When SoftBank is selling, why are you buying?

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There are many reasons not to buy Arm Holdings. Here are some:

This is not Nvidia.
From some angles, its IPO looks almost as expensive as Nvidia’s.
It is not fashionable. Technology investment is in vogue, and Arm’s advantages – efficiency, portability, interoperability – are considered unattractive because the power is unlimited, antitrust lawyers are extinct, and no one can get out.
Cornerstone investors such as Apple, Google, Nvidia, Samsung, Intel and TSMC appear to want to block stakes to prevent other cornerstone investors from eventually acquiring. Protecting Arm’s industry neutrality means that after listing, the shareholder base may become similar to the impasse in Mexico.
Chinese joint ventures are a disaster.
Arm’s former owners are often British fund managers who don’t wait for an invitation to complain about how the company has grown with the likes of Robin Saxby, Warren East, Jamie Urquhart. Jamie Urquhart or Sophie Wilson’s retirement and lost soul. Buying Arm in 2023 means investors will be obligated to listen to them.

Another reason to consider is the identity of the seller, as SoftBank doesn’t have a good track record with float. Analysis by FT Alphaville shows that only four IPOs of SoftBank-backed companies are still trading above the issue price, and 21 of them are trading below the issue price. The average IPO loss across the entire portfolio was 46%.

Below is a chart of equity financings in which SoftBank has or has had a significant interest that has been circulating among the buy-side in recent days. We recreated the table using Bloomberg data and our own research. Hover over each bar for more details:

To put it simply, IPOs of SoftBank-backed companies have raised a total of the equivalent of $75.4 billion. The present value of the shares sold is $68.7 billion, or a 9% decrease.

Alibaba’s landmark 2014 listing on the New York Stock Exchange helped overall results. Excluding it, total funds raised would fall to $50.4 billion, with the present value falling nearly 33% to $33.9 billion.

If subsequent issuances are included, the total raised would increase to $81.7 billion, compared with the current value of $72.6 billion. Note, however, that the data set includes primary and secondary stock sales, and these deals don’t necessarily involve SoftBank, so this is a somewhat misleading measure.

Try to understand it yourself with this bar chart. . .

. . . And this bubble chart, where the size of the bubble represents the size of the raise:

(Alibaba Bangkok IPO in 2022 involves depositary receipt. We quote it here because it appears in the Bloomberg data, even though it looks strange. )

Another thing to do is to show whether the additional issuance was above or below the IPO price. As you can see in the chart below, premium sales were slightly higher than discount sales, but that was largely due to Nasdaq-listed oncology group Guardant Health. Only one follow-on financing has turned a profit so far.

Will Arm break the general trend of value destruction? Probably not. Its float is already on the back foot.

SoftBank CEO Masayoshi Son has been looking to double his money after taking the chip design company private for $32 billion in 2016. The group gave Arm a $64 billion valuation last month by buying a 25% stake from its own Vision Fund unit.

It currently plans to sell 9.4% of Arm’s shares at a market value of $48 billion to $52 billion. Bookrunners on the deal are tasked with raising $4.9 billion, or possibly less, and for SoftBank, the initial placement would be in the same value range as Coupang (down 47% since its IPO) and Didi Chuxing (down 75%) — although there is still plenty of inventory for sale.

As the chart above shows, investors in SoftBank-backed companies rarely lose money by waiting for a follow-on offering rather than buying at the IPO. A more reliable strategy is to avoid them altogether.

So, good luck to Arm’s 28 underwriters.

Further reading:
— Arm Holdings Form F-1 (U.S. Securities and Exchange Commission)
— Farewell to Arm (FTAV)

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