Shares of chip designer ARM (ticker: ARMH) have jumped on rumors that Apple might buy the company. With an ARM market value of $5B, Apple could definitely afford the purchase, whether it is with a mix of stocks and cash or with a cash-only transaction (Apple sits on $40B in cash). The interesting question is *what* would Apple do with such a purchase. ARM is an intellectual property (IP) company that typically designs chips -or logic blocks- and licenses the blueprints and/or instruction sets to other companies to build actual chips. Last year, ARM has made “only” $500M in revenues, despite being the dominant player in the smartphone market.
Some argue that if Apple was to buy ARM, it would protectits futurebecause Apple mobile productsrely on ARM designs. That might be so, but Apple’s success is also very much in ARM’s interest too, so ARM isn’t likely to do anything crazy to harm Apple. That said, it would prevent a competitor like… Samsung (?) to bid for ARM.
Apple could also buy ARM and benefit from access to newer designs before licensing them to one of the other 220 companies that use ARM licenses. That might create a backlash from other customers, with unforeseen consequences in the long term. If customers flee, this could turn ARM into money-loosing unit.
For the most paranoid, Apple could also use the “nuclear” option and cut access to ARM designs to its major competitors like Samsung, Qualcomm, Marvell, Freescale or NVIDIA. This seems radical, but isn’t $5B-$6B worth it if they can get rid of all the competition in one strike? Again, there might be many unforeseen consequences, and pushing a bunch of ARM customers into a pit might not help in the long term.
On the paper, these possibilities seem plausible – some more remotely than others. Without knowing what Apple spends on ARM licenses every year (50M-80M?), it’s hard to figure out how Apple see this. Also, we have to remember that although Apple uses ARM cores, they also custom-design the rest of their A4 processor (possibly using other people’s IP blocks). Finally, most of the added-value from Apple comes from iOS, the operating system that powers all their ARM-based devices.
I would also add that buying companies whose value is intellectual property (it’s employees) can be very dangerous, depending on how folks in the acquired company feel. If there’s enough employees walking out, you basically paid billions of dollars for an empty shell and a portfolio of patents and designs that will be worth less overtime. Any acquisition has to be embraced by the target.
At the moment, I think that Apple doesn’t have the incentive to spend five or six billion dollars on an ARM acquisition. Arguably, they can extract more value from investing that money in new products and R&D.
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