Arm’s $55 billion initial public offer may not be what it seems
Arm Holdings’s Nasdaq debut was supposed to energize the anaemic initial public offerings (IPO) market in the US. But its roadshow, powered by more than two dozen investment banks, is looking like a hard sell. In their desperate attempt to earn fees and de-risk from Arm parent SoftBank Group Corp, bankers are getting investors worried.
The chip designer’s IPO shares were reportedly more than five times oversubscribed as the week began on Monday. It is now seeking to price at the top or above its range, valuing the Cambridge-based company at as much as $54.5 billion. Arm expects to price on Wednesday and start trading this week.
This oversubscription is not a straightforward indication of investor enthusiasm, however. SoftBank plans to sell only 9% of Arm’s shares, and will pledge out a 75% stake for margin loans once the stock debuts. Looking at data between 1980 and 2022, Jay Ritter, a finance professor at the University of Florida, found that historically, a company going public in the US, on average, offered 29% of its shares.
Even those in the lower 25th percentile floated 20%, according to Ritter. As such, Arm’s tiny float of just 9% is an extreme outlier. Anticipating that the stock will be included in major indices, asset managers are forced to chase after the few shares that are available, with “little price sensitivity," in the words of a Financial Times report.
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