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SoftBank's ARM Spends Big to Meet Son's Connected World Dream

Ian King and Jeremy Kahn
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SoftBank's ARM Spends Big to Meet Son's Connected World Dream

SoftBank's ARM Spends Big to Meet Son's Connected World Dream

(Bloomberg) -- These days ARM Holdings Plc is expanding at such speed co-founder Mike Muller has to make a reservation before he can use his own office.

“This has become a meeting room so I have to book it when I’m here because we’ve run out of space,” said the company’s chief technology officer in an interview at ARM’s Cambridge, U.K., headquarters.

ARM has added about 2,000 employees bringing its headcount to just shy of 6,000 at the urging of Japan’s SoftBank Group Corp., which bought the company in 2016. This has cramped its existing facility, where employees are spread out among six low-slung office buildings.

ARM will soon move to a new 48-million pound ($61 million) building on the Cambridge campus -- featuring a vast 180-meter long atrium bookended by “floating” staircases, and wired with more than 1,000 kilometers of ethernet cabling. While begun before the SoftBank acquisition, it’s a headquarters that befits ARM’s newfound swagger and ambition.

“It’s quietly understated," Muller says with typical British irony, before adding, "It’s nice, it’s big."

Founded in 1990, ARM quietly grew into the U.K.’s largest listed company before SoftBank’s $32 billion takeover. It designs chips that are licensed to the world’s largest technology companies. As a result, just about every smartphone, mobile phone, and tablet runs on an ARM chip.

Now under SoftBank Chief Executive Officer Masayoshi Son, the English executives who run ARM are having to step out into the spotlight, due to Son’s ambitions for the company. Son presses ARM executives in meetings to move quickly through details of current operations and skip to long-range plans. He insists that ARM submit monthly updates to its 10-year business plan to keep it focused on the future.

ARM Chief Executive Officer Simon Segars said it means his job is to invest ‘like crazy’ as the company attempts to break into high-end computing and become central to self-driving car technology. Such efforts will have to start to pay off before spending is scaled back to prepare the company to go public again in about five years, as Son has indicated.

ARM’s new owner has also brought in a different audience. When Segars recently showed Son a new Lenovo Group Ltd. laptop built on a chip that uses ARM technology, he was asked to hang around and do a demonstration later that day for Bill Gates during a meeting with Microsoft Corp.’s founder.While Segars and his team are in the dream scenario for technology executives: invest for growth and worry about profitability later, the exchange is taking them out of their comfort zone. ARM’s technology is pervasive in semiconductors. Son wants ARM to move into software and services.

When Son first opened takeover talks with ARM, he became fascinated with a “science project,” according to Segars. One of the reasons Son bought ARM is his belief that the chipmaker, with designs that dominate the smartphone market, could achieve similar market sway in the chips that will power the internet of things -- industry jargon to describe the connection of everything from refrigerators to factory equipment to the internet.

That connected future doesn’t seem to be dawning as quickly as Son and many other futurists hoped. And one reason is because all those connected devices present a huge management hassle -- they must be made secure, have their software updated and stay connected. Doing this is technically complicated, and potentially expensive.

Another problem is that ARM didn’t have much expertise in services for the internet of things. It had always been two steps removed from the actual end users of the devices that incorporated chips made with its designs.

So now, with Son’s encouragement, ARM has begun bulking up its IoT services division. In August, the company spent $600 million for U.S.-based data analytics startup Treasure Data Inc. -- its largest deal in 14 years. In June, the target was Stream Technologies, a Glasgow-based company that improves connectivity for internet of things devices.

“In a world that 10 to 15 years from now could be contain a trillion connected devices, even if they just make a few pennies per month per device, that’s still a big number,” said Chris Lane an analyst at Sanford C. Bernstein. “At this point it’s still too early. It’s a good idea.”

Eventually, Segars will likely find himself having to cut back spending and explain to public market investors why his company is worth more than SoftBank paid for it. SoftBank plans to list ARM in about five years, according to Segars.

ARM’s window of opportunity may close sooner than that. SoftBank’s Vision Fund was conceived when technology was flying high. ARM itself was buoyed by the belief that a rally in the chip industry was sustainable, due to new industries queuing up to add electronics and intelligence to their products and operations.

At the end of 2018, big tech and chip companies in particular are out of favor. Concerns that a trade war, slower-than-expected emergence of new markets such as self-driving cars and return of older issues like too much inventory, have begun to weigh on the semiconductor industry. The benchmark Philadelphia Stock Exchange Semiconductor Index dropped 7.8 percent in 2018, following two consecutive years of growth of more than 36 percent.

ARM already knows that success in one area doesn’t provide it with a free pass. The company has been trying to make a dent in Intel’s dominance of computer technology for almost a decade and has little more than a foothold.

And in servers, where Intel has had more than 90 percent market share for a decade, ARM-based processors have had multiple false dawns with chipmakers jumping in, then bowing out without winning discernible amounts of business away from Intel. ARM got a major boost in 2018 when, as was long rumored, one of Intel’s biggest customers, Amazon.com Inc., announced it was using chips of its own design in its server network, semiconductors that are based on ARM’s technology.

Segars’ recruiting drive has caused costs to balloon. Profit has pancaked. In its most recent quarter costs were 327 million pounds, up 33 percent from the same period a year earlier. Earnings before certain items was just 18 million pounds, about a quarter of what it was a year ago.

For now ARM’s owners aren’t concerned. But with 25 percent of SoftBank’s holdings in ARM in the hands of the Vision Fund, almost $100 billion raised from other investors, there are limits on the company’s freedom to invest in the future without returns. Segars is aware that expectations are high and Son expects to recoup a lot more than the $32 billion spent to acquire ARM.

“We’ll obviously need a lot more proof points along the way if we’re to have a successful IPO which will achieve the kinds of multiples that Masa likes,” he said. “My job is to make sure that we use this time we’ve got as a private company, to invest like crazy, to take all our profits and reinvest.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net;Jeremy Kahn in London at jkahn21@bloomberg.net

To contact the editors responsible for this story: Giles Turner at gturner35@bloomberg.net, Andrew Pollack

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