Arm's length

On 13 September 2020 Nvidia promised to buy Arm for $40bn and, in the same release, to keep “maintaining the global customer neutrality that has been foundational to its success”.^{2NVIDIANVIDIA to Acquire Arm for $40 Billion, Creating World's Premier Computing Company for the Age of AI13 Sept 2020} It took 17 months for regulators to decide that a promise was not enough. On 8 February Nvidia and SoftBank, Arm’s owner, called the deal off, citing “significant regulatory challenges preventing the consummation of the transaction, despite good faith efforts by the parties”.^{1SoftBank GroupNVIDIA and SoftBank Group Announce Termination of NVIDIA's Acquisition of Arm Limited8 Feb 2022} The cheque for $1.25bn that Nvidia paid up front stays with SoftBank.^{1SoftBank GroupNVIDIA and SoftBank Group Announce Termination of NVIDIA's Acquisition of Arm Limited8 Feb 2022}

Take the deal on its own terms. Nvidia, which makes the graphics chips that power much of the world’s artificial intelligence, offered $21.5bn in its own stock and $12bn in cash, with up to $5bn more if Arm hit financial targets.^{2NVIDIANVIDIA to Acquire Arm for $40 Billion, Creating World's Premier Computing Company for the Age of AI13 Sept 2020} Arm designs processor technology and licenses it to others, among them Nvidia’s rivals.^{3Federal Trade CommissionFTC Sues to Block $40 Billion Semiconductor Chip Merger2 Dec 2021} That is the rub. The Federal Trade Commission’s complaint, filed on 2 December 2021, argued that Nvidia would have the ability and the incentive to use its control of Arm to undermine competitors, and could see commercially sensitive information from licensees who are also its rivals.^{3Federal Trade CommissionFTC Sues to Block $40 Billion Semiconductor Chip Merger2 Dec 2021} The agency named three markets: driver-assistance systems for cars, smart network cards for data-centre servers and Arm-based processors for cloud providers.^{3Federal Trade CommissionFTC Sues to Block $40 Billion Semiconductor Chip Merger2 Dec 2021}

Britain was no more comforting. After a first look, the Competition and Markets Authority found the deal could cause a “substantial lessening of competition across four key markets”: data centres, the internet of things, cars and gaming.^{4UK GovernmentDigital Secretary asks CMA to carry out further investigation into Nvidia's takeover of Arm16 Nov 2021} On 16 November the Digital Secretary, Nadine Dorries, ordered an in-depth investigation covering both competition and national security, giving the authority 24 weeks, with a possible eight-week extension.^{4UK GovernmentDigital Secretary asks CMA to carry out further investigation into Nvidia's takeover of Arm16 Nov 2021} Ms Dorries said that “Arm has a unique place in the global technology supply chain”.^{4UK GovernmentDigital Secretary asks CMA to carry out further investigation into Nvidia's takeover of Arm16 Nov 2021}

We have a reputation here for preferring deals to bans, and the reputation is deserved. Most mergers make firms bigger and customers better off. But this one asked regulators to trust a pledge, and a pledge is only as good as the incentives behind it. A supplier that sells to everyone can, in principle, be neutral. A supplier owned by one of its customers cannot, however sincere its chief executive. Nvidia said it would continue Arm’s open-licensing model.^{2NVIDIANVIDIA to Acquire Arm for $40 Billion, Creating World's Premier Computing Company for the Age of AI13 Sept 2020} It could not promise that its successors would, nor that its rivals would believe it. In a business where chip designs are chosen years ahead of the products that use them, that doubt is itself a cost.

The best case for the deal is worth stating fairly. Nvidia argued that the combination would speed up Arm’s push into data centres, with Arm’s central-processor designs and Nvidia’s graphics and networking expertise working together. Jensen Huang, Nvidia’s chief executive, also promised that “Arm will remain headquartered in Cambridge”, where Nvidia would build an AI research facility.^{2NVIDIANVIDIA to Acquire Arm for $40 Billion, Creating World's Premier Computing Company for the Age of AI13 Sept 2020} These are real attractions, and a bigger Arm might have competed harder with Intel. Yet they are also the gains that could be had by commercial partnership, which needs no merger. Nvidia keeps its 20-year Arm licence, and Mr Huang says Nvidia will carry on as a “proud licensee for decades to come”.^{1SoftBank GroupNVIDIA and SoftBank Group Announce Termination of NVIDIA's Acquisition of Arm Limited8 Feb 2022}

That leaves the harder question of what happens to Arm. SoftBank says it will now prepare a public offering of the firm, starting in its financial year ending in March 2023.^{1SoftBank GroupNVIDIA and SoftBank Group Announce Termination of NVIDIA's Acquisition of Arm Limited8 Feb 2022} Masayoshi Son, SoftBank’s founder, said it would “take this opportunity and start preparing to take Arm public”.^{1SoftBank GroupNVIDIA and SoftBank Group Announce Termination of NVIDIA's Acquisition of Arm Limited8 Feb 2022} A listing would at least be an honest answer. A standard that so many rivals use should have no owner with a rival’s interest, and a stock-market float, with its many small shareholders and no controlling customer, is the nearest approximation to a Switzerland that the chip industry will get.

Nothing in this episode argues for a general suspicion of size. The FTC’s case worked because it named a specific harm: the loss of a neutral supplier. That is the kind of test that serves companies better than a hunch.

Nvidia wanted to own the road. Instead it will keep paying the toll.