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SoftBank bid for ARM Holdings paves way for more overseas takeovers

Published: 14:41 18 Jul 2016 BST

Cambridge University and people punting on River Cam
SoftBank has pledged to keep ARM in Cambridge

--- Updates with comment from ARM's founder and latest share prices ---

SoftBank Group Corp's £24.3bn takeover of ARM Holdings PLC (LON:ARM) may be the first of many as the pound falls, although the deal is unlikely to have resulted primarily from weak sterling, analysts say.

The Japanese telecoms and IT group surprised the London market by offering 1700p per share for the Cambridge-based semi-conductor chip maker. ARM's shares shot up 500.5p, or 42.1%, to 1,689.5p.

Analysts said the weak pound, which has hit 31-year lows following the UK’s vote to leave the EU, could spark more overseas takeovers of British companies as bidders hunt for bargains.

But they say buyers will need to be choosy to avoid companies that may face uncertainty over the outcome of any talks between the UK and the EU.

Chris Beauchamp at spread-betting firm IG said: “It would not be surprising to see other bids for UK firms that have now become cheaper thanks to the fall in sterling, so the ARM deal could simply be the first in a procession of deals.

“It won’t be an ugly rush, since ongoing political uncertainty will make it even more important for acquisitive firms to pick their targets carefully.”

SoftBank said it planned to maintain the ARM organisation, including ARM's existing senior management team, brand, partnership-based business model and culture to ensure continuity of a strong track record.

It also pledged to keep the headquarters of ARM in Cambridge and to increase staff numbers.

Softbank said it would at least double UK-based staff in the next five years and increase overseas headcount.

The bank's chief executive and chairman Masayoshi Son said: "SoftBank intends to invest in ARM, support its management team, accelerate its strategy and allow it to fully realise its potential beyond what is possible as a publicly listed company."

However, ARM's founder Hermann Hauser described SoftBank's move as one of the “sad and unintended consequences” of 'Brexit'.

He said the company's fate would now be determined in Tokyo rather than in London.

“Arm is the proudest achievement of my life and is the biggest player in the UK tech sector,” Hauser told the Financial Times.

While the weak pound could increase interest in UK companies, Hargreaves Lansdown said speculation that it was the main reason for SoftBank’s swoop was wide of the mark.

The broker’s Laith Khalaf said: “The ARM takeover doesn’t look like a Brexit baby, because the company is actually more expensive in Japanese Yen than it was on the day of the referendum vote.

“Almost all the company’s revenues come from overseas, so as the pound has fallen, the share price has risen sharply.”

Khalaf added that SoftBank had moved to allay fears that the takeover could lead to ARM leaving the UK by promising to double the UK workforce and keep the firm in Cambridge.

He added: “While it’s difficult to chalk this deal up to the Brexit vote, the falling pound does make some UK companies cheaper, and this takeover could act as the starting gun for more M&A activity."

But Jordan Hiscott, chief trader at Ayondo Markets, thought otherwise.

"The recent devaluation of Sterling has had some notable consequences: chiefly, the attractiveness of UK companies to foreign buyers – which seems to be the main catalyst behind Softbank’s takeover of ARM technologies this morning," he said.

"The deal between the two is not a natural fit. This is reflected in the news that the business will not be merged into Softbank and will still operate separately from its Cambridge base. Clearly, the massive 21% devaluation of GBP against the YEN played a part.

Technology stocks rose 28% on news of Softbank’s bid as investors speculated that other companies in the sector, such as Imagination Technologies PLC (LON:IMG) – up 20.5p or 10.87% to 206.5p  – could also be targets.

Imagination has been talked about as a target for smartphone giant Apple Inc, although the latter issued a statement in March saying it had talked to Imagination, but did not plan to make an offer at the time.

Analysts at Liberum Capital said ARM was likely to keep the characteristics of an independent company under SoftBank’s wing, making the deal more acceptable to customers such as Apple.

“This is likely to reduce the chances of a counter-bid, particularly if SoftBank can assure key stakeholders like Apple, Qualcomm and TSMC that the strategy will remain unchanged,” they said in a note.

Russ Mould, investment director at AJ Bell, said the fact that the share price had only risen to SoftBank’s offer price reduced the chances of a rival bid.

But he said investors had other options to benefit from the so-called Internet of Things (IoT) , which links the growing number of smart devices such as phones, meters and cars.

Mould highlighted other IoT-focused stocks such as Netcall plc (LON:NET), EMIS Group Plc (LON:EMIS) , Marimedia (LON:MARI) and also Wandisco Plc (LON:WAND).

He added: “The weak pound may tempt overseas predators to lunge for their prey. ARM is the second quoted UK firm to receive a formal bid since the EU referendum vote and sterling’s subsequent collapse – the other is Poundland PLC (LON:PLND), where South African retailer Steinhoff is looking to swoop.”

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