London has dodged a bullet with Arm IPO snub
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London has dodged a bullet with Arm IPO snub

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Arm's China exposure would have been a harsh blow for the City if the company had opted to list in London instead of New York

When it filed its IPO filing with the Securities and Exchange Commission (SEC) on Monday, UK semiconductor company Arm must have expected to be heavily scrutinised and to have its entire business model hyper-analysed by potential investors.

But it surely had not anticipated the turn that events have taken.

Just 24 hours later, the company is staring down the barrel of a catastrophe as investor show concern over its strong links to China. A list of risks — such as the fact that the Chinese operations of the company are not controlled by owner Softbank or Arm itself, and that the country accounts for around 25% of revenue — are said to be spooking potential investors.

There's an argument that this should not have come as a surprise. Companies must list risk factors carefully in their SEC filings, and Softbank was simply doing what it had to do to initiate its Nasdaq listing. While the risks that the company has laid out are great, the contents of the filing are not particularly shocking.

Yet the undeniable fact is that the cat is out of the bag. With the risks laid bare so publicly, it will likely prove hard to undo the damage and convince investors that owning a tech company with close ties to China is a good idea in a week where the country’s economic vulnerabilities have been placed under the spotlight.

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These revelations could not have have come at a worse time for the global IPO market, which — as GlobalCapital has reported over the last couple of weeks — is watching the event with bated breath. The deal is set to be a litmus test for the entire market. Indeed, despite its now infamous decision to list away from Europe, at $60bn-$70bn the sheer size of the flotation means it still holds a huge significance on the continent.

For these reasons alone the activity of the last couple of days must have been particularly unwelcome news for equity capital markets bankers. There is however one party in the market that — while not going as far as celebrating, and would never admit its glee — may be breathing a sigh of relief as the story unfolds: the London Stock Exchange.

The LSE has been vocal in its disappointment that Cambridge, UK-based semiconductor company Arm chose to re-list in New York, despite a beauty parade involving altered listing regimes, improved regulatory conditions and even some light corralling from UK prime minister Rishi Sunak.

An Arm IPO would have been a shiny jewel in a crown that is severely lacking diamonds, with the exchange suffering more than most from a major equity downturn brought on by the pandemic and the war in Ukraine.

But, given the backlash against the filing, the LSE has dodged a bullet with Arm.

Had it chosen to list in London and been met with such immediate hostility from investors, it could easily have been chalked up as the latest in the City’s failures — and added to the long list of reasons why it is no longer a premier IPO destination. With so many eyes on the eventual valuation of Arm, a poor performance could have been the straw that broke the camel's back for both the LSE and Europe's equity capital markets.

Instead, the robust Nasdaq will take any hit and London can simply sit back and watch it unfold. The ramifications for ECM more broadly may still be great, but at least the blame will be elsewhere.

In fact, it could even be argued that had the company chosen to file in London it may have avoided some of the negative press it has faced altogether, for two reasons. Firstly, the UK listing regime is less invasive than in the US and companies are not required to undertake the same level of disclosure.

Secondly, although the UK does take measures to protect its corporates from China and monitors Chinese investments, the animosity between the two countries is nowhere the level of that between the US and China, and scrutiny is of a lesser nature.

The US has taken extraordinary steps to protect itself from what it deems as the threat that China represents. For example, the White House has convened an entire inter-agency legislative committee, the Committee on Foreign Investment in the United States, for the sole purpose of monitoring national security implications of foreign investment — both inbound and outbound — to the US. The UK monitors investments but pales in insignificance in comparison.

The furor may yet blow over, and the whole business could be declared an overreaction, but for now it appears that, for once, the LSE has been dealt a good hand. If Arm’s IPO does falter, or underperform, at least London wont have had anything to do with it — this time.

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