NVIDIA Corporation’s ( NVDA Quick Quote NVDA - Free Report) proposed Arm Holdings’ acquisition encountered a fresh hurdle after the U.S. Federal Trade Commission (FTC) sued to block the transaction over competition concerns on Thursday. The deal, already facing significant global regulatory challenges, could be killed by the latest FTC lawsuit.
FTC, in its lawsuit, stated that the proposed acquisition would provide NVIDIA control over computing technology and designs that rival firms rely on to develop their products.
On Sep 13, 2020, NVIDIA inked an agreement to acquire Arm from its existing owner, Softbank Group Corporation, in a cash-and-stock deal worth $40 billion. A rise of approximately 158% in NVDA’s stock price increased the deal's value by more than $55 billion.
Deal Faces Multiple Regulatory Probes
The England-based chip designer, often referred to as the Switzerland of the semiconductor industry, plays a neutral role in the space. Hence, the deal is feared to block this chip access neutrality and could favor the U.S. owner over its rivals.
As a result, the deal has caught the attention of competition regulatory bodies of several countries. Last month, the British government ordered an in-depth – Phase Two – investigation of the transaction over competition and national security concerns.
The U.K.’s Competition and Markets Authority has been given 24 weeks to deliver a final report, with a provision to extend the time frame by eight more weeks. Based on the reports filed by the agency, the U.K. government could block the deal on one or both grounds, clear it on both grounds or approve it with certain conditions.
The Europe and China regulatory bodies are also gearing up to launch lengthy investigations over whether the sale of Arm to NVIDIA could impact competition and disrupt the global chip supply chain.
Rival Tech Companies Opposing the Deal
Several tech companies, including
Qualcomm ( QCOM Quick Quote QCOM - Free Report) , Alphabet’s ( GOOGL Quick Quote GOOGL - Free Report) Google and Microsoft ( MSFT Quick Quote MSFT - Free Report) , have opposed the transaction and asked the U.S. antitrust regulators to intervene.
According to these firms, the acquisition would provide NVIDIA control over Arm’s intellectual property (IP) rights, which license chip designs and related software to those willing to pay for the same, including rivals to one another.
Qualcomm has been more vocal in opposing the deal. Arm supplies IP rights to the company whose chip designs are found in most smartphones around the globe. Qualcomm is worried that following the acquisition, NVIDIA could limit its access to Arm’s chip licenses, which have built its mobile chip empire using the latter’s designs.
Qualcomm has also stated that it is open to investing in Arm if the regulatory bodies block NVIDIA’s deal. Arm’s other customers, Alphabet and Microsoft, have also voiced similar concerns that NVDA might limit access to Arm’s technologies or raise prices.
NVIDIA aims to integrate its artificial intelligence computing platform with Arm’s expertise in a bid to create a premier computing entity. It had earlier stated that the transaction would be immediately accretive to non-GAAP gross margin and non-GAAP earnings per share after its closure.
However, looking at the protest by major tech companies and the intensifying antitrust scrutiny by several regulators worldwide, it would be difficult for NVIDIA to win approval for the Arm acquisition.
Currently, NVIDIA carries a Zacks Rank #2 (Buy).
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The long-term earnings growth rate projections for Alphabet, NVIDIA, Qualcomm and Microsoft are pegged at 25.8%, 21.6%, 15.3% and 12%, respectively. Shares of GOOGL, NVDA, QCOM and MSFT have soared 63.2%, 147.9%, 16.4% and 48.3%, respectively, in the year so far.