There is no doubt why SoftBank is spending $31.4 billion to acquire ARM Holdings. The company is making a huge investment in the industrial Internet of Things (IoT). The question is will paying a premium price for ARM pay off?
Here are the stats: The number of devices connected to IIoT is forecast to grow from about 1.2 billion in 2015 to nearly 2.5 billion in 2021, growing at a 15 percent rate, according to Semicast Research. The total available market for electronics equipment that could be connected to the IIoT is forecast to grow to more than $930 billion, from $675 billion over the same period, translating into a growth rate of about six percent.
The IIoT market, including sensors, RFID, industrial robotics, 3D printing, smart meters, GPS/GNSS) is expected to reach $151 billion by 2020, according to a recent report released by MarketsandMarkets. The compound annual growth rate is pegged at 8.03 percent between 2015 and 2020.
All of these forecasts indicate significant growth over the next five years. One of the driving growth factors in IIoT will be advances in semiconductors. It’s also going to take industry standardization and a transformation in the manufacturing industry through new automation technologies. Think smart factories and Industry 4.0., encompassing big data, analytics and cloud computing.
Gartner Inc. estimates that 56 percent of businesses in asset-intensive "heavy" industries and 36 percent of "light" or "weightless" will implement IoT by the end of 2016, according to a survey of 465 IT and business professionals across 18 business sectors in North America, EMEA, Asia/Pacific and Latin America. Gartner defines heavy industries such as utilities, oil & gas, and manufacturing while light or weightless industries are service-oriented.
"2016 will be a very big year for IoT adoption. We are starting to see a wide range of IoT use cases across virtually all industries. But, the big challenge now is demonstrating return on investment. Executives need to validate the contribution that IoT can make in order to justify large-scale rollouts," said Chet Geschickter, research director at Gartner, in a statement.
Based on a 2015 survey of 229 semiconductor executives at member companies of the Global Semiconductor Alliance (GSA), conducted by the alliance and McKinsey & Company, the IoT is expected to be one of the three biggest growth drives in upcoming years. The report finds that 48 percent of respondents believe IoT will be one of the top three growth drivers; 17 percent said it will the number one growth driver, and 33 percent believe it will be one of many growth factors for the industry.
SoftBank is one of many companies who are gaining a fast foothold in the IoT industry through acquisitions. Mergers and acquisitions in 2015 related to the IoT totaled $14.8 billion to purchase 39 IoT-related companies, which exceeded $14.3 billion spent on 62 companies in 2014, according to a 451 Research report. In addition, semiconductor-related acquisitions were the bulk of the IoT buys in last year with ARM, Intel and NXP each announcing two or more deals.
There is no doubt that SoftBank believes ARM will significantly add to its overall growth over the long term. Otherwise, why pay a premium price to acquire a company. “We have long admired ARM as a world renowned and highly respected technology company that is by some distance the market-leader in its field. ARM will be an excellent strategic fit within the SoftBank group as we invest to capture the very significant opportunities provided by the “Internet of Things,” said Masayoshi Son, Chairman and CEO of SoftBank, in a statement.
“This is one of the most important acquisitions we have ever made, and I expect ARM to be a key pillar of SoftBank’s growth strategy going forward,” Son continued.
To help ARM on its IIoT growth path, SoftBank plans to make very few changes to the company – at least in the short term. ARM will operate as an independent business, and maintain its headquarters in Cambridge, UK, and “existing senior management team, brand, partnership-based business model and culture to ensure continuity of a strong track record.”
In the longer term, SoftBank wants to at least double the employee headcount in the UK and increase the headcount outside of the UK over the next five years.
The strong track record that SoftBank is likely referring to includes an 80 percent market share (in units) for 32-bit microcontrollers in industrial and medical applications, and about a 50 percent share in microprocessors, according to Semicast. The market researcher also believes that ARM is steadily building its share in “little data analytics at the network edge,” while Intel continues to dominate big data processing at the core of the IIoT.
“These intelligent, connected, industrial devices generate the ‘Little Data’ which has never previously been captured, to be processed locally or fed straight to the Cloud for Big Data analytics, thus creating the IIoT of smart buildings, cities, factories, grid, medical, payment and security,” according to Colin Barnden, principal analyst, Semicast Research, in a statement.
Barnden believes “ARM dominates the technology and intelligence powering the IIoT and its leadership in this market helps explain Softbank’s announcement to buy ARM for USD 32 billion on July 18.”
Barnden describes IIoT as “intelligence and connectivity being added to ever smaller, distributed, remote industrial devices. This includes obscure, somewhat dull products, such as pressure measurement, proximity sensors and motion detectors, which offer none of the glamor and allure of smart watches or wearables, but which nonetheless are manufactured in volumes of tens of millions of units per year.”
I like Barnden’s analogy about the acquisition: “Softbank’s purchase of ARM seems a little like buying ExxonMobil to fill your gas tank." He also notes that "only time will tell if this was a smart move by Softbank, but at a premium of more than 40 percent of the previous closing price, ARM’s shareholders will be celebrating already.”