Arm’s giant listing is set to be a litmus test for the state of the global IPO market.
After a disappointing year, the performance of the deal will illuminate whether the struggling market can turn a corner after falling into a deep slump at the end of 2021.
The current cycle of fiscal tightening in response to surging levels of inflation in the wake of the pandemic began two years ago and has shown little sign of abating. As it draws closer, the success of the marquee IPO is increasingly important.
After de-listing from the London Stock Exchange in 2016, the UK-based chipmaker is preparing to launch its re-IPO on the New York Stock Exchange this autumn. Following several months of debate about where the company would list, which eventually saw it opt for New York over its home exchange, the company is currently in talks with prospective cornerstone investors to backstop the stock market flotation.
Potential early investors include several high profile and wide scale users of its chip technology, such as Apple, Amazon and Nvidia. The latter tried to buy Arm but was blocked by US and UK competition regulators, leading to the collapse of the merger in February 2022. This prompted Arm’s Japanese owner SoftBank to trigger preparations for an IPO instead.
Given the high-profile nature of the asset, the size of the deal and hype around the semiconductor industry, Arm is likely to attract some of the most powerful names in the technology sector into its shareholder register as anchors of the IPO. The deal is expected to raise around $8bn-$10bn, making it comfortably the biggest flotation globally this year.
For the sake of the broader IPO market it is vital that Arm’s flotation goes well. Any other outcome could be disastrous for other prospective companies in the pipeline set to list this or early next year.
Things have been bad for a while. After a global boom during the pandemic, IPO volume crashed as central banks aggressively hiked interest rates to curb surging inflation ignited at start of the war in Ukraine in February 2022.
It is not that bankers expect a flood of issuance in the autumn, but there is a growing feeling that the market is beginning to turn a corner.
A poor performance from Arm would be a huge backwards step. What happens in New York is always an important driver of sentiment in equity capital markets in other regions, including EMEA. And more generally speaking, where the US equity capital markets go, the rest of the world tends to follow.
There have been early signs of a potential bounce back. Stocks have rallied this year as inflation has begun to fell in many major economies, particularly the United States, where the Federal Reserve’s cycle of interest rate rises may soon reach its peak.
As a result, tech stocks have surged, with the Nasdaq Composite entering a new bull market. This paves the way for high quality issuers like Arm to test the IPO market’s appetite for the sector again, poor performance would be a deterrent for smaller tech companies to follow suit.
This year, there have only been six IPOs globally that have raised $1bn or more, down from 15 in 2022, according to Dealogic data. The biggest IPO of 2023 so far is the $4.4bn IPO on the New York Stock Exchange of Kenvue Inc, the US consumer healthcare company, in May.
At its mooted size of around $8bn, Arm will comfortably be the biggest IPO in New York since electric car maker Rivian Automative listed in November 2021, when the market was at the tail end of the last boom, raising $13.7bn.
The resumption of large tech listings, a major driver of business before the slump, would be a key sign that the global IPO market is beginning to enjoy a normalisation period. Rather than stability, patchy flashes of activity have characterised much of the past eighteen months, such as the jumbo flotation of German luxury car maker Porsche in September last year, which was a major event in itself, but had little read across for the broader market.
If it goes ahead, and if it goes well, Arm’s IPO will provide the market with both a new major pricing point and a test of its capacity to absorb jumbo tech deals amid a changing macroeconomic backdrop. In such a turbulent market, anything less than resounding success is going to echo across the market and could do lasting damage.