Regulatory Scrutiny Short-circuit’s NVIDIA’s Acquisition of Arm Ltd.

Once touted as promising to “expand AI computing to every corner of the globe,” NVIDIA Corporation’s $40 billion acquisition of Arm Limited has fallen victim to heightened regulatory scrutiny. Announced back in September 2020, the union between the two technology companies was expected to “create the premier computing company for the age of artificial intelligence.” 

According to Matterhorn’s comprehensive M&A database, which harnesses AI to track current and historical deals, US-based NVIDIA agreed to acquire UK-based Arm Limited from its parent company, Japan-based Softbank Group, for a mix of cash and equity. It would have been the largest semiconductor chip merger in history.

While the deal was “subject to customary closing conditions, including the receipt of regulatory approvals for the U.K., China, the European Union and the United States,” as is customary, it was expected to close by next month. Under the terms of the share purchase agreement, Softbank will retain $1.25 billion prepaid by NVIDIA. 

But political winds have shifted since the deal was first announced 17 months ago: after taking office in January 2021, President Biden has repeatedly vowed further antitrust actions, blaming industry consolidation for feeding price increases. His Administration has acted on these vows by appointing enforcement-minded individuals to lead the Federal Trade Commission and the Justice Department’s Antitrust Division. 

Presidential advisor Timothy Wu stated that the Administration’s antitrust agenda – the most aggressive in generations – is in response to polls that “show that the public is truly concerned that the federal government should do more about the power of monopolies.” Senator Michael Lee, the ranking Republican on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, criticized this agenda as “an ideological witch hunt” that unduly interferes with private enterprise. 

In December 2021, the FTC sued Nvidia to block the acquisition, alleging that “[t]he proposed vertical deal would give one of the largest chip companies control over the computing technology and designs that rival firms rely on to develop their own competing chips.” According to the FTC’s complaint, because Nvidia supplies microchips and Arm provides chip design technology used by Nvidia and its competitors, “the combined firm would have the means and incentive to stifle innovative next-generation technologies, including those used to run datacenters and driver-assistance systems in cars.”

UK regulators had also expressed concerns, launching a national security probe into the deal. They and EU regulators expressed concerns that the “merger could restrict access to Arm’s ‘neutral’ chip designs and that it could lead to higher prices, less choice and reduced innovation in the semiconductor industry.”

Softbank is expected to spin off Arm in a public offering during the fiscal year ending March 31, 2023. Softbank was advised by law firms Morrison & Foerster LLP and Hogan Lovells. Nvidia was advised by law firm Latham & Watkins LLP, and financial advisor Morgan Stanley.