Arm sounds alarm over its Chinese business as it closes in on Nasdaq listing

Arm has raised alarm bells about China as it gears up for the biggest stock market listing in the US for nearly two years.

The Cambridge-based chip designer – which is owned by Japanese investor SoftBank – revealed it was ‘particularly susceptible to economic and political risks’ in China, where it rakes in nearly a quarter of its revenues.

In a 330-page document outlining plans for a £50billion initial public offering in New York next month, Arm spent more than 3,500 words detailing how the growing tensions between the Biden administration and Beijing were already hampering its performance.

American dream: SoftBank’s boss, Masayoshi Son, will be looking to prove himself with Arm’s float on the Nasdaq, according to an analyst

The US recently limited China’s access to new technology and investment through a series of sanctions – fanning the flames of a trade war.

Arm said sales made by divisions including Arm China slumped by £21million over the three months to June.

The figure included around £9million which it blamed on ‘trade protection and national security policies’ from the US.

And the company warned this situation would only get worse as its relationship with its independent Chinese business – which is majority owned by local investors rather than SoftBank – remains shaky.

‘We depend on our commercial relationship with Arm China to access the People’s Republic of China [PRC] market,’ the filing said.

‘If that commercial relationship no longer existed or deteriorates, our ability to compete in the PRC market could be materially and adversely affected’.

The warning came as Arm confirmed it was on track to be the most valuable company to complete an IPO since November 2021, when electric-car maker Rivian hit Wall Street.

And some analysts have said it is precisely because of the uncertain US-Sino backdrop that SoftBank opted for the Nasdaq rather than London to make Arm’s stock-market comeback.

‘New York is the safety-blanket path for listings especially big tech names like Arm,’ said Dan Ives, tech analyst at investment bank Wedbush. ‘Given the geopolitical headwinds and regulatory issues in China, all flight paths for IPOs now lead to New York.’

SoftBank took Arm private for £24billion in 2016, removing it from the London Stock Exchange.

Although it had hoped to sell Arm to US chip firm Nvidia in 2020, the £31billion deal collapsed due to regulatory blocks.

The UK then undertook an intense lobbying effort to convince SoftBank to have a dual listing in London and New York.

SoftBank’s boss, Masayoshi Son

SoftBank snubbed these efforts, claiming the US was the ‘best path forward’ for Arm.

Yet the move has raised serious questions for the City and its ability to attract bumper IPOs. Despite health company Haleon’s £30billion float last summer, FTSE valuations have suffered in recent years.

Some blame a ‘Brexit discount’, which has spooked international investors, and others slam London as a ‘Jurassic Park’ index due to its lack of stocks in new industries such as fintech and artificial intelligence.

The world’s largest building materials company CRH has warned it is going to move its primary stock market listing to New York, and gambling giant Flutter is gearing up to list there in the autumn.

According to data compiled by media group Bloomberg, fewer than £790million has been raised on the London stock market this year, the worst performance since 2009.

Meanwhile, the United States largely remains a safe bet for many companies who are looking for faster processes and higher valuations.

To emphasise the latter, Apple – which is America’s most valuable company – is worth nearly £1bn more than all the firms on the FTSE 100 combined.

‘Price seems to be the driving factor for SoftBank,’ explained Russ Mould, analyst at AJ Bell, who said that the Japanese conglomerate’s boss Masayoshi Son would also be looking to prove himself with this float.

He said: ‘SoftBank will be looking to show it can still make successful investments after a string of embarrassing duds, most notably [co-working space firm] WeWork and [crypto trading platform] FTX. Son will be out to prove that SoftBank’s track record is a good one.’

Arm will also be in good company across the Atlantic – the US is home to chip giants such as Nvidia and Intel.

By contrast, London has been on a mission to loosen its IPO rules to boost deal making, which includes giving founders greater control and removing financial reporting barriers.

Victoria Scholar, analyst at Interactive Investor, said: ‘While proposed changed to listing rules in London could help to bolster its appeal as a go-to destination for global IPOs, there’s still work to be done on its international perception.

‘London needs to work on fostering exciting fresh companies in fintech, renewable energy and artificial intelligence and prove that it’s just as important a global financial hub post Brexit as it was before.’

It is still possible, however, that SoftBank could eventually decide to list Arm in London as a secondary listing on top of its New York one.