British mobile processor designer ARM Holdings (Nasdaq: ARMH ) is no stranger to speculative takeover rumors. The rumor mill is buzzing again, sending shares more than 9% higher yesterday.
The renewed chatter may be a result of Hewlett-Packard's (NYSE: HPQ ) recent purchase of fellow Brit Autonomy for a hefty premium and all of the recent fuss over mobile-related IP. It's only natural that the market's attention would turn to ARM.
ARM's technology has become ubiquitous within mobile devices. Qualcomm's (Nasdaq: QCOM ) popular Snapdragon processor is based on ARM architecture, and there's even been talk that Microsoft (Nasdaq: MSFT ) will include ARM support in the next version of Windows.
Hypothetical suitors include Intel (Nasdaq: INTC ) , Oracle (Nasdaq: ORCL ) , and Apple (Nasdaq: AAPL ) . Rumors of Apple acquiring ARM surfaced as early as April of last year, and those clearly haven't panned out. ARM CEO Warren East has promptly gotten in front of the recent round of rumors, dismissing the idea in an interview with British newspaper The Daily Telegraph. However, East's comments did little to quell the rumor-driven rally.
Too expensive, even for Apple
Sure, with $75 billion sitting around Apple could afford to simply cut a check, but should it? No.
With ARM's current market cap around roughly $10.9 billion and the presumption that any offer would be at a substantial premium, the final price tag could end up in the neighborhood of $15 billion to $17 billion. What would Apple be getting for all those zeroes?
ARM's most recent quarterly revenue was $190.2 million, which pales in comparison to Apple's $28.6 billion. Apple already has access to the technology through its licenses, and since many of them are perpetual and last forever, competitors that already hold those licenses would only be inconvenienced at most. Apple wouldn't be able to simply invalidate the existing perpetual licenses at its discretion, but it could theoretically block additional future licenses.
Since ARM's business model relies on licensing its technology to multiple semiconductor manufacturers and OEMs, a lot of the company's value is derived from its unique place within the supply chain and from its impartiality. It also generates royalty payments from every chip produced with ARM's architecture and, together with licensing revenue, is able to recover its R&D expenses and subsequently pump out fat margins.
If Apple were to corner ARM's technology with an acquisition to prevent future licenses to competitors, it would significantly and immediately hinder the value of what it just paid for. Besides, Apple's acquisitions are typically small names and highly specialized. In recent years, it already had two processor related purchases: P.A. Semi for $278 million and Intrinsity for $121 million.
As tempting as it is to jump to the conclusion that Apple should buy ARM because of its heavy usage in iPads, iPhones, and iPods, in addition to rumors of ARM-based MacBooks, the notion quickly loses plausibility when you look at the facts. Apple wouldn't be getting any bang for its buck, making it far too expensive.
ARM Inside (Intel)?
The case for Intel acquiring ARM has a little more substance albeit with its own hindrances. ARM is a glaring threat to Intel, and the company's prominence is even comparable to Intel's own past success in the PC market.
The company has expressed interest in expanding beyond its core PC market and into mobile, even considering acquisitions since Intel has been missing opportunities to meaningfully penetrate the mobile market organically with its Atom processor. Meanwhile, ARM-based tablets have been decimating Atom-powered netbook sales.
With both Microsoft and Apple considering putting ARM processors in laptops and desktops in addition to mobile devices, ARM will be encroaching on Intel's home turf. There are numerous compelling reasons why an acquisition by Intel would make sense, but there are other obstacles that would likely stand in its way.
With $11.5 billion in cash on the balance sheet and operating on the above estimate of an approximately $15 billion price tag, an all-cash offer doesn't seem likely unless the company is willing to take on some debt to do so or to include stock in the deal. Intel's recent quarterly revenue was $13 billion, which also dwarfs ARM's sales. With much more similar business operations, Intel would realize more value out of an acquisition through cost-saving synergies than Apple would.
The biggest hurdle for Intel would be scrutiny from antitrust regulators. The company is all too familiar with antitrust claims and probably isn't too anxious to revisit with regulators.
ARM is well positioned in the growing mobile computing market. With an enviable gross margin of 94.8%, revenue growth of 27%, and more than 95% mobile market share, I'm going to be keeping an eye on the stock and will likely pick up shares in the near future. Even though there are impediments to the usual suspects acquiring the chip designer, the company has been doing just fine on its own and shows no signs of slowing down.