Nvidia’s 14-month-long, $40 billion proposal to acquire chip IP vendor Arm has hit another potential regulatory roadblock after being hit with two earlier challenges in Europe since October.

This time it was the U.S. Federal Trade Commission (FTC), which filed an administrative complaint on Dec. 2 to attempt to block the blockbuster transaction. The administrative complaint, which will be heard by an administrative law judge in 2022, alleges that if the merger is permitted it will give the companies “the means and incentive” to stifle innovative next-generation technologies, including those used to run data centers and driver-assistance systems in cars, according to the FTC’s filing.

The FTC decision to issue the complaint against Nvidia Corp., Arm Ltd., and Arm owner Softbank Group Corp. came on a 4-0 vote by the FTC commissioners. The administrative trial will begin on August 9, 2022.

“The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” FTC Bureau of Competition Director Holly Vedova, said in a statement. “Tomorrow’s technologies depend on preserving today’s competitive, cutting-edge chip markets. This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals. The FTC’s lawsuit should send a strong signal that we will act aggressively to protect our critical infrastructure markets from illegal vertical mergers that have far-reaching and damaging effects on future innovations.”

The FTC publicly acknowledged in late November that it was taking a deeper look into the proposed merger.

The FTC said that it issues such administrative complaints “when it has reason to believe that the law has been or is being violated, and [when] it appears to the Commission that a proceeding is in the public interest,” the agency said.

The FTC’s newly-filed administrative complaint swiftly follows related actions taken by regulatory agencies for the U.K. government and the European Commission (EC). On Nov. 16, the U.K. government ordered an in-depth, 24-week “Phase Two” investigation into the proposed deal. That investigation follows an earlier Phase One investigation the government conducted over the summer. The U.K.’s deepened investigation will be conducted by the government’s Competition and Markets Authority (CMA).

On Oct. 27, the EC unveiled its own “in-depth investigation” of the proposed merger proposal, saying it wants to look at whether the merger could stifle fair competition in the marketplace. An initial investigation phase by the EC determined that it needed more time to evaluate the proposed merger and its effects before it issues a final decision in the case.

All three agencies – the FTC, the UK’s CMA and the EC – say they are reviewing the proposed acquisition in more depth due to a variety of concerns, including how it could stifle competition, reduce innovation in the semiconductor industry and cause potential harm to national security.

The FTC said it has “cooperated closely” with staff of the competition agencies in the European Union, United Kingdom, Japan and South Korea during its investigation.

The FTC complaint alleges that the acquisition will cause harm to competitors “by giving Nvidia access to the competitively sensitive information of Arm’s licensees, some of whom are Nvidia’s rivals,” the complaint continued. If that were allowed “it is likely to decrease the incentive for Arm to pursue innovations that are perceived to conflict with Nvidia’s business interests,” the complaint continued.

That would be especially problematic, the complaint said, because “Arm’s licensees – including Nvidia’s rivals – routinely share competitively sensitive information with Arm. Licensees rely on Arm for support in developing, designing, testing, debugging, troubleshooting, maintaining and improving their products. Arm licensees share their competitively sensitive information with Arm because Arm is a neutral partner, not a rival chipmaker. The acquisition is likely to result in a critical loss of trust in Arm and its ecosystem,” the complaint continues.

The FTC also said that the acquisition “is also likely to harm innovation competition by eliminating innovations that Arm would have pursued but for a conflict with Nvidia’s interests. The merged firm would have less incentive to develop or enable otherwise beneficial new features or innovations if Nvidia determines they are likely to harm Nvidia.”

The merger would particularly cause competitive harm in three worldwide markets where Nvidia competes using Arm-based products – High-Level Advanced Driver Assistance Systems for passenger vehicles; Data Processing Unit SmartNICs; and in Arm-based CPUs for cloud computing service providers, the FTC said.

In an email reply to an inquiry from EnterpriseAI, an Nvidia spokesperson said today that the company is not giving up in the fight.

“As we move into this next step in the FTC process, we will continue to work to demonstrate that this transaction will benefit the industry and promote competition,” the spokesperson said. “Nvidia will invest in Arm’s R&D, accelerate its roadmaps and expand its offerings in ways that boost competition, create more opportunities for all Arm licensees and expand the Arm ecosystem. Nvidia is committed to preserving Arm’s open licensing model and ensuring that its IP is available to all interested licensees, current and future.”

Analysts Weigh In

So where is this all leading to? Will this proposed acquisition ever come to fruition after sharp criticisms from three governmental agencies around the world?

Several IT analysts told EnterpriseAI that the shine could be starting to fade on this deal.

“Since the initial investigations by the U.K. government and the European Commission, it has pretty much only been a matter of time before the FTC launched its own investigation into Nvidia’s proposed acquisition of Arm,” said Shelly Demotte Kramer, principal and co-founder of Futurum Research. “I am a fan of Nvidia and the innovation that [CEO] Jensen Huang is driving, and this acquisition does make perfect sense for Nvidia. But, that said, given both the UK and EC investigations, now joined by the U.S.’s FTC investigation, it is hard not to imagine this deal is probably dead in the water.”

Another analyst, Karl Freund, principal of Cambrian AI Research, said that he sees the actions from the UK, EC and the FTC as indications that the deal is now unlikely to succeed.

“Nvidia is supporting the investigations and seems confident they will prevail,” said Freund. “In my honest opinion, they have excellent arguments, but they may fall on deaf ears.”

Freund said he now views the odds of a successful conclusion to the merger as “slim and none.” At the same time, however, no one should underestimate Nvidia CEO Huang, he added. “He will find some way to make this a win for Nvidia. He surely must have known this was a likely course when he did the deal.”

The assurances that Nvidia offered to the Europeans and British to prevent a potential acquisition from causing competitive issues “are on the right path, but they need to find remedy mechanisms to put teeth into it,” he said.

Dan Olds, the chief research officer for Intersect360 Research, said he also sees the deal as dead. “Maybe not quite dead-parrot-dead yet, but it is definitely mostly dead,” said Olds.

Olds said he gives the deal less than a 10 percent chance of coming to fruition.

“It was always going to be a hard deal to pull off, much harder than Nvidia probably envisioned when they started their Arm bid,” he said. “There is a lot of global politics involved in this deal and regulators representing four entities (the US, UK, EU, and China) have to approve it before it can happen. Each of the regulatory parties has their own reasons for potentially giving the deal a thumbs down.”

One huge factor in the deal is that if Nvidia can purchase Arm, “it would make Arm technology subject to U.S. government regulations which could potentially ban China from using Arm designs in HPC or even in consumer products,” said Olds. “China cannot and will not take this risk.”

Another analyst, James Kobielus, the senior research director for data communications and management at TDWI, a data analytics consultancy, said the deal appears to be “on critical life support.”

Lacking regulatory support in the U.S. and U.K., “it is pretty much a lost cause unless Nvidia somehow radically restructures the deal to address anti-competitive concerns,” said Kobielus. “But it is hard to see how Nvidia could do that without gutting its core strategic rationale for doing the deal: leveraging the Arm acquisition to contend with Intel across a wide range of mobile, edge, embedded, gaming and internet of things endpoints and to serve chip makers who are adapting Arm designs to work in servers and PCs, which has long been Intel’s stronghold.”

Kobielus said that at this point he senses that Arm licensees just want to see the matter decided as soon as possible, one way or the other.

Charles King, principal analyst with Pund-IT Inc., told EnterpriseAI that while the latest challenges are not good news for Nvidia, it is now time to watch to see what the GPU maker’s reaction will be to the pressures.

“The main issue in each of the agencies’ actions is whether they will act to prevent the deal or offer terms for Nvidia to move ahead,” said King. “If the latter occurs, it mainly comes down to how those requirements might impact Nvidia’s long term plans and goals. The best approach is to work through the process and address issues that arise forthrightly. I expect Nvidia to do just that.”

Another analyst, Marc Staimer, the president of Dragon Slayer Consulting, said he believes it is hard to say what will now happen with the deal.

“Lawsuits are always crapshoots,” said Staimer. “The FTC has lost in court before, albeit they usually win. The EU is another story. They tend be a bit more [tough].”

This all means that the deal could still happen, he said, but it is only possible if Nvidia wins some fights in court. “It is not like they can carve off a piece of Arm and spin it out.”

Nvidia wants and might need its own CPU, said Staimer. “Of course, they could have done what Apple and Qualcomm do and just license the Arm architecture,” he added. “This will delay the deal for years.”

Linley Gwennap, principal analyst with The Linley Group, told EnterpriseAI that several major Arm licensees have been concerned about this deal from the start and made strong cases to U.S. and EU officials, setting off the investigations.

“I would not say the deal is dead, but the likelihood of completion is pretty low,” said Gwennap. “At the recent Nvidia investor call, Jensen did not mention it at all, so he is trying to downplay it. At this point, Nvidia may be looking for a way to get out of the deal. The lesson here is that if you are trying to buy a company and that company’s customers are opposed, you probably should not be buying that company.”

The Nvidia merger proposal for Arm was announced in September 2020 and has been the subject of controversy as well as praise. Several major tech companies, including Google and Microsoft, have vocally opposed the deal, issuing repeated concerns about its negative effects on competition and pricing.

But in June of 2021, three other chip companies – Broadcom, Marvell and MediaTek – backed the acquisition and began publicly saying that they see the move as one that could ultimately benefit their own businesses.

The Nvidia acquisition of Arm was set up when Japanese technology investment company SoftBank, which bought Arm in July of 2016 in a $32.25 billion all-cash deal, chose to sell the company after hemorrhaging cash since the first quarter of 2020. SoftBank had been looking to sell off assets to raise money after the company’s earlier bets on the rise of connected devices failed to pay off. The company’s Vision Fund, its AI investment fund, suffered a $13 billion annual loss in its fiscal year ending in March 2020.

Acquiring Arm would solidify Nvidia’s standing as a major player in wireless and other markets as it makes steady inroads in enterprise data centers. The graphics leader has released a stream of ever-more powerful GPUs targeting machine learning and other AI workloads that now dominate corporate data centers.