Britain’s latest Prime Minister Rishi Sunak recently struck a deal with the European Union to overcome trade frictions in Northern Ireland.
Impressive, given the stalemate that prevailed in the aftermath of Brexit despite two years of wrangling by his predecessors.
Yet only days later, Sunak learned he’d been defeated by a second longstanding challenge the former investment banker inherited on entering Number 10.
The doomed mission?
Persuading SoftBank – owner of leading microchip designer and licensor Arm – to list Arm in London later this year, when it becomes a public company once more.
Sunak reportedly held personal talks in January with Arm CEO Rene Haas and SoftBank founder Masayoshi Son to try to clinch the deal. This made him the third British PM to attempt to convince Arm’s owner that the UK’s most successful technology firm was a natural fit for listing on the London Stock Exchange.
All to no avail. SoftBank has confirmed that Arm will pursue its IPO in New York.
London won’t even get a secondary listing as a consolation prize.
Big in Japan
The Arm news has been described as a kick in the teeth for the City of London, and for the government’s aspirations to position Britain as a premier home for innovation and entrepreneurship as we develop our economy outside of the EU.
And while everyone will have their own views on the politics, it’s hard to argue Arm listing in New York is anything but a blow for London as a financial capital.
Cambridge-based Arm is one of the most formidable technology companies that the UK has ever produced. It has truly global scale.
The company was previously and happily listed here for many years, too, until it was acquired by Japan’s SoftBank in 2016 for a little over £24bn.
I remember that takeover very well – because I’d recommended buying Arm’s shares only weeks earlier for The Motley Fool’s Share Advisor service.
So I can testify that while the one-off price pop that accompanied SoftBank’s bid for Arm was obviously very profitable for investors, it was frustrating to see yet another British technology behemoth end up in foreign ownership.
Arm’s designs have captured at least a 95% share of the market for mobile chips, and its technology is behind an increasing proportion of other computer processing applications – from laptops to data centres.
UK tech companies are almost invariably acquired well before they reach such scale – as indeed Arm ultimately was. But prior to that it was an independent and world-class player in a sector dominated by US and Asian behemoths.
And with its upcoming flotation, London had a second chance at hosting a national champion.
Deliver us our dividends
There were apparently even discussions about London Stock Exchange rules being, well, bent to encourage Arm to list here – in particular rules concerning ‘related party transactions’, which would have forced a UK-listed Arm to gain approval from shareholders for certain dealings with its parent SoftBank.
These rules are in place to reduce fraud and conflicts of interest. But they’re more onerous than the equivalent in New York. US authorities only require companies to report such transactions to the market, not to gain shareholders’ agreement.
Perhaps, as has been widely reported, the City’s authorities weren’t sufficiently flexible to convince SoftBank. But it seems more likely to me that Arm’s owner simply believes there will be a deeper, more liquid market for the shares in the US.
The US market already boasts numerous tech giants, from Apple and Alphabet to Microsoft and Tesla. It’s where the world’s investors go to shop for international technology exposure.
In contrast, the UK market has long been criticised as parochial and obsessed with income at the expense of growth. Tech outfits of any size are noticeably absent.
This situation was memorably summed up in 2021 when hedge fund titan Paul Marshall described the City of London as a sort of “Jurassic Park”, populated by “coupon-clipping” dinosaur fund managers who are obsessed with dividends.
Down but not out in London versus Paris
The wider frustration here is that Britain has long punched above its weight in early-stage innovation.
Indeed, Arm itself is a legacy of a 1980s home computer boom that saw Britain battle US and Japanese rivals as virtual equals.
Yet the upper reaches of the UK market is dominated by financial, commodity and consumer giants, as well as healthcare conglomerates that have struggled to innovate for decades.
Worse, London is falling behind global rivals in terms of new stock market listings.
The total market capitalisation of the LSE was recently superseded by Euronext Paris, too. Paris has been capitalising on the fallout from Brexit and wooing financial firms to invest in France’s capital in order to access the EU market.
It’s easy to see why all this should worry British policymakers.
But should we wring our hands as UK investors that we can’t buy Arm in London?
Perhaps surprisingly, I’d argue not.
Even if Arm floating in New York is bad for Britain and the LSE, there are at least three reasons why the news shouldn’t unduly bother British Fools for now.
1. It’s easy to buy shares in US companies these days
All the big online trading platforms offer US share dealing, and fees are at most just a few quid more than buying British.
True, foreign currency exchange rates tend to be unjustifiably high, with brokers often profiting from onerous rates of around 1%. But at least there’s no equivalent of the UK’s 0.5% stamp duty when you buy US stocks. Foolish investors shouldn’t be churning their portfolios and paying those FX fees very often anyway.
2. Good closed-end funds are going cheap, and ETFs are widely available
We may not boast domestically listed technology players of scale, but there are several excellent London-listed investment trusts that offer one-stop shop exposure to the sector.
The most popular – Scottish Mortgage – is currently trading on a 16% discount to net assets, so it might even be a good time to pick up a bargain.
Alternatively, those who prefer a passive approach to investing via funds can turn to the cost-effective ETFs that have proliferated in recent years. Thanks to ETFs, getting technology sector exposure is no more difficult than buying Tesco shares.
3. Still room for the value recovery to continue
On the other hand, do you really want to buy technology shares right now?
Despite its dowdy reputation, London’s FTSE 100 index was a world-beater last year. Admittedly that’s after years of underperformance, but there are many in the market who believe so-called value stocks will continue to gain ground versus the growth shares that enamoured investors when interest rates were near-0%.
If that’s true, then London’s dinosaur market could yet stumble into another year of outperformance.
Investors, Arm yourselves
Given a choice, I’d prefer that the UK market had more high-growth shares and fewer ‘old economy’ companies. That’s not just reflective of my investing biases, but also because I believe it’d help to create a funding ecosystem to encourage UK entrepreneurs to found – and scale – the technology players of tomorrow.
However, as a private investor, I can just buy Arm shares when they’re listed in New York if I want to.
So personally speaking, I can’t say Arm floating in the US bothers me very much, except for sentimental reasons.
On that note, I’ve been aware of Arm since its RISC CPU architecture debuted in the late 1980s – and I used to play the computer game Elite on an Arm-powered Acorn Archimedes at a friend’s house.
Which explains my ‘Armless’ quip in the title of this piece. New players of the game were rated ‘Mostly Harmless’ when they began their ascent to ‘Elite’ status. Like British tech companies, bad British puns will continue to prosper, even if Britain sadly faces more years ahead as a shrinking financial powerhouse.
