2023 IPO Activity and Outlook

With the excitement over Arm’s upcoming IPO, many say that the U.S. IPO market is beginning to see signs of life again after 18 months of little activity. 2021 was a record year for the U.S. IPO market. Beginning in 2022, the U.S. IPO market essentially came to a halt due to the combination of the war in Ukraine, interest rate hikes, valuation corrections for high-multiple stocks, and fears of an upcoming recession. While the number of filings in 2023 is still below average, 16 companies submitted filings in August, with tech companies leading the way. Arm is set to be one of the largest tech IPOs in the past 20 years, while Instacart and Klaviyo are the first tech unicorns to file since 2021. These large IPOs, along with easing inflation, could boost momentum for other IPOs going into 2024. According to Renaissance Capital, from now until the end of the year, 30-50 more IPOs are expected to raise over $10 billion, and in total, 2023 will see approximately 110 IPOs raising approximately $22 billion in proceeds.

Here are some key 2023 U.S. IPO market statistics as of September 7, 2023 (source: Renaissance Capital):

• A total of $9.9B has been raised from IPOs YTD (a 116.4% increase from the same time last year)
• 70 IPOs have priced YTD (an 18.6% increase from the same time last year)
• 123 IPOs have been filed YTD (a 25.5% increase from the same time last year)
• IPOs have been most active in the Health Care industry (Biotech), followed by Technology and Industrials

A leading indicator of IPO conditions is the Renaissance IPO Index.  The Renaissance IPO Index is comprised of a portfolio of U.S.-listed newly public companies prior to their inclusion in core U.S. equity portfolios. Renaissance Capital’s IPO ETF (NYSE: IPO) tracks the index. Some of the top ETF holdings include Airbnb and Snowflake. As of September 7, 2023, the Renaissance IPO Index was up 32.1% year-to-date, compared to the S&P 500, which was only up 17.3%. This bodes well for the IPO market.

Arm IPO

Arm (Nasdaq: ARM) is set to price its IPO next week. Per their Form F-1 registration statement filed with the SEC,  they are offering 95,500,000 American depositary shares (“ADSs”), each representing one ordinary share, at a price range of $47- $51 per ADS. At the midpoint, they would raise approximately $4.7 billion at a $50.8 billion market cap, making it the largest U.S. IPO since electric vehicle maker Rivian in November 2021.

Arm is an industry leader in central processing units (“CPUs”), creating and licensing high-performance, low-cost, and energy-efficient CPU products and related technology. Its energy-efficient CPUs are in the vast majority of the world’s smartphones, and it is estimated that approximately 70% of the world’s population uses Arm-based products/technology.  

Arm was previously a public company. They originally went public in 1998, but SoftBank acquired them in 2016 for $32 billion, at which point they became private. A couple years ago, Nvidia wanted to acquire Arm for approximately $40 billion. However, the deal fell through due to regulatory challenges.

As an accountant, I naturally scanned their Form F-1 registration statement out of curiosity. All companies that want to go IPO in the U.S. are required to file a registration statement with the SEC. This filing provides potential investors with key information related to the offering, risk factors, business overview, management’s discussion of results, and the Company’s financial statements.

Here are some tidbits from their registration statement that caught my eye:

• They will be considered a “controlled company” after the IPO as SoftBank will beneficially own approximately 91% of the outstanding shares. Since SoftBank will retain a majority of the voting power, the Company may elect not to comply with certain corporate governance requirements applicable to other Nasdaq-listed companies. Therefore, the holders of the ADSs may not have the same protections as stockholders of other companies.
• As SoftBank will be selling a portion of its shares for the offering, the Company will not receive any of the proceeds from the IPO. All net proceeds will go to SoftBank. This is different from a traditional IPO, where companies go IPO to raise money and have to detail how they plan to use the proceeds.
• Revenues from China comprised approximately 24.5% of its total revenues for the fiscal year ended March 31, 2023. Given the current geopolitical tensions between the U.S. and China, its revenues have been impacted and will likely continue to be impacted by U.S. export controls and competition with China. However, this has impacted all major semiconductor companies (both domestic and international).
• The Company has approximately $1.6 billion of goodwill on its balance sheet (24% of total assets). As goodwill will need to be tested for impairment at least annually, there could be exposure to potentially significant impairment charges. Since the Company only has a single reporting unit, a steep and prolonged decline in its stock price could indicate an impairment. However, given their current estimated market cap, they have plenty of cushion and an impairment would be highly unlikely.
• The Company granted a significant amount of restricted stock unit awards (“RSUs”) under its 2019 All-Employee Plan, which will vest 180 days following the date the Company begins trading on Nasdaq. The Company currently intends to settle the RSUs in shares. Upon completion of the offering, the Company expects to recognize incremental and accelerated share-based compensation expense of approximately $273 million. This would be a significant charge to their income statement. However, management looks at non-gaap metrics to analyze core business performance. They exclude share-based compensation expense for equity awards that will be settled in equity. Therefore, this would not impact non-gaap operating income and non-gaap net income from continuing operations.
• SoftBank took out a loan facility of up to $8.5 million with J.P. Morgan SE and pledged its interest in Arm as collateral for the loan. The Company entered into an agreement to guarantee the loan, which gets triggered in the event it does not go IPO within 21 months of the closing of the loan facility or it fails to go IPO. Once the guarantee is triggered, the Company could owe J.P. Morgan SE for the loan amount if SoftBank defaults. Currently, the Company does not have any obligation until the guarantee is triggered, and even then, it would be likely SoftBank would prevent a default or restructure the debt before the Company would have to pay.
• As part of the expenses related to the offering, the Company incurred estimated accounting fees and expenses of $51 million, which was much higher than their legal fees. I’ve worked on a couple of IPOs, and this seems really high. Wish I had worked on their IPO!
• The Company completed a corporate reorganization on September 1, 2023. The reorganization resulted in Arm Holdings Limited re-registering as a public limited company under the laws of England and Wales and changing its name to Arm Holdings plc. Arm Limited also became a wholly owned subsidiary of Arm Holdings plc. The exchange of shares between Arm Limited and Arm Holdings plc was between entities under common control, so there was no financial impact on a consolidated basis. The key takeaway is that the Company changed its name to Arm Holdings plc.

Arm’s IPO will have a significant impact on the U.S. IPO market. There are currently rumors that Arm’s IPO is six times oversubscribed. That means demand for their shares in the IPO is six times the amount the Company is asking for. How it performs after the IPO remains to be seen. However, they stand to benefit from increased demand for artificial intelligence and autonomous driving. Here’s to a successful IPO and hopefully lots more IPO activity!