Spending an arm and a leg
As is always the case where Apple is concerned, what started as an insubstantial rumour has gathered momentum and is now being reported as almost fact.
Apple announced its latest earnings yesterday, and they were among its best ever, with record sales of the iPhone being the major contributor. Apple also revealed it was shocked at the high level of demand for its new iPad. Both of these products use SoCs that have microprocessor designs from UK company ARM in them.
ARM's shares experienced a lift after Apple announced its results and it looks like some of this lift was not just from its association with Apple, but a rumour that Apple might be buying it. The FT and the Evening Standard reported on this rumour, with the latter remarking that it has set the City "aflame". ARM's shares rose around three percent amid this conflagration.
So how likely is it that Apple would make such a move? On the plus side, Apple has over $40 billion in the bank and has a massive interest in the mobile device market, in which ARM's designs are almost ubiquitous. It has already entered the chip-making business with the A4, a move that demonstrates Apple's preference for taking things in-house if at all possible.
On the flip side, Apple would have to spend a fair bit of cash, probably upwards of seven billion dollars, to get ARM. Right now it pays ARM a relatively small amount of money to licence its IP and a minute amount in royalties every time an ARM-containing device is sold. It would take a very long time before it even reached break-even on the acquisition.
But the vital consideration for us is competition. Right now pretty much every company that makes a low-power chip licences some ARM IP, with only Intel looking to disrupt this status quo. If Apple got hold of ARM competition authorities surely wouldn't allow it to restrict access to ARM IP for the rest of the industry. So this would mean Apple would be licensing technology, in effect, to all its competitors.
One other thing to bear in mind is Apple's chip acquisition history. Yes, it acquired PA Semi a couple of years ago, but for a relatively small amount of money, and with the apparent aim of optimising ARM designs. The UK has another major player in the low-power chip market - Imagination Technologies - and rather than acquire it, Apple has bought a significant minority shareholding in it.
This, if anything, is what we think is a more likely move. Both Apple and Intel own big chunks of Imagination stock, primarily to stop one of their competitors snapping it up and preventing them using its designs. We wouldn't be surprised to see a few big tech companies buy ARM stock precisely to hinder such as move as is being currently rumoured.
But then again, you never know...
