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Relationship With China OF Arm Hinders Its IPO Launch

Relationship With China OF Arm Hinders Its IPO Launch
The impending IPO of semiconductor technology company Arm Holdings Ltd is expected to be powerful medicine for the issues plaguing the U.S. IPO market and give owner Softbank Group Corp. a boost.
But there is one issue. For access to China's huge smartphone market, Arm depends on a company that it does not own for over a quarter of its sales.
Details of the company's complicated connection with China, its second-largest market, are scattered throughout the hundreds of pages of Arm's prospectus. According to documents released on Monday ahead of its first public offering, sales in China accounted for 24.5% of its $2.68 billion in revenue in the fiscal 2023 year.
Arm China, a separate organisation with exclusive rights to distribute Arm's technology in the nation, accounts for the majority of that income. That makes China Arm's biggest customer, not more well-known companies like Apple or Qualcomm. Additionally, according to Arm's statement, this client has a history of making late payments and poses "significant risks" to the company.
The public offering of Arm, which might take place as early as next month, would aid in reviving the U.S. IPO market, which has generated only around 10% as much capital this year as it did in 2021. Arm had originally anticipated raising between $8 billion and $10 billion from the IPO, but now anticipates raising less money.
Arm China experienced a nearly two-year boardroom conflict between its local leader and shareholders that was resolved last year. Arm is in fact simply a modest shareholder in Arm China. A majority ownership is held by a private equity company and a group of Chinese investors.
Beyond these internal problems, Arm China's long-term trajectory is questioned by U.S. restrictions restricting supplies to China and the escalating rivalry in the Chinese market.
A representative for Arm declined to comment.
Despite its rapid early expansion, Arm China has presented SoftBank with continued difficulties. In 2018, SoftBank sold a 51% share in Arm Ltd's Chinese subsidiary, Arm Technology (China) Co Ltd, to a group of Chinese investors led by private equity firm Hopu Investments. This resulted in the creation of the new company.
Longtime Arm executive Allen Wu served as Arm China's initial CEO, but SoftBank fired him last year over perceived conflicts of interest. Wu refuted the claims and brought multiple legal actions against Arm; some of these litigation ended in Arm's favour, while others are still pending.
Arm China is controlled by unknown stockholders.
Arm has a meagre 4.8% effective share in Arm China, thanks to a 10% investment in Acetone, a middle company that owns 48% of the Chinese affiliate. According to the IPO filing, Hopu Investment indirectly owns 35% of Arm China, and various other Chinese parties directly or indirectly hold control over the other 17%.
To help the enormous smartphone market in China flourish, SoftBank and Arm formed Arm China. It had the authority to initially offer technologies to Chinese customers from the Arm headquarters. Wu oversaw the development of Arm China's own intellectual property.
This produced two business sectors: a distribution company that licenced Arm's intellectual property and a design company that sold Arm China's own lower-end IP. Arm China's business breakdown was not disclosed in Arm's filings.
Analysts, however, contend that the majority of income comes from licencing Arm's intellectual property. The United States' restrictions on the export of high-tech goods to China provide difficulties for that industry, and Arm said that in its most recent fiscal year, such restrictions lost it at least $63 million in royalties.
According to Stewart Randall, a semiconductor analyst based in Shanghai, Arm continues to be the top supplier of technology to Chinese companies making processor chips.
"But sanctions have meant it can't be used everywhere (in China). I'm unsure Arm can substantially grow revenue here," he added.
In its disclosures, Arm admitted that "in the past, we have received late payments from Arm China and have had to expend company resources to obtain payments from Arm China."
Arm's finances still reflect those delays as a discrepancy between China revenue and accounts receivable: in the fiscal year that ended on March 31, 24% of revenue came from Arm China, but 40% of accounts receivable were attributed to China, meaning that Arm has still not received payment for all of the goods sold in China.
Some of that gap seems to be being closed by the arm. In its filing, it stated that during its most recent fiscal year, cash from operating activities grew by $281 million, mostly due to $713 million in Arm China collections, but this was partially offset by cash owed to Arm China.

Christopher J. Mitchell

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