On December 2, 2021, the Federal Trade Commission (FTC) filed an administrative complaint against the chip supplier NVIDIA challenging its acquisition of its chip design provider, and leading open-licensing powerhouse, ARM. The FTC's suit comes as NVIDIA's proposed acquisition remains under scrutiny in other major jurisdictions including China, the European Union (EU), Japan, South Korea, and the United Kingdom (UK).
ARM is a critical technology supplier to most of NVIDIA's competitors. ARM widely licenses one of the most technologically advanced and high-performance Central Processing Unit (CPU) technologies available. Given its performance and energy efficiency, ARM's CPU designs are particularly suitable for use in datacenters. NVIDIA is a major supplier of Graphic Processing Units (GPUs), chips that help offload some of the simple tasks from the CPU and that are also used in applications such as bitcoin mining, and for deep learning and machine learning workloads in modern datacenters. Many of NVIDIA and ARM's technologies are complementary. Importantly, NVIDIA licenses ARM's technology for some of its other products: CPUs and Systems on Chips (SoCs)—including Data Processing Units (DPUs, also called "SmartNICs")—areas in which NVIDIA competes closely with other ARM licensees.
The FTC alleges that by giving NVIDIA control over critical ARM technologies, the deal would give NVIDIA the ability and incentive to foreclose its competitors in i) High-Level Advanced Driver Assistance Systems for passenger cars, ii) DPUs used in datacenters, and iii) ARM-based cloud computing CPUs. The UK's Competition and Markets Authority (CMA) and the European Commission (EC) shared these concerns with the FTC, but these agencies also expressed concerns about the supply of SoCs for automotive infotainment applications, datacenter GPUs, SoCs for high-performance IoT applications, and SoCs for gaming applications. The EC has also expressed concerns in SoCs for general-purpose PCs.
In common with concerns expressed by the EC and other agencies, the FTC complaint alleges that the acquisition would likely harm innovation competition by eliminating innovations that ARM would have pursued but for a conflict with NVIDIA's interests. The FTC's complaint alleges that ownership of ARM would provide it access to the competitively sensitive information of ARM's licensees, which include NVIDIA competitors. Such access would likely decrease the incentive for ARM to pursue innovations that are perceived to conflict with NVIDIA's business interests, and result in a critical loss of trust in ARM and its well-established ecosystem.
NVIDIA has attempted to head off regulatory action challenging its proposed acquisition of ARM by offering remedies to the FTC, the EC, and the UK CMA, and perhaps other agencies. For example, NVIDIA offered to spin-off ARM's licensing business as a separate entity, but the FTC was not satisfied that such a solution would address the concerns about future products and innovation arising from NVIDIA's control of ARM's product development and roadmap. Given this, and comments from the UK CMA on the unsuitability of "any form of behavioural remedy," it is difficult to believe NVIDIA will succeed in convincing all reviewing agencies worldwide that the transaction should be allowed to proceed.
Importantly, this is the first major merger complaint brought by the FTC under Chair Lina Khan. Significantly, given recent divisions at the FTC, the decision to file an administrative complaint was bipartisan, with a 4-0 vote in favor. The FTC elected to file an administrative complaint for adjudication on the merits by an FTC administrative law judge, rather than file a complaint for interim relief in federal district court. The FTC likely took this route as the transaction is not at imminent risk of closing: the transaction may not close until all required regulatory approvals have been obtained, and the transaction remains in regulatory limbo in numerous key jurisdictions. For example, the EC "stopped the clock" on its review on November 25, 2021, extending the EC's April 12, 2022 deadline for a decision on the merger. The UK's deadline to decide whether to approve or prohibit the transaction is May 2, 2022.
The FTC administrative trial is not set to begin before August 2022. It remains to be seen whether the parties and the FTC will contest an administrative litigation, or whether the FTC challenge is mooted due to a prior prohibition decision in another key jurisdiction.