Softbank (TSE:9984, Financial) announced on July 18 it was acquiring ARM Holdings (ARMH, Financial) for $32 billion in an all-cash deal. The sale price was approximately a 43% premium to the closing price on July 15.
ARMH had been a holding in both the Nintai Charitable Trust and in a Dorfman Value Investments individual account. We first purchased ARMH in the Nintai Charitable Trust in February 2016 after negative returns in 2014, 2015 and a nearly 15% drop in the first month of 2016. Until then I had never really gotten the valuation required for purchase. I purchased additional shares in June 2016 in a Dorfman Value Investment individual account.
Because this holding produced a good profit in a relatively short time, I would like to describe my rationale for purchasing it. ARM holds an extensive library of microprocessor intellectual property and has particular expertise in low-power high-performance chip architectures. ARM's IP is the backbone of the vast majority of processors used in mobile devices today, and strong tailwinds from the shift to higher-end smartphones and the proliferation of connected devices as part of the Internet of Things (IoT) should drive growth for ARM in the years ahead.
ARM Holdings is the type of company I love to hold for the long term. As seen below, the company is a cash machine generating high returns and compounding value over the long term. It has no debt and maintains an extraordinarily wide moat in its focused industry.
The acquisition of ARM Holdings was due as much to macroeconomic events as the favorable characteristics of the company. In 2016 sterling is down roughly 8% against the Chinese yuan, down 10% against the U.S. dollar, and down a remarkable 21% against the Japanese yen. All of these moves have been predominantly driven by the U.K.’s recent decision to leave the European Union. So while the company’s stock was up by roughly 17% since the Brexit vote, the company looked like a reasonable deal from Softbank’s Tokyo view.
I sold the entire position in ARMH in both the Nintai Charitable Trust and Dorfman Value Investments over the last 24 hours. I will be the first to admit I am simply not smart enough to make investment decisions on merger arbitrage, currency swings or stock chart patterns. At the Nintai Charitable Trust and Dorfman Value Investments I look for great companies with deep competitive moats generating high returns and free cash flow selling at a significant discount to their estimated fair value. It is my intention to let management compound value over the long term. If other market players can help make our investors favorable returns so much the better.
As always I look forward to your thoughts and comments.
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1 The title of the article is a play on Joseph B. Geoghegan's “Johnny We Hardly Knew Ya” that he wrote in 1865. My apologies to Mr. Geoghegan in spirit at least.
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