EU Gatecrashes NVIDIA’s Arm Acquisition Party, Announces a Thorough Investigation

NVIDIA is facing an in-depth probe into its proposal to acquire chipmaker Arm by the EU’s executive arm and competition watchdog. The European Commission is expected to announce its verdict in March 2022.

On Wednesday, the European Commission (EC) expressed concerns over the acquisition of semiconductor design company Arm by one of the premier U.S. chipmakers, NVIDIA. Subsequently, the European Union’s competition and antitrust watchdog formally ordered an in-depth investigation into the proposed deal, valued at $40 billion.

The announcement of this investigation comes just a couple of months after the U.K’s Competition and Markets Authority (CMA) raised an alarm over the deal. CMA and now EC expressed apprehension about the deal nearly a year after NVIDIA proposed to acquire the SoftBank Group-owned British developer Arm in September 2020.

“Our analysis shows that the acquisition of Arm by NVIDIA could lead to restricted or degraded access to Arm’s IP, with distortive effects in many markets where semiconductors are used,” said EC EVP and Commissioner for Competition Margrethe Vestager. “Our investigation aims to ensure that companies active in Europe continue having effective access to the technology that is necessary to produce state-of-the-art semiconductor products at competitive prices.”

The company is best known for designing Reduced Instruction Set Computer (RISC), which is an architecture used in chips used across several devices. Arm, which itself is an acronym for Advanced RISC Machines, currently licenses this proprietary technology, which is now the cornerstone of several processors made by companies such as Qualcomm and Apple.

Arm designs energy-efficient chips which are primarily suited to the needs of consumer electronic devices such as smartphones, tablets, multimedia players, smart TVs, Wi-Fi routers, printers, control systems, cameras, IoT devices, and many more.

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The breadth of devices that leverage Arm’s technology also include washing machines to large-scale datacenters. Going forward, Apple has even planned a shift from Intel’s x86-based processor architecture to RISC for its Mac line of desktop computers.

Arm supplies IP rights to several chipmakers which directly compete with NVIDIA. It is noteworthy that Arm itself doesn’t compete with NVIDIA, which is why EC’s trepidation for the deal stems from the notion that the merger may make Arm’s customers (almost every chipmaker) direct competitors to their own supplier, impacting downstream companies.

EC, through its preliminary investigation, ascertained that, “Arm has significant market power on the market for the licensing of Central Processing Unit (‘CPU’) IP for use in processor products. Therefore, the Commission has concerns that the merged entity would have the ability to restrict or degrade access to Arm’s technology by providers of processor products NVIDIA may compete with.”

EC fears that the $40 billion deal would stifle innovation owing to the reluctance of competitors to share commercially sensitive information with an NVIDIA-owned Arm. The reallocation of Arm’s R&D spending on certain profitable technologies, as opposed to the ones that NVIDIA competitors are reliant upon, is another point of contention.

EC also expects a reduction in competition in the market for the supply of processor products for data centers, smart network interconnects (SmartNICs), automotive advanced driver-assistance systems (ADAS), infotainment applications, IoT devices, gaming devices, and PCs.

NVIDIA attempted to assuage some of these concerns in February 2021, and later to the EC in October. NVIDIA CEO assured the maintenance of Arm’s open licensing model and customer neutrality. NVIDIA also committed to continue Arm operations in the U.K. However, it looks like EC didn’t buy it, stating that these commitments are “insufficient to clearly dismiss its serious doubts as to the effect of the transaction.”

Acquired in 2016 for $31.4 billion, Arm was one of SoftBank’s biggest acquisitions. Offloading Arm to NVIDIA or any other player would generate handsome returns for the Japanese investment management company, which lost some money in WeWork and Uber.

Since NVIDIA and SoftBank announced the deal last year, both companies expected turbulence due to regulatory scrutiny, especially in the U.K., China, the EU and the U.S. NVIDIA estimated the time to close the Arm acquisition to be 18 months, which is March 2022.

EC has said it would take a decision after an in-depth inquiry lasting 90 days, or by March 15, 2022. Given NVIDIA (U.S.) and Arm (U.K.) don’t fall within the jurisdiction of the 27 member nation-block, it is doubtful whether EC can block the acquisition from materializing. However, EC will certainly have a say in NVIDIA-Arm commercial activities being carried out in the EU.

Update

The Federal Trade Commission (FTC) is now challenging the proposed acquisition of ARM by NVIDIA, and has sued to thwart the deal after assessing that NVIDIA would have the “means and incentive to stifle innovative next-generation technologies.”

“Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets,” said FTC Bureau of Competition director Holly Vedova. “This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals. The FTC’s lawsuit should send a strong signal that we will act aggressively to protect our critical infrastructure markets from illegal vertical mergers that have far-reaching and damaging effects on future innovations.”

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