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Arm CEO Rene Haas and executives cheer, as Softbank's Arm, a chip design firm, holds an initial public offering (IPO) at the Nasdaq Market site in New York, U.S., September 14, 2023. REUTERS/Brendan McDermid |
On Thursday, shares of SoftBank's Arm Holdings (ARM.O) surged by roughly 25% above their Nasdaq launch price, reviving investor optimism for a recovery in the sluggish initial public offering market (IPO).
After a seven-year hiatus from the public markets, the stock, which had opened at $56.10, increased by 24.68% to end at $63.59 and valued the British chip inventor at $65 billion. The IPO had a $51 price.
According to market participants, Arm's impressive performance shows that investor demand for initial public offerings, which had been severely impacted over the previous two years by geopolitical tensions and rising interest rates, may be on the upswing.
Salman Malik, a partner at Toronto's Anson Funds, declared that the IPO was a success. That will benefit the IPO pipeline and demonstrate that the AI subject is still relevant today.
In the upcoming weeks, a number of businesses, including the supermarket delivery service Instacart, the German shoe manufacturer Birkenstock, and the marketing automation platform Klaviyo, plan to go public.
Bankers and experts predicted that if those IPOs are successful, a flood of new stock market listings will follow in 2024.
After pricing its IPO at the top of the advertised range on Wednesday, Arm achieved a value of $54.5 billion, bringing in $4.87 billion for SoftBank (9984.T), which still owns a 90.6% interest.
In 2016, the Japanese investment juggernaut paid $32 billion to take Arm private. Since at least 2020, when it decided to sell Arm to chipmaker Nvidia (NVDA.O) in a $40 billion transaction, it has been aiming to sell off part of its interest. That proposal had to be scrapped because of regulatory obstacles.
Since then, the company has changed course in order to become public, but it has also presented challenges, including conflicts with the British government, which was pushing for the chip manufacturer to list in London.
Although a solid performance on Thursday, Arm's debut represents a decline from the $64 billion it was valued at when SoftBank purchased the 25% share in Arm it did not directly hold via its Vision Fund business last month.
Yet, SoftBank CEO Masayoshi Son's excitement for Arm has not diminished as a result, according to an interview given by Arm's chief financial officer on Thursday.
"He has a lot of confidence in the business. His main concern is with the price in the future rather than the price today or even in the near future."
As practically every smartphone in the world is powered by Arm's chip designs, Arm is an essential component of the modern hardware ecosystem. Apple said last month that its two biggest markets, smartphones and personal computers, had declined, causing a 1% decline in yearly sales.
Child said that Arm can still increase sales since it was earning a 5% royalty rate on chips created with the most recent technology as opposed to a 3% royalty rate with the older one. The most cutting-edge Arm technology is more likely to be found in premium phones.
According to several bankers who worked on the IPO, the circuit designer Cadence Design Systems is the company with the closest valuation similarity to Arm. Whereas Arm trades at $51 per share at a price of 29 times profits, Cadence trades at 35 times earnings for the year 2025.
'HUMILITY'
The examination of LSEG data as of Friday revealed that the 10 largest U.S. IPOs of the previous four years are down, on average, 47% from the closing price on their first day of trade.
With an average loss of 53%, investors who purchased at the peak of an intraday price increase, which frequently occurs in high-profile listings, would have fared considerably worse.
Jordan Stuart, a portfolio manager at Federated Hermes, said: "The acquisition was priced inside its range, which tells me that investors are price sensitive and boards and investment banks are displaying a little bit of humility."
Stuart noted that although Arm's successful IPO would probably inspire other tech firms to proceed with their own offerings, it is unlikely to herald a return to the overheated market of 2021.
Unless interest rates start to drop and equities start to look more appealing than bonds, he predicted that industries like biotech would likely remain inactive for the next one to two years.
"Until the rate regime changes, you will witness not just a discernment among investors, but some sectors altogether missing from the market."
NASDAQ SCORES
The Nasdaq (NDAQ.O), which won the listing, may see future revenue growth benefit from Arm's launch.
Big transactions like Arm provide the Nasdaq immediate exposure and are a long-term wager to increase the recurrent income the exchange receives from yearly listing fees, according to experts.
According to Andrew Bond, managing director and senior fintech analyst at Rosenblatt Securities, "Nasdaq is able to create income whenever it obtains a new listed firm not just via the listing but also through the additional services that it provides to these listed companies on its exchange."
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