Nvidia agreed to buy Arm last September

Credit: AFP

The British microchip company Arm is falling behind its rivals and struggling to gain a foothold in crucial new markets, according to evidence Nvidia has handed to regulators in an effort to secure support for its $40bn (£29bn) takeover.

Research commissioned by Nvidia, which it has used to build a case for approving its takeover, claims that Arm is “stuck in the mud” and would be unable to fund the major investments needed to compete against US giants if it were forced into a Plan B of going public.

The report by semiconductor industry analysts Future Horizons says that years of misplaced investment under SoftBank, Arm’s current owners, mean that the British company is struggling to catch up in areas such as data centres and connected cars as its money-spinning smartphone business saturates.

“With stagnant revenues and no profits, time is not in Arm’s favour and funding the required increased levels of R&D spending will clearly be a business and financial leap of faith,” the report states. “Arm does not have the financial firepower to self-fund this from revenues.”

US technology business Nvidia commissioned the report and has filed it with competition regulators as part of its attempts to convince authorities to approve the acquisition. 

The deal faces opposition from Nvidia’s rivals, which have raised concerns that it could jeopardise Arm’s open model and that the company could thrive if it were floated.

Arm/Nvidia timeline (new)

Arm, whose chip designs feature in billions of smartphones and other devices, was taken off the London Stock Exchange in 2016 when SoftBank paid £24bn for the company. 

Last September, Nvidia announced it had agreed to buy Arm, but the deal faces a regulatory gauntlet, with competition authorities in the UK, EU, US and China needing to clear it. Arm has warned in recent weeks that blocking the deal could force it to cut investment.

Although the Future Horizons report is presented as an independent analysis, Nvidia’s submission of it to regulators is its strongest endorsement yet of the argument that Arm will flounder without its protection.

It says that Arm has enjoyed little success from a push into the “internet of things”, which has seen it hire thousands of employees. “SoftBank threw too much money into the wrong business areas that were not going to make money in the short term, if at all,” it says. “Little surprise Arm is not performing well and SoftBank has not made a good return on its investment.”

The report claims that a flotation would force it to cut investments to pursue profits, thus falling further behind rivals.

The UK’s Competition and Markets Authority has recently handed the results of its initial probe into the deal to Oliver Dowden, the Culture Secretary. Mr Dowden is due to decide on whether to refer the deal for further investigation.