Softbank Company, located in the United Kingdom, intends to sell chip Arm to Nvidia Company in the US for $40 billion. Softbank initially purchased Arm in a $32 billion deal in 2016 and has become global suppliers of microprocessors that find applications in smartphones, sensors, and cloud services. Nvidia has focused on the design of graphic cards used in video game companies, data centers, and artificial intelligence. Nvidia Company has experienced a drastic drop in its sales due to the coronavirus lockdown of gaming activities and seeks to expand its profit by purchasing Arms. The merger acquisition of Nvidia Company and Softbank Company relates to the Coase theorem of the price mechanism, transaction cost, and managerial intervention.
According to Coase (1937), firms may merge in cases where the bargaining cost in the transaction meets the parties’ expectations in the contract. Although transactions are costly in terms of time and resource, firms may exist if the profit accrued is more beneficial. Businesses will sell their shares if they can foresee financial benefits in engaging in contracts and minimize costs. Softbank Company’s reason for selling Arms relates to Coase’s idea since they perceived Nvidia’s potential to become one of the world’s most potent chip suppliers. The collaboration of the companies will increase Softbank shares by almost 10% (Bloomberg, 2020). On the other hand, Nvidia can utilize Arms technology to boost its profits and favorably compete with other chip suppliers such as Intel. The decision also suits Nvidia since it can help regain financial losses experienced due to the coronavirus pandemic.
Softbank’s management intended to change its economic plans due to the contrast in its value and assets. The merger would also reduce public inspection of Softbank and allow the regime to exercise freedom in investment. Additionally, Nvidia anticipated an expansion of its operation due to the combination of factors of production that is scarce in the market. Coase argued that managerial techniques that contribute to the variety of production factors might increase firms’ size (Coase, 1937, p. xx). Managers of firms may decide to adopt a new strategy if the cost of organizing production aspects will be lowered. The firms’ integration allows Softbank to exercise investment freedom and secrecy and permits Nvidia to be at the top of the market.
The merge of Softbank and Nvidia Company contradicts Coase’s argument of the division of labor. The division of work may help a firm acquire services or goods it may not solely produce. Alternatively, a firm may employ different people to increase in size, provided the costs are kept optimum. Softbank’s decision to merge with Nvidia is entirely based on the price mechanism since the latter aims to attain a full collaboration share. Likewise, Nvidia expects to generate income from purchasing Arms without necessarily sharing skills with Softbank Company. The merger is also based on the assumption that the Arms technology will help Nvidia stand out in microprocessors’ supply.
In conclusion, the merger proves Coase’s argument of disadvantages of transaction costs and the rare cases where firms may persevere the limitations. The companies merged since the financial strategy outweighs the hefty expenses of the transaction. Organizational changes that may influence appropriate use factors of production may also encourage mergers. Nvidia Company stands the chance of being a market superpower by adopting the techniques of Softbank Group. However, Coase’s idea of firms merging with a need for specialization is overlooked in the companies’ collaboration. Therefore, the Coase theory holds and applies to modern business.
Bloomberg. (2020, September 14). SoftBank group selling arm to Nvidia for up to $40 billion. The Japan Times. https://www.japantimes.co.jp/news/2020/09/14/business/corporate-business/softbank-selling-arm-to-nvidia/
Coase, R. H. (1937). The nature of the firm: Origins, evolution, and development. Oxford University Press, USA.