IDCC Premium Board (IDCC)

[Gamco]

ARM Wrestling at the Rumor Mill
Bob Faulkner MAR 08, 2010 10:00 AM

Last week investors saw ARM Holding's (ARMH) stock up more than 10% with more than 40% of that gain taking place in a big move last Friday. That action comes when the Philadelphia Semiconductor Index (SOX) gained less than 1% at the same time.

What, pray tell, could be sending this stock northward with such conviction? Why rumors, of course, and late last week we had one making the rounds that Qualcomm (QCOM) was interested in acquiring ARM Holdings. Qualcomm has thrown water on the idea but it’s out there.

I have absolutely no idea if ARM is interested in a sale or not. However, what I do know is that I feel very confident in saying that there is no way any of ARM’s licensees will buy this company. The regulators on both sides of the pond would never approve of the sale.

We know that nearly 90% of the billion-plus handsets sold each year include semiconductors containing an ARM core. Depending on the handset, there may be multiple instances. Imagine the hue and cry if one of your competitors now owned the intellectual property critical to making your part operate and possibly differentiating it from others in the field.

Look from the perspective of the handset OEMs. There are six handset OEMs that control about 80% of the entire industry. When we’re talking a billion units a year, that’s a big number. Given the market opportunity, it has attracted more than a few competitors on the semiconductor side of the equation. The OEMs have done a fabulous job of playing one supplier against the next in order to maintain price pressure in an industry that scrapes for profits. Just think how happy Apple (AAPL) or Nokia (NOK) would be to see their supplier base shrink and critical intellectual property consolidate into the hands of a few.

Given the current Congress and its mood of anti-business and anti-big (except for government of course), I don’t see any way they would allow the acquisition of ARM’s critical intellectual property by anyone already involved in the mobile handset business. The potential for competitive “mischief” is far too high. And even if an acquirer did play by all the rules, every action would be viewed as anti-competitive by the remaining licensees and provide a steady flood of complaints and lawsuits.

While I may doubt such an approval would pass Washington’s regulators, there’s no way such a transaction would make it through the EU Competition Commission. They hate everything! And they would particularly loathe the idea of a US-based company trying to buy one of their crown jewels. The signals would be very loud and very clear -- don’t waste your time and money filling out the paperwork. Not happening!

So if you think General Mills (GIS) or Home Depot (HD) is looking to diversify their operations and buy outside the box so to speak, then have at it. But, any firm currently in the semiconductor business that could actually leverage the intellectual property given their current positioning will be told not to bother.
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