You can think of Masayoshi Son's investments in terms of investment themes, like software, wholesaling, communications or silicon, but one idea dominates. Son sees himself as a new "Silk Road," bringing the technology of the West to China and extracting the tradesman's profits for his SoftBank Co. (OTCPK:SFTBF).
It's against that background that you should consider his move for ARM Holdings (NASDAQ:ARMH), on which he is paying a 43% premium, 32 times its sales, in order to freeze out competitors and get a deal done quickly.
China was why Son, then a struggling publisher and games producer, bought the old Comdex trade show in the 1990s, and China was why he was an early investor in Alibaba (NYSE:BABA). China was why he saw Sprint (NYSE:S) as part of a single global mobile network. Comdex collapsed beneath him, Sprint has disappointed. But China, in the form of Alibaba, made him a billionaire 15 times over.
Put simply, China needs ARM, but its businesses also needs to remain at arm's length of it. ARM designs have proven themselves to be as good or better than those of Intel (NASDAQ:INTC), and its fab-less business model is superior. Companies like Apple (NASDAQ:AAPL) license, tweak and order fab production of its designs, creating custom solutions for mass production. Apple uses ARM instead of Intel because Apple can control the result without actually reinventing anything.
As China makes the Internet of Things the centerpiece of its 13th Five-Year Plan, it faces a dilemma. It likes competition among designers, suppliers and solution providers. But it knows that placing key technology into any Chinese company hands threatens that competition, because any intellectual property owner would not hesitate to use it against rivals.
ARM provides an impartial third party. The model is similar to that of an open source foundation. Under Son, ARM will negotiate its road map with all major Chinese industrial players, implement those solutions in designs, and allow the market to work its will, as it did in mobility, where Chinese manufacturers own nearly the whole market.
This also is why there won't be an over-bid from a company like Intel or Qualcomm (NASDAQ:QCOM). No existing company could provide the impartiality China wants. Son, in charge of ARMH, offers that impartiality.
The Chinese play, meanwhile, will provide the cash flow and many of the standards needed for ARM to do the same IoT work in other parts of the world, including the United States. It's this cross-fertilization of intellectual property, on a global scale, that Son is looking for. This is his Silk Road. He has far more credibility in this area, at least with China, than the British owners had. SoftBank also has the capital to let ARM quickly say yes, and mean it, on major projects that may take thousands of engineers to implement.
This deal has taken time to come together. Son's new vision was likely behind the resignation of designated successor Nikesh Arora as well as the sale of a majority of Finnish game designer Supercell Oy to a Chinese company. SoftBank is now more likely to be a seller than a buyer regarding Yahoo Japan, which Arora had been talking of buying.
The ARM deal has taken SoftBank's stock down by 11%, and if you like aggressive, entrepreneurial owners like Elon Musk, I suggest you get on board. Not everything Son does works out, but when he's right he is very, very right.
And I'm not the only one who thinks he's right this time.
Disclosure: I am/we are long AAPL, INTC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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