RMBS--The Anglo File: Do You Know Your ARC From Your ARM?
By Nick Watson
Senior European Correspondent
9/6/00 3:02 PM ET
LONDON -- If you know your ARM (ARMHY:Nasdaq ADR - news) from your MIPS (MIPS:Nasdaq - news), then you might be interested in ARC.
ARC International, a U.K.-based designer of microprocessors -- an integrated circuit that can have software programmed into it to manage data -- is set to list its shares on the London Stock Exchange at the end of this month or beginning of October under the name ARC Cores. This initial public offering is proving to be of considerable interest to the market, no doubt due in large part to the phenomenal success of another U.K. microprocessor designer, ARM Holdings, whose shares have risen about 600% since they listed in April 1998.
However, while ARC and ARM share many characteristics, there are important differences in the type of microprocessor cores the two companies design, which some argue makes ARC an even more exciting prospect than its cousin.
ARC to Triumph
Market watchers are certain that ARC's flotation will be a success. Chosen this month as one of the best upcoming companies by Communication Systems Design, a monthly magazine covering the communications industry, ARC has set the price range for its shares at 170 pence to 210 pence. Based on the midrange pricing, ARC would have a market capitalization of about £500 million ($720 million), putting it in the top half of companies in the Techmark 100 index.
However, analysts such as Adam Lawson of brokerage Teather & Greenwood are forecasting that the market will value the company in excess of £600 million, with the shares rising to a "significant premium on their eventual debut."
Apart from the similarity of the names, ARC, like ARM, is a seller of intellectual property rather than actual products. Under this model, such "chipless" semiconductor companies concentrate fully on what they are good at -- designing chips -- rather than burden themselves with the complexities and huge capital requirements of building and operating fabrication plants.
According to Gartner's Dataquest, the global semiconductor intellectual property (IP) market grew 36% in 1999 to $417 million; microprocessors dominate, with a value of $190 million. The top three IP vendors are ARM, MIPS and Rambus (RMBS:Nasdaq - news).
ARC and ARM both design 32-bit microprocessor cores. However, here the similarity ends.
A fundamental difference between ARC and ARM's microprocessors is that ARC's are customizable to fit any application. Unlike ARM's processors, the instruction set of an ARC processor can be configured to match the customer's exact requirements. This makes it suitable for a wider range of applications and allows a designer to customize it to have either greater performance or lower power at reduced frequencies.
"ARM's processors are designed from the bottom up and so need a considerable amount of reworking," says a source at one of ARC's investors, who wishes to remain anonymous. "It's much simpler with ARC's designs: Use once, use again."
In practice, according to ARC CEO Bob Terwilliger, this means that the average development time for a processor, usually 12 months, can be reduced by about 25%. Also, as future generations of the processor are rolled out, these time efficiencies can be further increased. This is a crucial advantage in today's hypercompetitive chip market because manufacturers are increasingly looking for ways to be more responsive to customer demands and get these products to market faster.
While ARC's processors are used mainly in products such as cable and DSL modems, 3D graphics chips, cordless telephones and digital cameras, Jennifer Smith of Dain Rauscher Wessels believes the new breed of configurable processor designer, such as ARC and Tensilica, will intensify the competition in the mobile-phone chip market, which ARM currently dominates. Dain will act as a co-manager for ARC's IPO, while the bookrunner is Goldman Sachs.
However, convincing customers to change their architecture to use a new source of IP is considered the biggest barrier to entering the IP chip market. Additionally, ARM's dominance of the market for third-generation mobile phones, which will offer data as well as voice services, looks secure, at least in the medium term.
There is a huge battle among Microsoft (MSFT:Nasdaq - news), Palm (PALM:Nasdaq - news) and a consortium called Symbian -- made up of Nokia (NOK:NYSE ADR - news), Ericsson (ERICY:Nasdaq ADR - news), Motorola (MOT:NYSE - news), Matsushita (MC:NYSE ADR - news) and Psion -- to establish their operating system as the standard for these new mobile phones. Regardless of who wins, ARM has the intellectual rights to the chip that will power these devices.
Still, with some 40 licensees already signed up, including Fujitsu and Texas Instruments (TXN:NYSE - news), and no end in sight to the huge proliferation in digital devices, ARC looks set to be a major player in the semiconductor IP market. As such, it's not surprising that the company plans to sell the 75 million shares on offer only to institutions, once again leaving retail investors to pay an arm and a leg in the secondary market. |
