Last updated: January 6, 2011 8:45 am

Microsoft links with Arm in tablets move

Shares in Arm Holdings rose as 13 per cent in early London trading on Thursday after Microsoft announced overnight that the UK-based group’s chip designs would feature in a new version of the Windows operating system.

Steven Sinofsky, president of the Windows and Windows Live division, revealed that Microsoft would be rolling out a new class of lower-powered chips based on Arm designs and made by Qualcomm, Nvidia and Texas Instruments as part of efforts to widen Windows beyond basic personal computers to portable devices.

The announcement was made ahead of the official start of the International Consumer Electronics Show in Las Vegas, the industry’s flagship annual event.

Lee Simpson, analyst at Jefferies, said that the market had long anticipated that Arm-based chips would feature in Windows 8 and had priced that into the stock. However, he said the official announcement was likely to keep feeding into the share price. A move into PC chips will enable Arm to command higher fees for each chip sold, though the market is smaller than for phones.

The move is a boost for Arm, whose low-powered chip designs feature in 95 per cent of mobile phones sold around the world and in a range of other products but have made relatively little headway in the higher-power computer chip segment where Intel dominates.

Following the announcement by Microsoft on Wednesday, graphics specialist Nvidia also said that it would be developing a new Arm-based core processor for desktops and servers. The move puts Nvidia in direct competition with Intel.

Warren East, Arm’s chief executive, has said that the company expects to benefit from an expected leap in demand for tablet computers, which are seen as a crossover product between smartphones and netbooks.

The success of the iPad has prompted companies including Toshiba, Motorola, Research in Motion and Hewlett-Packard to rush to bring out their own tablets.

Microsoft said Arm-designed chips would not start to be seen in new devices for another two or three years. Arm’s chips currently feature in a version of Windows that runs on the US group’s smartphones.

In July, Arm signed a deal with Microsoft to extend and expand on an existing long-running licensing agreement. The deal gave Microsoft access to Arm’s core architecture, rather than licensing one product at a time. Microsoft had until relatively recently relied on Intel to supply most of its chips, though it has been widening its relationships with other chipmakers and designers.

Shares in Arm have risen more than 150 per cent over the past year, boosted by speculation of a possible shift into supplying designs for Microsoft and news that Arm’s chip designs featured in iPhone 4 and iPad, Apple’s highly successful tablet computer.

The group, which is trading on 44 times 2011 earnings, has also been seen by some as a prospective takeover target.

Arm, whose shares were trading at 532½p early on Thursday, makes its money by licensing its chip designs to semiconductor makers and then collecting royalties once the chips go into new products.

Mr East continues to insist that buying the company would make little sense to another chipmaker, given that Arm’s strength is its neutrality and ability to service lots of customers with its designs, thereby saving them the cost of research and development.

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