SoftBank Shares Tumble as Investors Question ARM Deal

TOKYO—SoftBank Group Corp.'s shares plunged Tuesday as investors questioned the $32 billion price tag on the company's purchase of U.K.-based chip designer ARM Holdings PLC.

Shares in SoftBank, a Japanese internet and telecommunications conglomerate, were down 10.7% at 5,365 yen ($50.7) as of the midday close in Tokyo. The price briefly touched ¥ 5,329—the lowest level since early April.

Japanese markets were closed for a national holiday Monday, so trading Tuesday showed the first market reaction in Tokyo to news of SoftBank's acquisition of ARM, which was announced Monday.

"My first impression was that the purchase made investors worried about SoftBank being able to receive synergies from the purchase of ARM and collect all the cash it spent," said Masayuki Kubota, chief strategist at Rakuten Securities.

In another sign of market skepticism, spreads on credit-default swaps, a measure of the cost of protection against the risk of defaulting on debt, also rose. CDS spreads had risen about 30 basis points Tuesday morning from Friday's close, according to Toshihiro Uomoto, chief credit strategist at Nomura Securities. Wider spreads mean debtholders are more worried about an issuer's credit risk.

SoftBank Chief Executive Masayoshi Son said Monday that the ARM deal marked a "paradigm shift" at SoftBank and a bet on demand for internet connectivity across everyday devices such as automobiles and refrigerators.

Analysts, though, say the business lies far outside the realm of SoftBank's existing operations, and the price was difficult to justify without further explanation from Mr. Son about what he hopes to gain from buying ARM.

"SoftBank is going to pay 43% premium for ARM, which is seen by the market as overpaying and is weighing on SoftBank share prices. SoftBank must show investors that the purchase is worth more than the premium," Nomura's Mr. Uomoto said.

Mr. Kubota of Rakuten Securities questioned why Mr. Son decided to invest in a hardware company.

"The most important thing in IoT [Internet of Things] is not hardware, but software, such as deep learning, the brains of smart devices," he said.

Other investors expressed concern that the ARM acquisition may delay SoftBank's efforts to turn around unprofitable U.S. wireless carrier Sprint Corp., which it bought in 2013.

"A push into the Internet of Things is positive in the long run. Mr. Son is right on that," said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management. "But we'd rather have seen that after they figured out how to turn around Sprint."

Mr. Son said Monday that he decided to make the ARM purchase partly because he is confident about turning around Sprint. SoftBank has been cutting expenses to revive the No. 4 U.S. mobile carrier.

Sprint shares fell 5% in New York on Monday.

Write to Megumi Fujikawa at [e-mail] and Kosaku Narioka at [e-mail]

(END) Dow Jones Newswires

July 19, 2016 01:15 ET (05:15 GMT)

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