After looking through ARM’s IPO filing, it is clear that the company has a significant problem posed by its Chinese business, which Arm China operates. The chip manufacturer only owns 4.8% of Arm China via an indirect stake built on its 10% stake in an entity called Acetone, which owns 48% of the Chinese firm.
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The lack of a controlling stake in Arm China is a significant concern, given that the Chinese entity accounted for 24.5% of its Arm’s $2.68 billion revenue in its 2023 fiscal year. Arm has warned investors about Arm China and its lack of control of such a crucial subsidiary.
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ARM warned investors in its IPO filing that “The fact that Arm China operates independently of us exposes us to significant risks. Arm China’s value to us as a customer is dependent on Arm China’s business results, which are, in turn, subject to substantial risks that are outside of our control.”
The chip manufacturer also noted that its business with ARm China was threatened by the US sanctions on China, which prevent tech companies from selling high-end technology devices to Chinese firms, precisely what Arm does when transacting with Arm China.
Therefore, the company warned that its business relationship with Arm China might be negatively affected if US sanctions continue extending to cover more of the chips it sells in China. The company noted that sanctions had already cost it $63 million in royalty revenue in its most recent fiscal year.
ARM’s IPO, which could happen as soon as next month, was expected to inject some much-needed value into the US stock markets, given the IPO market’s lacklustre performance this year.
Arm was initially expected to raise between $8 and $10 billion from the markets, but many now expect the firm to raise less. The uncertainty around its Chinese business could play a role in the amount raised if investors focus on the same, as it is a significant business risk.
The company also accused Arm China of submitting its royalty payments late in the past and sometimes forcing the company to extend its resources to collect amounts owed by Arm China. The delays are alarming, given that Arm China is Arm’s largest customer.
Overall, it is clear that Arm China will affect the Arm IPO significantly due to the above reasons.
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