Pokemon Go Offers Glimpse Into $32 Billion SoftBank-ARM Deal

The company poised to push the boundaries of mobile computing is ARM Holdings, which has built a business designing chips that squeeze the most out of limited battery capacity on mobile devices, dominating 85 percent of the market.

Masayoshi Son built SoftBank Group Corp. by making big, early bets on personal computers, broadband and smartphones. Now, he's spending $32 billion to buy ARM, gambling that the company's chips will find their way into self-driving cars, virtual-reality devices and machines with artificial intelligence. Pokemon Go, the hit game that relies on power-hungry GPS and camera functions to work, is showing people the limits and capabilities of their smartphones.

"ARM holds licenses to core technologies, so Son is effectively taking control of the roulette table," said Yoshihisa Toyosaki, an analyst at Architect Grand Design, an electronics research and consulting company in Tokyo. "It would be interesting to see how his thinking will impact ARM's strategy going forward."

Son is making the case that the company's biggest-ever acquisition will go beyond smartphones and is an investment in the future of connected devices, also known as the Internet of Things. Apple, Google, Samsung Electronics, General Electric and other tech giants have connected thermostats, washers and watches to the web. Whatever those devices will be, and whatever software runs on them, Son is wagering they will run on silicon designed by ARM.

"With augmented reality suddenly becoming a hot topic after the Pokemon Go boom, graphics capabilities of mobile handsets are going to another level," said Amir Anvarzadeh, Singapore-based head of Japanese equity sales at BGC Partners. "ARM looks nicely positioned to land a good chunk of that market's growth."

ARM focuses on small, low-power devices and doesn't actually make semiconductors, licensing its designs instead. Its chips found their way into 15 billion devices in 2015, including televisions, medical equipment, cars and internet-connected home appliances -- as well as every iPhone and Samsung Galaxy smartphone.

SoftBank and ARM's fortunes are already intertwined in several markets, according to IHS Markit. Son's company operates wireless networks in Japan and the United States and has investments in robotics, energy and internet startups. ARM is expanding into wearables, infrastructure and smart home and automobile applications.

"SoftBank's investment in ARM might not only be paid back by further growth in ARM, but also help protect the company's other investments and drive future investment strategies," IHS Markit analysts Tom Hackenberg and Lee Ratliff wrote in a report. "The company represents a crucial piece of technology that is in virtually all of the technology markets guiding the 'Information revolution' at the core of SoftBank's vision."

Not everyone is convinced. The deal doesn't mesh with SoftBank's investment strategy set out by former President Nikesh Arora, said Atul Goyal, an analyst at Jefferies Group. So far, the Japanese company has pursued minority stakes in startups poised to disrupt established industries, such as India's ride-hailing service Ola and US-based online lender Social Finance Inc.

"Some of the devices that he's talking about, refrigerators and houses and all that stuff, also require steel, which in turn requires iron," Goyal said. "You can stretch the logic any which way."

The company had more than $100 billion in debt as of the end of March - and will probably have to borrow more to get the deal done. That's pushed spreads on SoftBank's bonds higher as investors reassess the burden on the company's finances and the risk of non-payment.

Son has forged a career and Japan's second-biggest fortune by going into debt to bet early on some of the pivotal technology trends of his time. SoftBank started as a distributor of software in 1981, right after the first IBM personal computer appeared.

In 2000, Son invested in an e-commerce startup that would evolve into Alibaba Group Holding Ltd. more than a decade before it became an online shopping powerhouse. Then in 2006, SoftBank paid 1.8 trillion yen ($17 billion) for Vodafone Group Plc's struggling Japanese operations. Two years later, SoftBank gained the exclusive rights to the iPhone in Japan.

Son now says a new paradigm shift is afoot. Regardless of whether there's another Pokemon Go hit, an entirely new gadget or a groundbreaking business such as Uber Technologies Inc., the one thing they will probably have in common is that an ARM-based chip will be crucial to making them work.

"I believe IOT will be such a big opportunity for all mankind and for all the products in the consumer world," Son said at a press conference in London Monday. "The key is to make moves that five, 10 years down the road will seem obvious."

© 2016 Bloomberg L.P.