What to Know About Arm’s Feud With Qualcomm Ahead of its IPO

Arm Holdings Ltd. launched a risky legal brawl with Qualcomm Inc. a year ago that looms over the British chip company as it goes public this week.

(Bloomberg) — Arm Holdings Ltd. launched a risky legal brawl with Qualcomm Inc. a year ago that looms over the British chip company as it goes public this week.

Arm, controlled by SoftBank Group Corp., is suing Qualcomm over chip technology developed by startup Nuvia under a licensing deal with the UK firm. Arm wants Qualcomm, which acquired Nuvia in 2021 as part of its push into the PC-processor market, to either pay higher royalties or stop using its proprietary technology without permission. The case is scheduled to go to trial late next year. 

Arm’s highly anticipated initial public offering — the biggest of 2023 — raises the pressure on the company to win or reach a favorable settlement. It must show investors it has a tight grip over its intellectual property and is able to grow its licensing revenue. But Qualcomm, which bought Nuvia to beef up its product offerings, faces its own challenge as cooling sales of smartphones, for which it has been the leading chip supplier, have squeezed its margins.

Here’s what you need to know about the lawsuit and how it could sway newly-listed Arm’s fortunes:

The Dispute

In a complaint filed last August in Delaware, Arm accused Qualcomm of building on technology it acquired from Nuvia without negotiating a new license. Qualcomm filed a countersuit claiming it’s done nothing unlawful and that Arm can’t demand that it destroy processor chip technology built with Nuvia’s intellectual property.

The litigation “could cause us to incur significant reputational damage in the industry, in our relationship with Qualcomm or in our relationship with other third-party partners,” Arm said in its pre-IPO disclosure. 

Royalties from San Diego-based Qualcomm, the world’s biggest supplier of smartphone chips, accounted for almost $300 million, or 11%, of Arm’s $2.68 billion revenue in the fiscal year ended March. 

Arm’s customers rely on its chip designs and fundamental code governing how software communicates with chips. Nuvia’s technology was originally intended for servers and is now being developed by Qualcomm for use in mobile and computing.

Arm’s wrestling with Qualcomm to extract more licensing fees could be worrisome for other top customers of Arm including Amazon.com Inc., Samsung Electronics Co. and Apple Inc., according to Jim McGregor, a semiconductor analyst at Tirias Research.

The timing of the IPO amid acrimonious litigation is “horrible,” McGregor said. Arm “decided during this whole IPO process to file a suit against Qualcomm, that along with trying to raise its royalty rates, isn’t necessarily setting a good feeling with a lot of Arm customers.”

Arm and Qualcomm both declined to comment. 

Looking Ahead

SoftBank is looking to raise almost $4.87 billion in the IPO. The public market listing was previously expected to generate roughly twice that amount but the Japanese investor lowered its target partly because it decided to buy the 25% stake held by its Vision Fund and retain a larger portion of Arm shares.

Arm will offer 95.5 million American depositary shares for $47 to $51 each, the company said in a regulatory filing. The deal will value Arm at as much as $54.5 billion at the top end of the range.

If Arm’s listing performs well, it could embolden numerous tech companies and startups to make US stock market debuts after a dreary year for listings. 

As of Monday, the IPO was already oversubscribed by 10 times, according to people familiar with the matter. 

Chip industry analysts say it’s difficult to predict whether Arm or Qualcomm will prevail in court because the litigation will ultimately turn on details in agreements between the two companies that are sealed from public view. Some of those contract details will probably be revealed if the case goes to trial in September next year in federal court in Wilmington.

For Arm, “the risk is if it can’t bind Qualcomm to a higher royalty rate then that would be a high-profile knock on its ability to flex pricing power,” Bloomberg Intelligence analyst Tamlin Bason said. “That could be a troubling narrative for a newly-listed company trying to demonstrate it’s value to the market,” he added.

–With assistance from Ian King.

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