(AUSTRALIA) – In a departure from the typical initial public offering (IPO) approach, SoftBank’s plan to sell just 9 percent of Arm’s shares has raised eyebrows.
Rather than indicating overwhelming investor enthusiasm, this move is seen as an outlier in the world of IPOs.
Historically, data from 1980 to 2022, analyzed by Jay Ritter, a finance professor at the University of Florida, reveals that the average IPO in the US involved the sale of 29 percent of a company’s shares.
Even companies in the lower 25th percentile typically offered 20 percent of their shares to the public.
Arm’s decision to offer such a small float has left asset managers scrambling to secure the limited available shares, showing “little price sensitivity,” according to reports from the Financial Times.
During marketing presentations, Arm’s CEO Rene Haas and bankers sought to convince investors of the company’s potential as an AI leader.
Jensen Huang, the founder of Nvidia, joined the pitch, hailing Arm as an “extraordinary company” with a “world-class management team.”
Arm’s small float sparks rush among asset managers
However, some analysts question whether Arm’s focus on AI is too early. While the company mentioned in its prospectus that its central processing units (CPUs) were already handling AI workloads in devices like smartphones and cars, it did not delve into their market prospects.
Currently, the AI boom is expected to primarily boost demand for server chips, rather than those used in smartphones where Arm dominates.
Growth in the smartphone sector is slowing, raising doubts about Arm’s alignment with the AI and machine learning themes.
Despite these concerns, SoftBank’s offering of millions of dollars has convinced bankers to spin the narrative, even if it appears stretched.
The 28 investment banks working on the deal stand to share up to $US100 million in fees, with the top four underwriters potentially earning $US17.5 million each.
In a year where IPO fees have amounted to just $US323 million so far, this deal is a significant windfall for the banking industry.
However, it’s worth noting the risks involved. Last year, in their bid to secure the IPO, banks provided SoftBank with $US8.5 billion in term loans backed by Arm’s shares.
This financing comes amidst concerns about margin calls, following the Archegos Capital collapse in 2021.
Once Arm goes public, it will be easier for banks to offload pledged assets in the event of margin calls.
However, due to the limited public float, counterparty risk remains only partially mitigated. In the event of a margin call and SoftBank’s inability to provide additional funds, banks without strong ties to hedge funds and private wealth clients may be forced to sell Arm shares at a discount, incurring credit losses.
For SoftBank, the strategy is clear: offer a small float to boost Arm’s valuation, which can then be used to secure better margin loans.
But for the broader market, this approach by bankers may signal that the AI-fueled rally is reaching its end.
