Nvidia's Pending Arm Acquisition: What Investors Need to Know

Graphics chip giant Nvidia (NVDA -3.71%) agreed to acquire Arm for $40 billion last September, but more than a year later the deal is still a long way from the finish line. In this Fool Live video clip, recorded on Sept. 30, Fool.com contributors Toby Bordelon and Matt Frankel, CFP, discuss the pending acquisition and where things stand now. 

Toby Bordelon: Let's get started with a company I'm sure many know, many may own Nvidia. We all know what they do. Make graphics cards, make chips, all that stuff. The big news for Nvidia, I think is the Arm deal. This deal was originally announced in September of last year, 2020. Almost a year ago. Nvidia is buying Arm. In theory; that may be a little bit of trouble right now, a few weeks ago, Nvidia admitted that their original 18-month timeline is unlikely at this point.

The deal was supposed to close by March 2022. That's probably not going to happen at this point based on what we know. U.K. regulators are reviewing the deal. They say they have some security concerns. I think they might be less national security concerns and more political concerns. They don't really want potentially a U.S. company owning Arm. Arm is based in the U.K. That's why they are dealing with this, right now owned by SoftBank though, which is a Japanese conglomerate.

Their rationale doesn't ring true when you really look at the alternative. There are also maybe concerns with China regulators. Nvidia just recently submitted the application to China regulators in June, eight months after the deal was announced and China is making noise that they're not going to be rushed. They're going to take their time reviewing this deal. The timeline is at risk and this deal might not even get done. There is a potential that it doesn't actually happen, regulators don't approve it.

But what's the alternative? You look at other companies that could buy Arm and they all probably have even bigger issues than Nvidia does thinking, Apple, Samsung, Qualcomm, Intel, Microsoft (MSFT -0.79%), Microsoft doesn't even make sense. But all of these other potential buyers have just as big, if not more regulatory issues, especially antitrust issues to getting this deal done than Nvidia does.

I think Nvidia's consolation prize, if the deal doesn't close, that no one else gets them, at least. But I think Nvidia is going to be fine either way. It'd be nice if they had Arm, but don't think that if this doesn't close, suddenly, this is a bad investment. We'll have to see what happens. But at a minimum, it's going to take longer than we thought.

Matt Frankel: Nvidia's become a really big company over the years. I sure do wish I would've bought shares about five or six years ago. But do you see Nvidia as having become too big to really deliver market-beating performance over the long term?

Bordelon: That's a good question. It's a $500 billion company. I think it's definitely getting up there. Is it capable of market-beating returns? I think for sure. Look at Apple, Amazon, Microsoft. Big companies can give us market-beating returns. But I think when you look at these big companies, like the large companies that give you market beating returns, that's an elite group.

I'm not sure Nvidia is quite ready to join that group yet. I do want to show you this real quick. This is part of the slide presentation they did for the Arm deal. Part of the rationale for that is their investment in R&D. You look at this chart here on the left, Nvidia's R&D as a percentage of their revenue compared to what other companies are doing. That tells you that as much as they are putting on R&D, yeah, they could potentially give you market beating returns because they are seriously investing in their business even at this size.

But it's going to be a struggle and I just don't think you should expect the small-cap SaaS returns we've seen from some other companies in the past couple of years.