NVIDIA

’s

NVDA

proposed deal to acquire U.K.-based semiconductor chip designer, Arm Holdings, encountered another major hurdle after the British government ordered an in-depth investigation of the transaction over competition and national security concerns.

U.K.’s Secretary of State for Culture and Digital, Nadine Dorries, yesterday revealed that she has instructed the Competition and Markets Authority (“CMA”) to carry a “Phase Two” probe of the proposed acquisition.

The CMA has been given 24 weeks to deliver a final report, with a provision to extend the time frame for eight more weeks. Based on the reports filed by the agency, the U.K. government could block the deal on one or both grounds, clear it on both grounds or approve it with certain conditions.

What’s Concerning Agencies About the NVIDIA-Arm Deal?

The reliable access to Arm’s technologies and the resilient supply chain are of utmost importance for the U.K.’s national security and defense departments. Moreover, the England-based chip designer is often referred to as the Switzerland of the semiconductor industry and plays a neutral role in the space. Therefore, the deal is feared to block this chip access neutrality and could favor the U.S. owner over its rivals.

The CMA in its August 2021 report has already warned that following the acquisition, NVIDIA could cut off Arm’s technology access to its rivals and lead to lesser competition, stifle innovation and push up chip prices.

NVIDIA-Arm Deal Faces Multiple Hurdles

On Sep 13, 2020, NVIDIA inked an agreement to acquire Arm from its existing owner, Softbank Group Corporation, in a cash-and-stock deal worth $40 billion. A rise of approximately 147% in NVDA’s stock price has increased the value of the deal more than $50 billion.

However, the deal has caught the attention of competition regulatory bodies of several countries. Following the initiation of the investigation from the CMA in January 2021, the U.S. competition regulator, the Federal Trade Commission (“FTC”) opened a probe on grounds of competition in February.

The FTC has sought more detailed information about the transaction from all the three companies — NVIDIA, Arm and Softbank. It has also asked other relevant companies that might provide information regarding this deal.

The European and Chinese regulatory bodies are also gearing up to launch lengthy investigations over whether the sale of Arm to NVIDIA could impact competition and disrupt the global industry-wide chip supply chain.

Tech Giants Opposing the Deal

Additionally, several tech companies, including

Alphabet

’s

GOOGL

Google,

Microsoft


MSFT

and

Qualcomm


QCOM

, have opposed the transaction and asked the U.S. anti-trust regulators to intervene.

These firms are arguing that the acquisition would provide NVIDIA control over Arm’s intellectual property (“IP”) rights, which license chip designs and related software to those willing to pay for the same, including rivals to one another.

Qualcomm has been more vocal in opposing the deal. Arm supplies IP rights to the company whose chip designs are found in most of the smartphones around the globe. The company is worried that following the acquisition, NVIDIA could limit its access to Arm’s chip licenses, which have built its mobile chip empire using the latter’s designs.

Qualcomm has also stated that it is open to invest in Arm if the regulatory bodies block NVIDIA’s deal. Arm’s other customers, Alphabet and Microsoft, have also voiced similar concerns that NVDA might limit the access to Arm’s technologies or raise the prices.

Conclusion

NVIDIA aims to integrate its AI computing platform with Arm’s expertise in a bid to create a premier computing entity. Additionally, the company had earlier stated that the transaction would be immediately accretive to the non-GAAP gross margin and non-GAAP earnings per share post the transaction’s closure.

However, looking at the protest by major tech companies and the intensifying antitrust scrutiny by several regulators across the world, it would be a difficult task for NVIDIA to win an approval for Arm’s acquisition.

With multiple antitrust agencies initiating fresh in-depth probes, NVDA is most likely to miss its initial target of completing the acquisition in March 2022. The European Union has set a Mar 15, 2022 deadline to disclose its final decision about the proposed transaction. Also, U.K.’s “Phase Two” probe’s time frame of 24 weeks plus an eight-week extension translates that the government’s final decision would come by June-end 2022.

Currently, Alphabet sports a Zacks Rank #1 (Strong Buy), while NVIDIA and Qualcomm carry a Zacks Rank #2 (Buy). Microsoft carries a Zacks Rank #3 (Hold), at present. You can see


the complete list of today’s Zacks #1 Rank stocks here


.

The long-term earnings growth rate projections for Alphabet, NVIDIA, Qualcomm and Microsoft are pegged at 25.8%, 19.5%, 17.5% and 12%, respectively. Shares of GOOGL, NVDA, QCOM and MSFT have soared 68.7%, 131.3%, 19.3% and 52.6%, respectively, in the year so far.

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