SoftBank’s arm is best off listing in London

SoftBank’s Arm is best off listing in London

by BLOOMBERG

LONDON is the underdog to New York in the battle to host Arm Ltd’s return to the stock market. It shouldn’t be.

The greatest homegrown UK technology business was listed in London before its purchase by SoftBank Group Corp in 2016. There is no convincing reason to believe Arm would be more successful as a US-listed company.

SoftBank is planning to sell a stake in Arm via an IPO after objections from regulators around the

world scuttled US chipmaker Nvidia Corp’s US$40 billion purchase.

Notwithstanding the recent market turmoil, SoftBank’s founder and CEO Masayoshi Son said this week he wants to list Arm as soon as possible. Bloomberg News reported in March that Softbank was seeking a minimum US$60 billion valuation. 

The preparation required for a transaction of this size means a decision on a listing venue would ideally be made soon, even if it ends up happening early next year.

Son suggested he preferred the US for the deal when the IPO became Plan A in February. That’s not been formalised and reported lobbying by UK Prime Minister Boris Johnson suggests a final decision still hangs in the balance.

For the UK, the stakes could scarcely be higher. Arm designs key parts of the chips that power almost every smartphone on the planet and if it lists in the US, its headquarters is likely to follow in time: It would be necessary to become a US company to become a member of the S&P 500 index.

Arm’s base in Cambridge would be diminished, with worrying implications for the region as a technology cluster. Tax revenue would be lost. The City of London’s ambitions to attract more growth companies would suffer. 

All in all, the blow to the UK would be huge.

The immediate question for Son, however, is whether the listing venue would affect Arm’s share-price performance, creating lucrative opportunities for SoftBank to sell more of its holding.

The arguments in favour of New York are simple. 

The US capital market is massive. It’s also valued more highly than the UK’s. When other markets shut to IPOs, the US may stay open.

More speculative venture-capital style businesses are welcomed that would be shunned elsewhere. Dollar-denominated, US-listed stock is a good currency for M&A.

These are genuine advantages. But their relevance to Arm is questionable. The company is not a start-up. It’s a pivotal player in a global industry. 

Arm will attract investors from around the world wherever it lists. It could probably get an IPO done even in choppy markets that would kill other deals. Its paper will be a good acquisition currency regardless. Moreover, the S&P 500’s apparent premium to the FTSE-100 largely reflects its greater weighting in growth stocks, which have higher valuations. 

Like-for-like comparisons between sectors are less flattering. Drill down to individual names and the reality is that US companies often enjoy a higher valuation because — embarrassingly for Britain — they are just higher quality businesses: UK banks are still dogged by worries surrounding the post-Brexit economy; BP plc and Shell plc are more leveraged than US peers; Unilever plc and Reckitt

Benckiser Group plc are suffering self-inflicted wounds. 

Arm’s valuation is likely to settle at the same level regardless of its listing venue. To the extent that local

support matters, domestic demand from London’s sterling-based investors would be strong given they don’t have any other way of gaining substantial exposure to the semiconductor sector in their home market. 

Recent changes to listing rules mean Arm would go into the FTSE 100 almost immediately, forcing passive funds to buy into the IPO. These technical factors will certainly help, but the idea that Arm will enjoy any substantial valuation boost from listing in London is stretching it.

The IPO destination is, therefore, a close call. 

Most bankers would probably favour New York: It has the feel of being the safe option. The US also has going for it the fact that it accounts for much of Arm’s revenue (although being close to your customers is arguably less important in chip design than other sectors.)

But London should edge it. The previous London listing, which was accompanied by American depositary receipts in New York, helped the company become become what it is. That’s proven. 

The UK investors who used to own it won’t need re-educating in the business’s moving parts. Arm’s DNA is British, and since the UK is where roughly half of its employees are based, staff may prefer share-based pay in primary-listed UK stock. Plus Arm’s scarcity value as a London tech giant must count for something.

Given all that, the question shouldn’t be why London, but why not?