- Arm Expresses Concerns Over China’s Impact on IPO
- Decline in Arm’s Sales Amid US-China Tensions
- Choosing New York Over London for IPO Raises Questions
Arm has raised concerns about China as it prepares for the largest IPO in the United States in nearly two years.
The chip designer based in Cambridge, which is owned by the Japanese investor SoftBank, disclosed it was “particularly vulnerable to economic and political risks” in China, where it generates nearly a quarter of its revenue.
In a 330-page document outlining plans for a £50 billion initial public offering in New York next month, Arm devoted more than 3,500 words to describing how increasing tensions between the Biden administration and Beijing were already hindering the company’s performance.
Recent US sanctions restricting China’s access to new technology and investment have fanned the embers of a trade war.
In the three months leading up to June, Arm’s divisions, including Arm China, reported a £21 million decline in sales.
The amount included approximately £9 million attributed to ‘trade protection and national security policies’ in the United States.
The company warned that the situation would continue to deteriorate as its relationship with its independent Chinese business, which is majority-owned by local investors and not SoftBank, remains tenuous.
The filing stated, “We rely on our commercial relationship with Arm China to access the People’s Republic of China [PRC] market.”
If this trade partnership ended or deteriorated, our PRC market competitiveness could suffer.
The warning came as Arm confirmed it was on course to be the most valuable company to complete an IPO since electric car manufacturer Rivian went public in November 2021.
According to some analysts, SoftBank chose the Nasdaq rather than London for Arm’s stock market reintroduction because of the uncertain US-Chinese environment.
Dan Ives, a tech analyst at the investment bank Wedbush, stated that New York is the safest option for listing large tech companies such as Arm. In light of the geopolitical headwinds and regulatory issues in China, all IPO flight paths now lead to New York.
In 2016, SoftBank acquired Arm for £24 billion, removing it from the London Stock Exchange.
It had intended to sell Arm to the American chipmaker Nvidia in 2020, but the £31 billion deal fell through due to regulatory obstacles.
The United Kingdom then engaged in intensive lobbying to convince SoftBank to list in both London and New York.
SoftBank dismissed these endeavors, asserting that the United States was Arm’s “best path forward.”
However, the move has raised significant concerns about the City’s ability to attract successful IPOs. Despite Haleon’s £30 billion IPO in the summer of 2017, FTSE valuations have declined in recent years.
Some blame a ‘Brexit discount’, which has frightened international investors, while others criticize London as a ‘Jurassic Park’ index due to its dearth of equities in new industries such as fintech and artificial intelligence.
The largest building materials company in the world, CRH, has warned that it will transfer its primary stock market listing to New York, and the largest gambling company, Flutter, is preparing to list there in the autumn.
Bloomberg reports that the London stock market raised less than £790 million this year, the poorest result since 2009.
In the meantime, the United States remains a safe option for many businesses seeking quicker processes and higher valuations.
To illustrate, Apple, the most valued US company, is worth roughly £1 billion more than the FTSE 100 combined.
Russ Mould, an analyst at AJ Bell, explained that price appears to be the driving factor for SoftBank and that the Japanese conglomerate’s CEO, Masayoshi Son, will also be seeking to prove himself with this IPO.
SoftBank will try to prove it can invest after embarrassing flops like WeWork and FTX. Son will strive to demonstrate that SoftBank’s track record is positive.
Chip heavyweights Nvidia and Intel will also be good company for Arm across the Atlantic.
London, on the other hand, has been on a mission to relax its IPO regulations to promote deal-making, which includes giving founders more control and removing financial reporting barriers.
Victoria Scholar, an analyst at Interactive Investor, stated, “While proposed changes to London’s listing rules could help boost its appeal as a destination for global IPOs, there is still work to be done to improve the city’s international image.”
Post-Brexit, London must foster innovative new companies in fintech, renewable energy, and artificial intelligence, and demonstrate that it remains an important global financial center.
SoftBank could still list Arm in London as a secondary listing in addition to its New York listing.
