Nvidia has agreed to buy British chip designer Arm Holdings from SoftBank for US$40 billion (A$55 billion), creating a giant in the chip industry.

The cash and stock deal for Arm was announced on Monday morning.

Nvidia is known for its graphics chips that power video games, but it has developed other markets including artificial intelligence, self-driving cars and data centres.

Arm supplies the chip technology for virtually all mobile devices such as phones and tablets but is also expanding into processors for cars, datacenter services and other devices.

The British company does not make chips. Instead it licenses out the underlying technology so others can make chips with it. It has previously collaborated with Nvidia.

Last year Nvidia said it would make its chips work with processors from Arm to build supercomputers, deepening its push into systems that are used for modeling both climate change predictions and nuclear weapons.

SoftBank acquired Arm for US$32 billion in 2016, its largest-ever purchase, in part to expand into the internet-of-things technology, which connects everyday devices from traffic signals to refrigerators to the internet.

The terms would mark a big win for the Japanese company which has struggled to jump-start growth in the business, according to the Wall Street Journal, which reported on the deal earlier.

Nvidia said in a statement it will expand Arm’s R&D presence in Cambridge in the UK “by establishing a world-class AI research and education centre, and building an Arm/Nvidia-powered AI supercomputer for groundbreaking research”.

“AI is the most powerful technology force of our time and has launched a new wave of computing,” Nvidia founder and CEO Jensen Huang said.

“In the years ahead, trillions of computers running AI will create a new internet of things that is thousands of times larger than today’s internet of people.

“Our combination will create a company fabulously positioned for the age of AI.”

As part of Nvidia, Arm “will continue to operate its open-licensing model while maintaining the global customer neutrality that has been foundational to its success, with 180 billion chips shipped to-date by its licensees”, the two companies said. 

Under the terms of the transaction, Nvidia will pay to SoftBank a total of US$21.5 billion in stock and US$12 billion in cash, which includes US$2 billion payable at signing. Nvidia will also issue US$1.5 billion in equity to Arm employees.

Nvidia said it intends to finance the cash portion of the transaction with balance sheet cash.

The transaction does not include Arm’s IoT services group.

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