The CMA, the UK’s competition watchdog, has been instructed to launch phase two of its investigation into the takeover of the Cambridge-based chip designer Arm by US-based Nvidia on public interest grounds, citing competition and national security concerns.

Last year, over 2,000 business leaders signed an open letter calling on the prime minister to block the deal, claiming UK jobs and influence could be at stake. The deal has garnered worldwide regulatory attention. Nadine Dorries, the Secretary of State for Digital, Media, Culture & Sport explains that this is because “Arm has a unique place in the global technology supply chain and we must make sure the implications of this transaction are fully considered”.

In our exceedingly tech-based lives, the chip technology industry is worth billions and is essential to many of the products that we use daily. Arm plays a role in critical data processing and datacentre technology that supports digital businesses across the economy and will be ever more important to the future development of artificial intelligence technologies in robotics and self-driving cars.

About the Merger

Nvidia, a technology firm that produces graphic processing units ( GPU’s), acquired Arm, a semiconductor and software design company, from SoftBank for $40 billion.

Arm, which has an over 90% CPU market share in the smartphone industry, designs energy- efficient chips. The users of its designs include Apple, Samsung, Qualcomm and Nvidia.

The merger allows Nvidia to use Arm’s design prowess to engineer CPU’s for datacentres to complement its own strength in GPU’s.

Competition Concerns

The announcement of the further investigation follows the CMA’s initial phase one finding in July that the deal raises the following competition concerns:

  • limiting Nvidia’s competitor’s access to Arm’s key IP technologies;
  • stifling innovation across a number of important and growing markets;
  • fewer choices for consumers; and
  • higher prices.

Overall, the report stated that the deal would lead to a “substantial lessening of competition” across four key markets: data centres, Internet of Things, the automotive sector and gaming applications.

The mechanism through which these concerns arise is not the direct elimination of competition. The acquisition is a vertical one. Nvidia doesn’t design CPUs nor does it license IP to semiconductor companies. Hence, Nvidia and Arm are not competitors. The concerns centre around the opportunity for Nvidia to change Arm’s current business model to its advantage.

Before the acquisition, Arm was a fair and independent licensor of its technology to other technology firms, including Nvidia. This independence is credited as the main reason for Arm’s success. The acquisition would give Nvidia control of Arm’s technology, allowing it to drive out competition in the long term by playing favourites.

Geopolitics and National Security

The deal adds to the sense of their being a raid on top British companies. This concern was mirrored by Margrethe Vestagar, the EU’s competition commissioner, who advised governments to stop foreign countries from buying their key assets. Whilst currently the ARM intellectual property is overwhelmingly British, the acquisition would make Arm’s technology subject to US export laws. The UK’s New Foreign Investment Screening Regime, which will take effect in January 2022, modernises and increases the government’s powers to investigate and intervene in acquisitions that could threaten the UK’s national security. The semiconductor sector, in which Arm operates, is among the 17 defined sensitive sectors.

The deal also affects the US-China technology stand-off and trade war. The two co-founders of Arm have claimed that the post-deal combined business would become the next US tech monopoly alongside companies such as Google and Facebook, threatening China, which is rushing to develop a domestic semiconductor industry. Arm would become a US subsidiary of a US company, meaning it would “fall under the Cfius [Committee on Foreign Investment in the United States] regulations,” Mr Hauser told BBC Radio 4’s Today programme. “[That] means that if hundreds of UK companies that incorporate ARM’s [technology] in their products, want to sell it, and export it to anywhere in the world including China – which is a major market – the decision on whether they will be allowed to export it will be made in the White House and not in Downing Street”. This is leading to the fear that the US might seek to deny Chinese and UK firms access to chip technology.

Furthermore, there would be a potential reduction of the UK’s autonomy to develop, operate or support defence and security systems that utilise Arm’s intellectual property.

The Race Against the EU

The European Commission announced an in-depth inquiry at the end of October.

Commentators get the sense that the UK wants to reclaim regulatory sovereignty post-Brexit by deciding first on an issue that greatly affects it. Currently, after its phase two announcement, the UK is ahead in its investigation in comparison to the EU, which is still in phase one.

Another reason for the UK’s race to make a decision is the potential difference between the approach of the UK and the EU on the issue. In its phase one report, the UK stated that, while Nvidia made some behvioural remedy promises, it did not believe any form of behavioural remedy would address the competition concerns and that the suggestions would only result in “considerable specification, circumvention, and monitoring and enforcement risk”. The CMA cited the following reasons for this:

  • the complex and evolving nature of the contracts and markets involved;
  • the magnitude of the competition concerns; and
  • the breadth and technical.

Nvidia’s behavioural promises included maintaining its base in the UK, hiring more staff, and maintaining Arm’s non-discriminatory licensing. The UK would prefer structural remedies to the problem as behavioural ones such as those suggested are not as enforceable. On the other hand, the EU seems to be more amenable to behavioural remedy suggestions. For example, it accepted the long-lasting behavioural remedies as a condition to giving clearance to the Google/Fitbit deal.

If the UK wants a harsher outcome that takes more of the UK’s interests into account, it will be seeking to decide on the matter before the EU does.

What Happens Next?

The CMA now has 23 weeks to conduct its investigation, although this can be extended by up to eight weeks. While there is a debate about the extent to which the conservative Tory government will intervene, they will not want to appear asleep at the wheel when blue chips are draining out of the country. The outcome of the investigation will either be a regulatory clearance or the blocking of the deal. The latter outcome is certainly not novel. Qualcomm pulled out of its $44bn purchase of NXP after it failed to get clearance by China within the period the two companies had allowed for the deal during high technological tension between the US and China.

In its agreement with SoftBank, Nvidia has until the end of 2022 to complete its purchase. Opposition in the chip industry and regulatory delays have led to speculation that SoftBank may eventually opt for a stock market listing for Arm, rather than try to press on with a full sale. The new and improved National Security and Investments Act will make the regulatory clearance of this deal less likely.