What happened
Nvidia (NVDA 3.71%) stock was down by as much as 3% at 10:35 a.m. ET Tuesday -- before turning around, erasing its losses, and heading higher in early afternoon trading. As of 12:34 p.m. ET, it was up by about 1%
The reason for the sell-off was no great mystery: Nvidia just called off its planned acquisition of Arm Holdings from Softbank (SFTB.Y -1.37%). The reason for the bounce-back is a bit trickier to figure.
Image source: Getty Images.
So what
As Reuters reported Monday night, Nvidia and Softbank have "shelved" their planned deal for the former to buy the latter's Arm Holdings semiconductor subsidiary -- a deal that started out valued at just $40 billion, but had soared to the point where it would have cost the buyer something closer to $65 billion, thanks to Nvidia's gravity-defying stock price.
Reuters -- rightly -- put the blame for the deal's demise chiefly on regulatory opposition to it that spanned the globe from the U.S. to the U.K. to the EU to China. But the fact that Arm's effective sticker price had grown by more than 60% (indeed, at one point, the price tag had nearly doubled) probably played a role as well.
Now what
Regardless of precisely why the sale fell through, this deal is now dead as the proverbial doornail. Instead, Softbank says it now intends to spin off Arm Holdings with an IPO, and will probably list the company on the Nasdaq. It's not yet known how much Softbank will make from such a sale.
However, Reuters noted that Arm took in $2 billion in revenue over the first nine months of 2021. Extrapolating that out to a run rate of $2.7 billion for the full year, and applying, say, a multiple of 25 times sales to business's valuation (that's Nvidia's price-to-sales multiple, by the way), it's possible Arm could sell as an independent company for even more than Nvidia was willing to pay for it -- perhaps as much as $66.7 billion. Throw in the $1.25 billion breakup fee that Nvidia now owes Softbank, and the Japanese conglomerate might not suffer much from this development at all.
As for Nvidia, well, shareholders of the semiconductor giant will just have to console themselves with the fact that they just dodged a $65 billion bullet, and hope the company can keep on growing at 25% annually all by its lonesome.
