Arm/SoftBank: even an army of underwriters cannot stand up $70bn valuation 

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Chip designer Arm is set to be the biggest US listing of the year. A timely artificial intelligence boom has lifted chip stock peers. Major customers are expected to back the initial public offering. So why has owner SoftBank felt the need to line up so many banks to help?

The offering is being led by Barclays, Goldman Sachs, JPMorgan and Mizuho along with 24 other underwriters. All these bankers will be happy for the work amid a market dry spell that cut IPO deal proceeds to a record low last year.

But the large roster is tacit admission that SoftBank needs some assistance to hit its targets. Arm is expected to seek a valuation of $60bn to $70bn. If successful, it would help the Japanese investment group to repair some of the damage done by its Vision Fund, which lost a record $30bn last year. 

SoftBank has tried to set the stage for a high price. The listing document reveals an internal transaction in which it acquired its own Vision Fund’s stake in Arm for $16bn, a deal that valued the chip company at more than $64bn.

Investors should take little notice of this figure. On a broader, average industry earnings multiple, Arm’s enterprise value would be closer to $30bn. This is not far off the price SoftBank paid when it bought the company in 2016.

Efforts to market Arm as an AI company do not mean it should be valued in line with Nvidia, the leading maker of AI chips. Sales of AI chips are at a record but Arm’s sales fell in the last fiscal year. In fact, its performance is more closely tied to smartphones, a market that has been in decline since 2016.

The most serious risk to Arm’s valuation is China. US and UK export controls mean revenues there, nearly a quarter of the company total, are under threat. Chinese companies have also been investing aggressively in developing RISC-V, open-source chip design architecture that could serve as an alternative to Arm’s designs.

Valuation discrepancies between SoftBank and markets are nothing new. Look at WeWork, where Softbank’s internal revaluations of its investments have been a source of persistent concern for shareholders.

Shares in SoftBank have dropped more than a third from their 2021 peak. Chief executive Masayoshi Son argues that it trades at a steep discount to net asset value. His inflated assessment of Arm’s value suggests that he is incorrect.