 Okay, welcome back to the deal room. And there's only one topic to talk about in deals in general right now. And that is ARM, the chip maker owned by Softbank. Just talking to you offline now, Steven. So IPO to be priced today and then trading tomorrow. So literally live deal in the pipes right now. Yeah, it's a very look, if you're into these kind of things, it's a very exciting time. And if you look at the top news stories from all of the financial journalists, there's probably three or four ARM related stories before you get into anything else in the moment. And it's not as if nothing else is going on in the market, right? IPO is a bouncing back. There's other pricing's going on. There's quite a lot of MNA. If anyone likes Everton Football Club, there's a big deal for Everton at the moment, Microsoft and Activision. So we've got so much to talk about. But I thought, let's just spend a little bit of time on ARM, because it is such a big case study. It's one of those ones that students probably need to know a little bit about. And it gives us a good opportunity to go a little bit deeper into the IPO process, a little bit deeper into Softbank, a little bit deeper into, you know, the economics of chip making and chip licensing and things like that. So yeah, I'm really looking forward to it. Yeah. And I know for students, you always ask like, what is the current deal? I mean, this is the biggest deal and it involves nearly every major financial institution it would seem. So yeah, this will be absolutely perfect, I think, for what we are in, which is now heat of application season. Yeah. And you're going to impress people if you have a nuance and you're going to impress people, you're going to impress people if you have a view that is picked up by evidence. So if you can take some of the stuff that we're talking about today, and then maybe go away and research a little bit more in order to build a view, you know, is this priced appropriately? Has this been a successful process? What does it mean to be over subscribed in an IPO process? Is that a good or a bad thing? You know, hopefully you can delve a little bit deeper after this part. Yeah, we'll kick us off then. So let's talk a little bit about the history and the backstory of ARM. So who are they? What do they do? Yeah, so ARM is a UK based technology company that was founded out of a barn just outside of Cambridge by a bunch of ex Cambridge guys. And I think it was all guys at the time in 1990. And their goal was to, well, their goal transpired to develop the blueprints by which the basically the mobile phone industry took off. So early nineties, obviously we were well before the smartphone. We were still pretty clunky. I can't remember if I had a phone in the early nineties, but I don't think it was very pretty if I did. And they were working with a company called Nokia. You may have heard of it. We certainly have heard of it, right? And they were the apple of the nineties. And it was quite interesting just to do a bit of digging back into this. Europe in the nineties were the by far the leader in mobile phone technology. Stuff in the US was pretty clunky, pretty old school, pretty low battery life, etc. Nokia came along and blew them out the water. I think it was at 6210, which was the kind of breakthrough phone. And it was arms technology and arms chip capability. It's blueprints for the chip manufacturing that ended up going into Nokia that powered phase one of the mobile phone revolution, right? So if you look back and fast forward to 1998, they listed, they did a dual listing in London and in New York. And on the front of their IPO prospectus was a picture of the Nokia 6210. As a representation of how important ARM was to that growing industry and that superstar company as was. So comparable, would it be like thinking in current context, they're like the Nvidia to AI. They were the powering of the chip to the breaking of the first usable mobile phone. Yeah, yeah, absolutely. And I was interested to see which example you would have used because if you had used, let's put an Apple iPhone 15 on the front of the prospectus, that's probably a little old hat. It would be the, what are we powering that is going to be the next generation of growth? And it is definitely the Nvidia powering the chat GPTs, the future of AI. So IPO in 1998, pop 42% on debut. Very exciting company. Remember, 98 lead up to the dotcom bubble. Good time to IPO. And they went on a tear from 98 to 2016. They basically integrated themselves into almost every single mobile phone, smartphone that is manufactured. And quite one of the astounding facts of ARM as we kind of bring this into today. The astounding facts of ARM is that it is used ARM's technology, ARM's chip licensing. They don't manufacture chips. It's chip licensing is used by over 99% of all mobile phones, all smartphones globally. So from that base of 98 Nokia, it has become this kind of necessary, almost utility in this industry that's obviously ubiquitous. Wow, you're making me want you're trying to sell me into this IPO on the day of listing here. I'm trying to sell you into the IPO back in 1998, but that's unfortunately been and gone where we can definitely talk about the 20. Yeah, the IPO that's happening over the next couple of days. I'm not going to be able to speculate as to whether it's going to go up or down, but there's certainly some interesting cases for and against, I think. So whenever people talk about you read about ARM in the press, like the FT, they always talk about soft bank. So what who was soft bank and what's the relationship there and why is that important? Yeah, so a couple of weeks ago, I did a bit of a solo pod. I think I think you might have been on holiday. I did a bit of solo pod on soft bank and its vision funds and its history. So I won't spend too much time on soft bank, but soft bank, the Japanese holding company slash now, basically a tech investor through its vision fund, soft bank acquired ARM in 2016, taking it off the stock market in a kind of take private deal. And it bought the company, it bought ARM post Brexit in 2016 for $32 billion. So it was 2016, $32 billion. And since then, ARM has grown at a compound annual growth rate of about 16, 17%, albeit revenues have been flattening and off flattening off recently. It actually had an offer, soft bank actually had an offer from Nvidia a couple of years ago to buy the whole company to buy ARM from soft bank for $66 billion. This got roundly kiboshed by the Federal Trade Commission, as we'll go on and talk about a little bit later, as I said, ARM is effectively a utility. It is used by so many different organizations that to be owned by one, one amongst many, would be considered to be deeply, deeply anti competitive. So soft bank having had this bid turned down or rejected back in 2020, have been looking to sell this company, or at least looking to sell a small fraction of this company. I said a couple of weeks ago on the pod that soft banks had many failures, and actually declared a $30 plus billion loss last year. So it's looking to kind of rejuvenate and refill the coffers. And what's one of its trophy assets? ARM, sorry. So it's been going through this process of trying to IPO, trying to raise money through an IPO by listing ARM in order to go on what Masayoshi Son says is the counteroffensive. He wants some money in the bank to go off and continue to invest after a few quarters of downbound investing. So you mentioned there, one of the things was they've been growing on compound, but then flat revenues, you said. So how do you construct this pitch book to IPO now if the company's got flat revenues? What are they saying? What's like this North Star that they're promoting to get the value to get some people so into this listing? Yeah, it's super interesting because they are being valued. Well, the price range for the IPO is $47 to $51 a share, which at $51 a share would give the company a $52 billion market cap. And this means that it will, on launch, trade at about 28 times, 25 times trailing 12-month revenue, revenue, not profit, not EBITDA. So it is looking for a pretty chunky valuation under any circumstances. Nvidia is on a 37 times market capitalization to revenue multiple. So that's the North Star. But Nvidia and ARM are very, very different companies. As you said, Nvidia has been growing very quickly. ARM's revenues have tailed off, have flattened off. So they're trying to sell this story of an extremely high technology engine. I think on their prospectus it said that they are the brain of everything, which is a pretty lofty thing to say, isn't it? But they are the brain of everything. They are a powerhouse and the necessary part of the infrastructure of modern technology. So that's a pretty nice sales pitch, but why isn't their revenue growing? Well, the answer to that is in the gift and the curse of having 99% coverage of their major market. So it is lovely to derive revenue from 99% of all smartphones. That's great. And it means that your revenue is probably not going to trail off too much. But where's the growth story? The fact of the matter is they only actually generate a few cents for every chip put into a mobile phone because they're just licensing the blueprint in order for the chip to be manufactured. So it's a good story, kind of monopolistic position, but it's also where's the growth coming from? And I think that's probably what you're getting at. Yeah. And I know that before these things, it's good to beat the drum and get out there and pound the street. And I read a piece about in New York last Thursday on, as they're talking to potential investors, they were talking about cloud computing. And they were talking about the cloud computing market of which it currently only has a 10% share. And they foresee then definite room as that's an area to penetrate that they can expand in. They're expecting to grow an annual rate of 17% through 2025. I mean, 2025, if that's not that far away, either. And they're talking about, again, it's good to drop it in, right? And that's based on the back of the advances in artificial intelligence, of course. And I'd like to know how many AI mentions there are actually in the prospectus when you actually trawl through it. Just to juice up the excitement a little bit. Well, yeah, it's interesting. And I think, again, it's a good bit of advice for any business model that is seeking ubiquity. Effectively, ARM has become so essential that it has become a utility. But because it is a utility, the price is effectively driven down to not very much, a few cents in every single phone. So it's having to figure out, it's actually having to pivot its business model, not only into new markets, generative AI, cloud computing, those would definitely buzzwords in the prospectus. But the CEO who's been touting, Rene Has, has been touting a new way of engaging with clients, which is more of a spoke. We are going to design something that is bespoke for your particular use case, whether it's autonomous driving vehicles, or whether it's your particular smartphone evolution that you want someone to help be the brains behind, the brain of everything. So if you go bespoke, if you go from software as a service to an enterprise model, your fees are much, much higher. Obviously, there's more work. But at the moment, it's a really interesting stat. At the moment, ARM's gross margin, so revenue minus cost of goods sold, ARM's gross margin is 95%. It's basically a utility, right? You just sell licenses. Their model is licenses and royalties. So they can probably afford to do a little bit more bespoke stuff, a little bit more work on the cost of goods sold line to bring that gross margin down in order to drive their revenue. And I think that's probably the growth story that we are, well, maybe that we're buying into. And I read that there's nearly 30 banks on this deal. And I know that when I normally read about the oil flow, it's normally tagged onto the end. There might be two or three advisors on a deal. There's nearly 30. So why so many? And how does that work? What's the hierarchy in that perspective? Yeah, it's very unusual. And I think I put out a post, deal of the week, post a few weeks, trying to understand why there are 28 banks. I mean, first things first, this is a big IPO. They are trying to raise hopefully over $5 billion. That's not an insignificant amount. They're trying to raise from investors across the planet, across the globe. So they are looking at investors that have deep, they are looking at banks that have deep investor networks in the UK, in Europe, in the US, and in Asia as well. So you need a decent amount of banks to cover that spectrum and give a relatively high degree of certainty that that $5 billion, it was actually trying to raise $8 to $10 billion earlier on in the process. And that their ambitions have been slightly scaled back. But even when there is a lot, when there are a lot of banks on a ticket for an IPO, usually there's still only one lead left, lead advisor, lead sponsor. And in this case, there are four, one of which is Mizzouho, which is an interesting one because you've got JP Morgan and Goldman Sachs on the other side of the ticket. So they've got a number of lead banks all splitting the top tier of the fee cake amongst themselves. So Mizzouho, for example, I read an article yesterday, they're looking to get, I think it's probably going to be about a $19 million fee day for them, times that by four lead banks, then you've got to pay the other 24. And we haven't even spoken about, and these are all banks on the IPO ticket, kind of underwriting banks. There's a bank called Rain Bank. I don't know if you've come across these guys, I think we might have spoken about them in the context of Manchester United. They're a boutique US investment bank that are very close to soft bank. They're going to get about $5 million from the advisory side, as opposed to the underwrites side of the deal. So this is a bit of a bonanza for investment bank fee revenue starved. Again, we don't feel too sorry for these guys, but it's a good day if it launches and launches successfully. I've just got a vision of all these bankers out there in the Sahara Desert and it just starts pouring with rain. And they're all like, oh, hallelujah. We've been saved. Yeah. Yeah. Go to certain members clubs in New York and maybe you'll feel a similar Savannah-esque moment. So I've read about some of the names that are these kind of cornerstone investors or anchor investors. And there's some big names here, Apple, Nvidia, Alphabet, lots of others. So tell me a little bit more about the role that they play. How many do you need? Is there a base requirement? What does that look in reality? Yeah. So anchor investors play a very important role in a large IPO. And there are some examples. You don't have to have an anchor investor, an investor that is putting their name out there and explicitly signing up to take a percentage of the deal in order to make other investors feel a little bit more comfortable about piling into this IPO. You don't need to have one of those anchor investors. It's not a statutory or regulatory thing. But if you don't, the risk is a lot higher. So we talk about whenever we're doing a bit of teaching on IPOs, we talk about Deliveroo, one of the biggest botches of an IPO in history. I mean, they got it wrong on almost every part of the playbook. But they also didn't have an anchor investor. And that anchor investor is usually a large institutional investor. If it's UK listing, it's probably a UK institutional. They didn't have an anchor investor. So there was no tethering, no anchoring, and the deal absolutely, the IPO absolutely bombed. So in this case, what's interesting is that the anchor investors are not institutional investors. They are clients. These are all pretty core customers of ARM. And this is why I keep going back to this kind of monopolistic utility angle. These guys are both so essential to the infrastructure that makes all of these companies that have come in as anchor investors, whether it's Samsung or Alphabet or Apple or Nvidia, that makes them successful. But they've also driven their kind of cost, well, their value to these companies to a few cents in every chip. So these anchor investors, and as you said, I think that there are 10 of them, they've committed to buying $735 million of this IPO. So if this IPO is going to be $5 billion, they're taking about 15% of it. And that's important. 15% is a decent lock-in or lock-up of that IPO. But it's more a signal to say, all right, we are the clients, we care about this company ARM, we are not going to let them, we are going to continue caring about this company ARM, because not only are we the customer, but we're also the investor. So it's that you could talk a little bit about conflicts of interest, but you can also talk about the mutually beneficial nature of ARM growing and these other companies growing and their investment in ARM getting better, but they're also getting a better service from the company. So it should be a good new story for the investors that are looking to pile in after the anchor investors. And just thinking of regulatory alarm bells going off when you were describing that last part in terms of can't make for a healthy, fair level playing field. Well, this is a really interesting thing because obviously the FTC blocked the Nvidia deal. So they consider an acquisition of one to be inappropriate, a controlling state by one client at the detriment to the detriment of all the other clients that work with ARM. But ARM works with hundreds, if not thousands of different companies, it just so happens that the 10 that are piling into the IPO are 10 of the biggest. So what is that going to do? You're actually right, there hasn't been any, there's no challenge because it's minority investments and there's no controlling stake, but is that going to lead to any form of preferential treatment? If I'm selling a chip to Apple who have got in on my IPO versus a company that hasn't, is there going to be a different conversation? I'm not sure, but it's certainly something to think a little bit deeply about. Okay, and then some of these other questions that I have around, I mean, you talked about delivery bombing. What I've heard reading reports, the talk on the street is that this is the complete opposite. It's like 10X over subscribed. When I hear that, I naively think, well, the bankers have got too cautious. I've got, surely I've got it wrong to be that far below price because obviously they want it to be a success. And I'm sure there's some sort of symbolic value of finishing that first day print on Wall Street where it's like, we doubled the share price on something like that. But surely from a revenue generation perspective, they could have squeezed this a bit harder and took a bit more risk. Or is it because of the environment? Or am I missing something? Yeah, there's a number of things here and it's very good to try and unpack this. So the price range that has been set by the banks in consultation with the anchor investors and with SoftBank is $47 to $51 a share. And we are hearing reports almost hourly that the offer at 47 to 51, we don't know where it's going to be priced precisely, the offer has been oversubscribed. I read on my notes from Monday that it's six times oversubscribed. Over the weekend, it was five times oversubscribed. Yesterday, we were hearing it's 10 times oversubscribed. So what does that mean? Well, theoretically, that means that for about $5 billion worth of shares, there is about $50 billion worth of investor interest and subscription to this IPO. Now, that sounds great. That sounds maybe like, gosh, well, certainly it will come out at the top end of the price range, $51, but maybe that price range should have been $52 to $56, which I think is your point. A couple of things here. Firstly, the banks do still have the option to price above the 51. And a lot of reports are talking about them adding an extra dollar onto the top end of the price range so that today, we'll find out today. Today, it prices at $52. But that still goes, well, but still, 10 times oversubscription. The few things to note here, I think the most important is when I subscribe to an IPO as an investor, it's not a legally binding subscription. And often, these institutional investors and hedge funds who actually get hedge funds don't tend to get a massive allocation, possibly because they can go short as well as long. And the long-onings tend to get a bigger piece of the pie. They go in for a massive subscription knowing that A, they're going to be allocated down quite significantly. But B, they want optionality. They want to be able to go at the time. Yeah, I'm in for all of this or not so short. So 10 times oversubscription is just kind of, it's interesting. And it builds up a bit of hype. We don't usually hear so many of these stories coming out on a daily basis. There's obviously a hype merchant in the background sounding the Foghorn that this is the most amazing, hotly anticipated IPO. And we're doing a podcast about it. So we're increasing the hype. But 10 times oversubscription, look, it's interesting, but until we see pricing today and until we see the pop tomorrow or maybe it won't be a pop, maybe it will bomb. I somehow doubt it, but we'll see. Yeah, and I don't want to kind of hold your feet to the fire and talk about the price movement so much for tomorrow, but perhaps more from your side of things, your perspective, at what point, they're watching it on the first day from a banker's perspective. What is success and what's that period look like in terms of the first day, the first week, the first six months? Yeah, it's a really good thing to try and think a little bit more deeply about. So again, we've spoken about, I think, Carver on the podcast a few weeks ago, which popped over 100% on debut, which means that the shares, I think, were priced at $20 a share when the bell was rung. And then by the end of the day, it was at $40 a share. And everyone's going, gosh, did the investment bankers miss a trick here? Did we just woefully underprice? Now, the case might be yes, they have overpriced, but the first day is a very different story to the first six months or the first year. So the first day, kind of anything can happen, Facebook bombed on day one, other companies pop 100%. It's often due to kind of this speculative mania on the long or on the short side, but a lot of these anchor investors and a lot of these investors in the IPO have a lockup period. So they do not get to trade on the price for a number of, well, for 30 days or 60 days after the IPO. So what you actually want to see is not necessarily day one pop, but you want to see price on day one of issuance, price on launch, versus price in two months time. And then you'll see whether how good the pricing has been from an underwriter's perspective. So it probably will pop tomorrow, partly because they saw banks only selling 10% of the company, right? It's not, I know it's five billion dollars, but it's not, you're not trying to get 50 billion dollars away in the market, you're trying to get five billion dollars away in the market. And it has been quite hotly anticipated. So, you know, we'll watch with interest tomorrow, but we won't say either, we won't kind of cast judgments on success or failure until maybe a few months down the line. Oh, it's a banker talk, not trader talk. All right, well, fascinating discussion as always, Stephen, appreciate all the insights. And yeah, anywhere we share this, please do drop a comment. If you have any questions, I'm sure Stephen doesn't mind fielding them, whether that be on LinkedIn or YouTube, wherever it might be. But yeah, hope you enjoyed that. And thank you, Stephen. Thank you everyone for listening. Thank you,