Deals and IPOs

Nvidia's acquisition of Arm could be a 'nightmare' for China, CLSA says

Key Points
  • China wants to avoid the "nightmare" of an American company owning Arm, which would open the door to possible intervention by the U.S. government to limit China's access to technology, said Sebastian Hou of CLSA.
  • Nvidia agreed to buy U.K.-based Arm from SoftBank in a $40 billion deal, the companies announced in a statement last week.
  • The deal needs to get regulatory approval from the U.S., U.K., EU and China. "We think that China will pose the biggest challenge," Hou said.
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China's 'biggest nightmare' may grow from Nvidia's Arm deal: CLSA

SINGAPORE — The "biggest challenge" for the Nvidia-Arm deal is getting regulatory approval from China, a managing director at an investment firm said this week.

That's because the Chinese government wants to avoid the "nightmare" of an American company owning Arm, which would open the door to possible intervention by the U.S. government to limit China's access to technology, said Sebastian Hou, managing director and head of technology research at CLSA.

In a deal worth $40 billion, U.S. graphics chip giant Nvidia has agreed to buy British chip designer Arm from SoftBank, the companies announced last week. Arm licenses chip designs to technology companies around the world and is "very crucial" for smartphones, Hou said.

The proposed transaction will need regulatory approval from the U.S., U.K., the European Union and China, the joint statement said. Nvidia is based in the U.S., while Arm is headquartered in the U.K., but both have offices in the EU, China and other regions.

Almost every smartphone sold today uses Arm technology. According to Arm, more than 180 billion chips with its processor cores and other components have been shipped around the world. 

Chinese investors also hold the majority stake in Arm's China operations. That part of the business made up around 20% of Arm's revenues in the fiscal year ended March 2018, SoftBank said.

A Nvidia logo is seen on the company's building at an industry park on February 7, 2019 in Tianjin, China.
VCG | Visual China Group | Getty Images

Nvidia Chief Executive Jensen Huang reportedly said he had "every confidence" the deal would be approved by Chinese regulators.

However, an opinion piece in state-backed Chinese media Global Times said it was "disturbing" that Arm could be bought by a U.S.-owned company. The Chinese tabloid, often seen as closely aligned to the government's thinking, also said: "If Arm falls into U.S. hands, Chinese technology companies would certainly be placed at a big disadvantage in the market."

"We think that China will pose the biggest challenge (in terms of regulatory hurdles)," Hou told CNBC's "Squawk Box Asia" on Tuesday.

"If it's going to be owned by American company Nvidia, then that will give more ability for the USA government to sanction, to control the technology access of China," he said.

"That would become the biggest nightmare for China government," he said, adding that many tech companies in China depend on Arm.

Separately, the U.K. said it is working to understand the "full impact" of the sale of Arm.

Caroline Dinenage, minister for digital and culture, noted that Nvidia and SoftBank have made commitments to keep Arm headquartered in Cambridge and expand its facilities in the city.

"We will consider all those statements incredibly carefully," she said.

CNBC's Kif Leswing contributed to this report