SoftBank to reclaim Vision Fund’s 25% share of Arm

SoftBank Group is currently engaged in discussions aimed at acquiring the remaining 25% stake in Arm that it doesn’t already own from Vision Fund 1 (VF1), a substantial investment fund established in 2017. This potential move holds promise for investors who have patiently awaited robust returns over the years. As it stands, SoftBank possesses a 75% stake in Arm and is making preparations to list the chip designer on Nasdaq in the coming month, with an estimated valuation ranging between $60 billion and $70 billion.

Should these negotiations culminate in an agreement, this strategic manoeuvre by the Japanese tech conglomerate would yield significant and immediate gains for VF1 investors, which include Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala. These investors have encountered setbacks due to unfavourable outcomes from SoftBank’s ventures into startups like WeWork and Didi Global.

An alternate course of action would involve VF1 gradually offloading its Arm shares on the stock market after the initial public offering, a process that typically spans one to two years due to the substantial size of the stake. However, this approach could expose VF1’s investors to increased risk, as there’s a possibility of Arm’s share value declining post-IPO.

Recent quarters have witnessed VF1’s return to profitability, buoyed by the growing excitement surrounding artificial intelligence, which has enhanced the value of select startups within its portfolio. Nonetheless, earlier losses impeded SoftBank’s ability to attract external investors for Vision Fund 2 (VF2), a $56 billion fund sourced from SoftBank and its leadership, including CEO Masayoshi Son.

The prospect of a substantial windfall for VF1 investors could potentially enhance SoftBank’s future capital-raising prospects from these stakeholders, although sources indicate that there are currently no immediate plans for such an endeavour.

To ensure impartiality in the decision-making process, CEO Masayoshi Son has enlisted the services of investment bank Raine Group to guide SoftBank through these negotiations. He has recused himself from VF1’s discussions concerning the matter, ensuring that the fund’s interests remain paramount. VF1’s investment committee, along with SoftBank’s investment advisory board, consisting of representatives from fund investors, are at the helm of these negotiations.

The precise valuation under consideration for the Arm transaction between the two entities remains undisclosed. Moreover, the sources emphasise that the possibility of reaching no agreement at all is plausible.

If an accord is reached, SoftBank would likely reduce the number of Arm shares offered in the IPO, potentially retaining ownership in the range of 85% to 90%. The sources have requested anonymity due to the confidential nature of the ongoing negotiations.

All parties involved, including SoftBank, VF1, and Arm, have refrained from providing comments on these developments. Raine Group has not yet responded to requests for commentary.

Arm’s impending IPO not only bodes well for VF1 but also holds significance for SoftBank, which recently reported its third consecutive quarterly loss. Declines in the valuations of major holdings like Alibaba Group, Deutsche Telekom, and T-Mobile U.S. have contributed to this downturn.

Having taken Arm private in 2016 for $32 billion, SoftBank sold a 25% stake to VF1 for $8 billion in 2017. Additionally, SoftBank has been in discussions with several tech firms, including Amazon.com, regarding potential participation as cornerstone investors in Arm ahead of its IPO.

Last week’s reports indicated that VF1 garnered gains of $12.4 billion from $89.6 billion in investments, whereas VF2 incurred a loss of $18.6 billion from $51.8 billion in investments.

Since May 2022, SoftBank has operated in a “defence mode” due to declines in technology valuations amidst rising interest rates and economic uncertainty. However, the recent surge in excitement surrounding advancements in artificial intelligence has prompted CEO Masayoshi Son to consider a shift to an “offence” mode.

Following the collapse of a deal to sell Arm to Nvidia for $40 billion in the previous year, SoftBank initiated preparations for an Arm IPO. This decision was driven by objections from U.S. and European antitrust regulators. Arm’s IPO plans involve a potential offering of up to $10 billion.

Arm’s prosperous business model, rooted in licensing designs rather than direct production of processing systems, has contributed to its relative resilience in comparison to the broader chip industry. Its technology has achieved widespread integration in smartphones and data centres, generating substantial royalty payments. Nevertheless, a slump in smartphone demand has affected Arm’s earnings.

Highlighting Arm’s strategic importance in SoftBank’s portfolio, the company welcomed Arm Chief Executive Rene Haas to its board of directors earlier this year.