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What is ARM—and why is SoftBank spending $32 billion on it?

The company doesn’t make any products on its own, but its designs are used in billions of chips.

SoftBank's $32 billion deal to buy chip designer ARM had many people scratching their heads Monday.

It's not that ARM isn't important in tech. Indeed, its processor designs are used by nearly every chipmaker and, by extension, find a place inside nearly every piece of tech gear from cell phones to hard drives to networking gear.

Simon Segars, chief executive officer of ARM Holdings Plc,
Chris Ratcliffe | Bloomberg | Getty Images
Simon Segars, chief executive officer of ARM Holdings Plc,

Rather, it is the fact that the chipmaker is so far removed from SoftBank's other businesses. The Japanese conglomerate has a wide range of tech holdings, including a controlling interest in Sprint, its own mobile carrier business in Japan and investments in Alibaba, OlaCabs and Snapdeal.

"SoftBank would have been one of least likely I thought to buy ARM," said longtime chip analyst Kevin Krewell, of Tirias Research. "They are not in semiconductor business in any significant way."

Krewell says he suspects that SoftBank looked hard at buying other companies in the chip business and decided that ARM was the strongest play, especially for the very long term.

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"ARM has the biggest reach in the semiconductor business," Krewell said, noting that even archrival Intel uses its ARM designs in some chips.

It's worth taking a second to understand how ARM's business works and what it does.

ARM doesn't make any products. Not only does it not manufacture chips, it doesn't even design the ones that are eventually sold.

Rather, it designs the core engines that get built into others' chips — chips from companies like Qualcomm and Nvidia as well as processors like Apple's A9 and Samsung's Exynos.

For its efforts ARM gets a small license fee from every chip that uses its design. Because it is in so many products, that small license fee adds up to a pretty healthy business. (Its 2015 revenue was nearly one billion British pounds.)

And its sphere of influence is growing, both in terms of the number of chips using its design as well as the kinds of products. Last year nearly 15 billion chips using its designs were sold, up from about six billion in 2010.

Cars, servers and internet-of-things devices are all seen as big expansion areas for ARM chips.

So just what will SoftBank do with ARM?

It's likely to be business as usual, for now.

As part of the deal, ARM got SoftBank to agree to keep its existing team and strategy in place, including its focus on licensing its chips to partners. SoftBank also agreed that over the next five years ARM would double its employees in the United Kingdom, where it is based, and grow overall headcount as well.

SoftBank may eventually try to get ARM chips into the servers that power its own telecommunications gear, or boost the license fee ARM gets from those who use its designs, Krewell said.

"Over time ARM will have a greater influence," Krewell said.

Another question is what, if anything, the deal means for how SoftBank manages its big investment in Sprint.

NewStreet Reseach analyst Jonathan Chaplin speculated that it could make it harder for SoftBank to buy T-Mobile US down the road simply because of all the cash it is using to buy ARM.

"The ARM deal doesn't diminish the strategic value of a (Sprint-T-Mobile) deal in any way," Chaplin said in a research note. "However, it reduces the amount of cash that SoftBank could commit to the deal, making it marginally more challenging for them to fend off competing offers from Comcast and others."

By Ina Fried, Recode.net.

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