NVIDIA Ups the Ante in Chip Competition
By Jim Pearce • September 17, 2020 • Stocks to Watch
A month ago, I opined that inflated stock prices and low interest rates would soon result in a flurry of mergers and acquisitions (M&A) activity in the technology sector. As I noted then: “The economic environment has never been better to make a deal.”
Apparently, semiconductor chipmaker NVIDIA (NSDQ: NVDA) feels the same way. A few days ago, it announced that it will purchase the Arm Limited subsidiary of Softbank Group (OTC: SFTBY) for $40 billion.
Of that amount, up to $28 billion will be in the form of NVIDIA stock with the remainder in cash. After the transaction is completed, Softbank will own roughly 7% of NVIDIA’s outstanding common stock.
This is exactly the type of deal I was expecting. A year ago, NVIDIA was trading near $170. A few weeks ago, it peaked above $589 for a return of greater than 200% over the past 12 months.
In essence, this deal (if approved by regulators) will cost NVIDIA almost nothing. NVIDIA’s market cap increased by $28 billion over the past month alone, fully covering the stock piece of the purchase price.
In addition, the press release claims that this transaction will be “immediately accretive to NVIDIA’s non-GAAP gross margin and EPS.” Usually, it takes at least two to three quarters for the financial benefits of an acquisition to start hitting the bottom line.
If true, then NVIDIA is risking very little by making this acquisition. That explains why its share price jumped more than 5% the day the deal was announced. Softbank popped nearly 8% at the same time. It appears that Wall Street believes both companies will become financially stronger as a result.
Strategic Fit
The tactical aspects of this transaction aside, it makes a lot of sense strategically, too. NVIDIA’s founder and CEO, Jensen Huang, elaborated on the immediate benefits of this marriage:
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