Mostly ARMless

I am not exactly sure what to make of the bid by Japanese company SoftBank for ARM Holdings, one of the few British tech successes of recent years. Indeed, the chips made by ARM are in devices across the world from smartphones to tablets. Whilst ARM is a reasonably sized UK company, with revenues of around $1.5bn and profits close to $500 million, which puts it just outside the top 20 largest British firms, it is a tiddler in global terms. For example, AstraZeneca – the last big British company to be involved in politically sensitive takeover negotiations – generates revenues of around $25bn, whilst a serious tech giant such as Google makes $75bn in revenue and net profits of $16bn.

What sets it apart is its strategic importance. The company has a 95% market share in the smartphone market and as the Internet of Things takes off, the kinds of processors which the company makes will be in high demand. Although the new Chancellor Philip Hammond insists it is a demonstration that 'Britain has lost none of its allure to international investors’, it flies in the face of the speech made last week by prime minister Theresa May who argued strongly that the government would be less keen on seeing strategically important businesses sold off to 'transient' foreign investors.

One of the founders of ARM has expressed regret that the future of the company will be decided in Japan rather than in Britain. As an economist, I ought not to care, although in these increasingly difficult geopolitical times the idea of a business world without borders is no longer as attractive or realistic as it appeared a few years ago. Perhaps more importantly, the profits made by the company will flow back to Japan thus exacerbating the UK's current account deficit, which is already one of the highest in the OECD. Regret has also been expressed in tech circles that yet again another national champion has been sold off, which will stymie European efforts to build companies to compete with the Silicon valley giants. But the company belongs to its shareholders and if they decide to cash in on a very generous offer, who can blame them?

Although the weakness of sterling in the wake of Brexit has made assets such as ARM cheaper in yen terms, the surge in the share price in pounds has gone up at an even faster rate. Thus, by last Friday ARM’s share price in yen terms was 3.5% higher than on 23 June. Moreover, SoftBank paid a premium of 43% relative to Friday’s close and a multiple of 60x 2016 earnings – way above the FTSE’s already-high average of 38x. It was almost too good an opportunity for shareholders to turn down, although it could yet be derailed by a counterbid or indeed by direct government intervention.

Undoubtedly, the issue will raise concerns about the UK’s willingness to sell out important businesses to foreign investors. But so long as the UK continues to operate an industrial policy in which companies have a duty only to their shareholders, and in which they are encouraged to take decisions on purely financial terms, we will undoubtedly see more deals such as these. This is all the more true as the collapse of the pound since the EU referendum reduces the costs of buying into the UK. It also boosts the revenue of those companies (such as ARM) which derive the bulk of their revenue from overseas, which will increase their attractiveness, and explains why the prices of those companies with a high degree of exposure to the EU have outperformed. Of course, it would be hugely ironic if the Brexit-induced collapse in sterling leads to more foreign takeovers, thus weakening the case of  those who thought that this was a chance to revitalise the economy in the interests of the British people.