UK Widens Probe of Nvidia-Arm Deal

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The U.K. government has launched a 24-week, follow-up investigation into Nvidia’s proposed acquisition of IP vendor Arm, citing and competition and national security concerns. Regulators also published a full report of their initial inquiry that concluded the deal could stifle technology innovation.

The move comes three weeks after the European Commission opened an antitrust probe to assess the proposed acquisition under the EU merger regulation, saying it must render a decision by March 15, 2022. European regulators worry the combined chip company would have the ability and incentive to restrict rivals’ access to Arm’s technology. The EC probe will also consider whether the proposed transaction could result in higher prices, fewer choices and reduced innovation in the semiconductor industry.

Nadine Dorries, the government’s digital secretary, directed the U.K.’s Competition and Markets Authority (CMA) to commence an in-depth investigation of the proposed $54 billion acquisition by Nvidia (the value of the deal has risen from the original $40 billion due to rising Nvidia share prices).

Dorries said, “I have carefully considered the Competition and Market Authority’s phase one report into Nvidia’s proposed takeover of Arm and have decided to ask them to undertake a further in-depth phase two investigation. Arm has a unique place in the global technology supply chain, and we must make sure the implications of this transaction are fully considered.” The CMA will report to Dorries on the competitive and national security implications of the proposed deal and “provide advice on the next steps,” Dorries added.

“The government’s commitment to our thriving tech sector is unwavering and we welcome foreign investment, but it is right that we fully consider the implications of this transaction.”

Competition within the strategic semiconductor industry has been central to European regulators since the proposed merger was announced in September 2020.

“Semiconductors are everywhere in products and devices that we use every day as well as in infrastructure such as data centers,” noted Margrethe Vestager, the EC’s executive vice president. “While Arm and Nvidia do not directly compete, Arm’s IP is an important input in products competing with those of Nvidia, for example in data centers, automotive and in Internet of Things.

“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,” Vestager added. “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.”

Restricted access

In a phase-one investigation report published this week, CMA identified Nvidia and Arm as critical technology drivers, meaning their combination “would afford the merged business a significant degree of control over key technologies for a range of sectors.”

The U.K. regulator said it received many comments from customers and competitors raising concerns about the proposed deal. “After careful examination, the CMA found significant competition concerns associated with the merged business’ ability and incentive to harm the competitiveness of Nvidia’s rivals [or ‘to foreclose’] by restricting access to Arm’s CPU IP and impairing interoperability between related products, so as to benefit Nvidia’s downstream activities and increase its profits.”

It also found significant competition concerns resulting from foreclosure effects on CPU supplies, interconnect products, GPUs and SoCs across data centers, IoT, automotive and gaming applications.

Nvidia did offer a set of behavioral remedies seeking to address the CMA’s concerns. However, the agency deemed the proposed remedies as presenting considerable specification, circumvention and monitoring and enforcement risks. CMA further said proposed behavioral remedies fail to address competition concerns identified by the phase 1 standard.

Citing comments from unnamed third-party comments, the report also assessed the current state of semiconductor IP alternatives to Arm. CMA concluded that many licensees rely heavily on Arm CPU IP, and do not consider other IP suppliers as credible alternatives within the next five years.

“The evidence also suggests that, across all applications, turning towards developing in-house solutions is not considered as a realistic alternative to Arm CPU IP by many third parties.”

In one example cited by regulators, a respondent noted that “CPU core development requires significant re-engineering efforts in terms of time and investment. The evidence also indicates that no supplier of semiconductor IP, other than Arm, has so far succeeded in expanding sufficiently after entry.”

Hence, CMA said “third-party evidence indicates that there are significant barriers to switching IP supplier as a result of software portability issues, which require considerable time and investment to address.”

Key concerns

Other key themes emerging from industry comments included:

  • Arm’s technology is used in industry sectors deemed crucial for U.K. national security, thereby raising additional technology sovereignty concerns. Those concerns include whether the combined chip company could eventually be subject to U.S. technology export restrictions.
  • Concerns that the merged company would become a “single gatekeeper” of the core components for critical computing infrastructure, creating competitive risks related to technologies used in data centers as well as edge- and cloud-related applications.

In pursuit of U.K. regulatory approval, Nvidia has proposed behavioral remedies, including a five-year plan to retain Arm’s open licensing program. Also proposed is providing access to Arm technology for its current licensees, including access to all Arm technology acquired by Nvidia. Other proposed remedies include: early access to Arm technology for any licensee of Arm’s architecture or implementations; delivering Arm IP to implementation licensees without restrictions; honoring all existing Arm non-disclosure agreements; offering all Arm licensees the opportunity to enter into new or updated NDAs to protect confidential customer information; and appointing a monitoring trustee to oversee all proposed steps.

CMA concluded that Nvidia’s proposed remedies fell short of addressing competitive concerns based on its established standard. The full 122-page CMA report is here.

What’s plan B?

In response, Nvidia told the Financial Times: “We plan on addressing the CMA’s initial views on the impact of the transaction on competition, and we will continue to work with the U.K. government to resolve its concerns.”

Referring to the technology sovereignty issue, Karl Freund, principal analyst at Cambrian AI Research, told the website EnterpriseAI: “Clearly the governmental agencies in Europe, especially in the U.K., have concerns. But why did they approve the Arm acquisition by a Japanese financial conglomerate [in the past], but struggle to see why Nvidia is the best outcome for Arm? Nvidia has the capital needed to keep Arm ahead of RISC-V, and SoftBank wants out.”

Freund praised Nvidia CEO Jensen Huang as “one of the most brilliant leaders in technology today, perhaps equaling Steve Jobs in his impact on the industry and the world around us.” Huang is, “far too smart to screw up Arm by doing anything to diminish the competitive edge and innovations Arm partners derive from their Arm licenses. Why in the world would he endanger the asset his is paying so dearly for?”

Undoubtedly, Huang and Arm CEO Simon Segars anticipated vigorous regulatory scrutiny. Hence, they appear prepared to play the long game in responding to critics of the deal, especially given the onslaught of concerns from regulators as well as their own customers and partners.

That long-term strategy notwithstanding, what happens if the Nvidia-Arm acquisition is blocked on competitive or national security grounds? Is there a plan B? Segars previously dismissed the prospect of an IPO, saying in a blog earlier this year, “We contemplated an IPO but determined that the pressure to deliver short-term revenue growth and profitability would suffocate our ability to invest, expand, move fast and innovate. Combining with Nvidia will give us the scale, resources and agility needed to maximize the opportunities ahead.”

The extended U.K. probe will take months to complete, so it’s too early to speculate on the possible outcomes. Still, if the blockbuster chip merger doesn’t clear regulatory hurdles, and an IPO is out of the question, there are few other scenarios available.

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