In a recent development that has captured the attention of financial circles, semiconductor design giant Arm has embarked on its highly anticipated initial public offering (IPO) journey, attracting 28 prominent banks as underwriters. What makes this situation intriguing is the absence of a predefined fee arrangement, a departure from the norm in such high-stakes financial undertakings. This unconventional approach sheds light on the significant leverage that Arm’s parent company, SoftBank Group, wields over underwriters eagerly vying for a role in this landmark IPO.
Traditionally, the fee structure for underwriters involved in an IPO is determined at the culmination of the process. However, the absence of an approximate fee percentage communicated to underwriters is an uncommon move, leaving financial experts to speculate about SoftBank’s strategy. This strategy involves withholding fee details until a mere one to four days before the expected pricing of Arm’s IPO, which is slated for September. By this time, the IPO’s investor roadshow would have commenced, and SoftBank aims to evaluate the underwriters’ performance before finalizing the fee arrangement. This unique approach highlights SoftBank’s desire to ensure the best outcomes while maintaining the upper hand in the negotiation process.
Leading banks including Goldman Sachs, JPMorgan Chase, Barclays, and Mizuho Financial Group, who are spearheading the IPO as lead underwriters, have seemingly agreed to this unusual arrangement. The allure of participating in what is anticipated to be the most significant U.S. stock market listing since the IPO of electric car manufacturer Rivian Automotive in 2021 – a venture that raised a noteworthy $13.7 billion – has seemingly driven these prominent financial institutions to comply with SoftBank’s terms.
Insiders suggest that the underwriting banks are anticipating compensation in the range of 1.5% to 2.5% of the projected $6 billion to $7 billion offering as standard fees, coupled with additional incentive fees. This compensation structure aligns with prevailing market rates. Furthermore, it is anticipated that approximately 60% of these fees will be allocated to the four lead underwriters, emphasizing their pivotal roles in the IPO process.
The decision to withhold fee specifics mirrors SoftBank’s previous approaches in capital market endeavors that pique underwriters’ interest. For instance, in a similar vein, SoftBank maintained ambiguity about fee details during a $21 billion stock sale involving U.S. wireless carrier T-Mobile in 2020, revealing the intricacies only at the eleventh hour.
It’s important to note that while the absence of a clear fee arrangement might seem unconventional, the banks enlisted for Arm’s IPO view their roles as integral to a broader investment banking relationship that yields multifaceted rewards. Several of these institutions were also instrumental in arranging an $8.5 billion margin loan for SoftBank, leveraging a substantial stake in Arm as collateral. Although specifics about the potential gains from this loan arrangement remain undisclosed, it underscores the depth and complexity of the financial connections between SoftBank and these banking giants.
On a grander scale, SoftBank’s extensive involvement in mergers and acquisitions, as well as its investments in startups, attests to its heavy reliance on investment banking services. This IPO comes at a time when financial institutions are particularly eager to secure IPO projects, following market setbacks due to global events such as Russia’s incursion into Ukraine and fluctuations in interest rates. Despite a year-to-date decline of 21.3% in global IPO fees compared to the previous year, which amounts to approximately $3.4 billion, banks are keen to leverage opportunities like Arm’s IPO to bolster their revenue streams.
Arm’s IPO journey, characterized by its distinct fee arrangement strategy, provides a fascinating glimpse into the intricate dynamics between influential corporations and underwriters. SoftBank’s deliberate withholding of fee details until a critical juncture underscores its leverage over banking partners, while these institutions, cognizant of the multifaceted benefits of their involvement, continue to forge ahead in an increasingly competitive financial landscape.