Why ARM Holdings plc May Be The Next Buyout Target

ARM Holdings plc (LON: ARM) could be a takeover target.

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The tech sector’s merger season is well under way, with two multi-billion dollar transformational deals being announced during the past two months alone.

In particular, NXP Semiconductors, a Dutch company that specialises in chips used in debit and credit cards, acquired smaller US rival Freescale for $11.8bn at the beginning of March. While, Intel is currently in talks to acquire Altera, a maker of “programmable” processors, in a deal likely to exceed $10bn.

And it’s possible that ARM Holdings (LSE: ARM) could be the next company to announce a deal. 

Supply security

The logic behind the Apple-ARM speculation is simple. Demand for Apple products remains at an all-time high and the company is struggling to keep up with demand. 

ARM is Apple’s largest, and most important supplier. Indeed, while ARM itself does not manufacture Apple’s microchips, ARM’s chip designs have been essential to Apple’s success. What’s more, the bond between Apple and ARM will only grow stronger over the next few years as Apple is planning to remove Intel from its supply chain.

With this being the case, analysts have begun to speculate that Apple is planning to acquire a strategic stake in ARM, to avert a possible predatory move on ARM, which could threaten Apple’s future success.

The best technology

Apple is right to be concerned about a possible predatory move on ARM. The company is miles ahead of its peers in terms of chip design, and there are many companies that would be willing to offer a significant premium to get their hands on ARM’s technology.

For example, ARM recently revealed a new processor blueprint with better computing performance, designed for smartphones and tablets set to be launched next year. The new design is three-and-a-half times faster than comparable chips from 2014 and energy use is 75% less than competitors products.

Clearly, this is the kind of technology Apple will want to get its hands on to remain ahead of the game. 

A high price

Analysts believe that Apple would have to pay around £15.00 per ARM share in order to acquire the kind of controlling stake it needs to block a move by another tech sector peer. 

That being said, ARM is no stranger to takeover rumours, and there’s no guarantee that this latest rumour has any substance behind it. 

Still, ARM’s earnings are set to grow 69% this year and a further 20% during 2016, so even if a deal doesn’t emerge, ARM remains one of the best growth stocks around. 

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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