Economics: October 2009 Archives

A few weeks ago, Sramana Mitra asked whether Intel might just buy ARM and have done with it. It's a supremely scary thought but one that's not beyond possibility. The purchase might raise antitrust issues and that's what a lot of ARM's customers would hope for. But the IP space is still reasonably fragmented.

Even though ARM's competitors in processor IP trail way behind, Intel could easily argue that their presence means that a purchase of ARM should be blocked. As long as MIPS Technologies stays afloat, Intel has a good argument. Plus you have Tensilica and Virage Logic, courtesy of the ARC buy, in the position to have a good poke at ARM's core market in handsets, particularly as ARM is pulling away from traditional DSP now that it's closing its Leuven centre - where the Optimode DSP technology was designed - and moving more aggressively into general-purpose and graphics processing.

ARM's current market cap is slightly south of £2bn ($3bn). The slump in the pound means $1bn has been wiped off the company's price to begin with. It's not cheap. Intel would have to pay a premium to fend off another chipmaker that wanted to keep a key supplier out of the x86 maker's hands. But could the ARM board afford to recommend a lowball white-knight deal, almost certainly a stock swap, when Intel could afford to offer a significant premium in crispy folding stuff?

Yes, shipments of ARM processors are on the up. Each time an ARM core is stamped onto silicon, the company earns somewhere between 5 and 6 cents. You'd have to promise a future where it will rain ARM-core chips every day to win the certain cash versus potential future earnings argument. ARM's numbers held up reasonably well in a crushing recession but this is all relative. But the difference between a good and a bad quarter is something like $50m. For Intel, it's more like a few billion.

An Intel offer would have to be a cash deal. Intel would almost certainly destroy ARM as a coherent business unit: it just does not have the corporate mentality to run an IP company the way ARM has done. But that destruction could just as easily send more billions Intel's way while it capitalises on a much stronger position for the x86 and the other IP suppliers scrabble for the bits Intel does not care for. Even if Intel chose to be careful about integrating ARM, it could learn a lot as a company about working with other companies in the fabless chipmaking environment - something it dealt with uneasily in the past decade.

The problem for ARM is that, right now, Intel does not have a great deal to win by mounting a bid today other than a cheaper price. But if ARM does make inroads into the netbook business - if OEMs decide Chrome OS on ARM is worth supporting against simply taking the market-development money from Intel for an x86-only portfolio - then it becomes more of a target for a hostile takeover attempt by Intel. And if ARM is not successful at displacing Intel from its home territory, then its threat is gone and the reasons for doing a deal ebb away.

Dealing with an 800lb gorilla at any time is hard. Dealing with one that has more cash on hand than you can earn in 20 years of trading is another matter.