, valued at more than $5 billion, leading to the abandonment of the deal.

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Arm has engaged in discussions with some of its partners and clients regarding the sale of small stakes in the IPO, each valued at up to $100 million. However, it remains undisclosed which, if any, of these investors will participate in the offering. Such collaborations with strategic and prominent financial investors are occasionally pursued by companies to leverage existing relationships and enhance market credibility, thereby bolstering demand for the IPO.

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For the Wall Street institutions involved, including Barclays, Goldman Sachs, JPMorgan, and Mizuho, this deal represents a positive development in light of the recent challenges faced by the IPO market, affirming their pivotal role in facilitating this landmark event.

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