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TOKYO – Maybe Masayoshi Son can walk on water after all. In a May conference call with investors, the SoftBank billionaire made the kind of God-complex headlines CEO’s tend to avoid.
By comparing himself to Jesus Christ – another visionary who he claimed was misunderstood – Son became the target of social media scorn and ridicule. Bears piled on, selling SoftBank’s shares with unholy ferocity for months.
Yet Son is having the last – or at least the latest – laugh as SoftBank’s stock prices have shot back toward the heavens. SoftBank has surged 130% since a March low brought on by WeWork and other big bets going sideways, with a touch of coronavirus panic tossed in.
Many of Son’s biggest plays in recent years have been on the sharing economy – including Uber and Grab – that are now being ravaged by the pandemic.
But as SoftBank walks on water with investors again, it’s wise to recall the depths of potential trouble below the surface.
Son’s resurrection in the eyes of punters is being propelled by giant buybacks and talk of more asset sales. Thus far, Tokyo-based SoftBank has tossed US$23 billion-plus at investors shellshocked by last fiscal year’s $18 billion loss.
Since March, while shares were nose-diving, Son’s team has pledged asset sales worth $42 billion.
SoftBank quietly sold $2.2 billion of its $150 billion stake in Alibaba. Expect more such transactions as the Japanese conglomerate seeks to raise funds to pay down debt and fund more buybacks.
Son’s team is trimming its stake in T-Mobile US Inc by as much as $20 billion. There’s lots of chatter that British chip designer Arm Holdings, which SoftBank bought four years ago for $32 billion, could be Son’s next target for disposal.
That’s fine for now, but it’s hard not to conclude that Son is employing gimmicks and essentially buying investors’ loyalty. The game, it seems, is to deflect attention from the myriad bad bets Son made in recent years.
There are questions about the sustainability of this approach. But don’t write him off. Son has made a career of swinging for the fences and confounding the naysayers.
The biggest home run was a 2000 bet on a little-known Hangzhou English teacher. The $20 million he handed Jack Ma was worth some $50 billion by 2014 when Alibaba went public on the way to today’s heights.
Things turned dark in the interim, though. Around the same time Son was betting big on Ma 20 years ago, a series of wagers on tech startups went wrong, racking up big losses.
Son managed to stop the bleeding and move on to 2006, when he made a $15 billion acquisition of Vodafone Group. This, too, was widely derided until it began paying off.
Then came the Vision Fund gamble. His big score on Alibaba bestowed a “Warren Buffett of Japan” halo upon Son. In 2016, he decided it was time to recreate that magic to supersize SoftBank’s profits. The $100 billion fund he devised that year quickly remade the venture capital business.
But to many, Son became a one-man bubble blower. He was notorious for overpaying for startups from Silicon Valley to Hyderabad to Singapore.
Not surprisingly, Son invested in more than his fair share of duds. Exhibit A: WeWork, the office-share hive that was more old school real-estate play than new-economy win. WeWork was en route to implosion long before the coronavirus made such businesses unsafe.
Not only did Son fall for co-founder Adam Neumann’s flimflam – he doubled down on it even after WeWork’s model began collapsing.
Just as Elon Musk convinced Wall Street that Telsa is more Apple than Toyota, Neumann sold WeWork as a tech game-changer, rather than a highly-leveraged leasing company bidding for properties around the world it couldn’t afford.
Wall Street called WeWork’s bluff. The prospectus Neumann’s team dropped ahead of a planned 2019 initial public offering was big on fake-it-until-you-make-it speak, but riddled with red flags.
Questions emerged about excessive spending, odd management structures and Neumann’s penchant for hiring family members. Even worse, no clear strategy for creating the iTunes-like community WeWork promised. The IPO was scrapped.
WeWork, of course, is just a microcosm of the dangers of SoftBank thinking it can hedge-fund its way to steady profitability. The question that haunts investors, says Mitsushige Akino of Ichiyoshi Asset Management, is whether “…WeWork is just the tip of the iceberg for SoftBank’s troubles.”
Examples of hubris can also be found in SoftBank’s telecoms business.
Earlier this year, Son’s team rolled out its much-anticipated 5G wireless service in Japan. Though SoftBank’s network boasted lightning-fast speeds, its coverage was limited initially. And there was a dearth of new and enticing content to keep customers on the network.
Users complained, too, that SoftBank was slow to recalibrate data-usage plans.
The question all this raises is a big one: Where does SoftBank goes from here? Son, it’s often said, is a scattershot investor. He fires as widely as possible, hoping to hit at least some of his targets. The play is that some of those kills will be lucrative enough to make up for the many misses.
So, he’s been throwing many billions at startups in the US, China, Germany, India, Singapore, South Korea, sub-Saharan Africa, Switzerland, the UK and just about everywhere else.
Diversification is important. But so is a strategy to pull disparate constellations of investments together into a cohesive whole. Along with dominating financing in the global ride-sharing business, Son has plowed big money into startups making microchips, solar panels and robots.
He’s invested big in e-commerce companies, indoor farms, investment banking, satellites and, of course, real estate via shared-office hives like WeWork.
Now may be time for reconsideration. “It makes sense now for the Vision Fund to cut back,” says analyst Shinji Moriyuki of SBI Securities.
The upshot is that the Vision Fund has devolved into a kind of island of misfit startups. This outcome is arguably what Son had in mind all along.
In 2017, for example, as the fund was just getting up to speed, Son said he works on a 300-year time horizon. Son spoke early and often about the “singularity,” the moment when AI can out-think humans – a matter upon which science fiction writers have spilled much ink.
Such talk bestowed a kind of folk hero status on Son. It’s a rarified one in business circles, and Son has played it quite successfully to keep investors engaged.
As of 2020, Son is selling himself as a fusion of Buffett’s value-investing genius, Musk’s bluster and Richard Branson’s fearlessness. This promise of a multifaceted effort to control the future of global tech explains how Son has almost supernaturally willed SoftBank’s share price higher against all odds.
Son’s job now, though, is to multitask as few CEOs ever have.
The Covid-19 assault on the sharing economy in which Son saw such potential isn’t just an added challenge, it’s the ultimate wild card as Son sets out to stabilize his empire. Upping the stakes, though, are credit-rating companies scrutinizing the conglomerate’s balance sheet.
Last month, Moody’s Investors Service revised its outlook for SoftBank to “negative” from “ratings under review.” The announcement came three months after Moody’s sparked a public spat with SoftBank over a two-notch downgrade. Debt-laden SoftBank was so aghast that it took the unusual step of requesting its rating be withdrawn.
Moody’s remains skeptical of SoftBank’s affinity for complex financial schemes like collateralized margin loans, saying the practice “signals a heightened tolerance for risk and financial complexity.”
Bottom line, Moody’s says, is “major asset sales have been announced but given the structured nature of the transactions, cash proceeds may not all yet have been received or applied towards debt reduction.”
In June, S&P Global Ratings put its finger on the pulse when it warned that Son’s preference for asset sales over structural reforms and increased profitability raise doubts about “financial soundness and creditworthiness.”
Perhaps it’s no coincidence that these warnings coincided with the unraveling of Wirecard AG, one of Son’s lesser-known misfires. In April 2019, Son’s team lavished $1 billion on the Munich-based payments company.
Wirecard has since collapsed in a swirl of fraud allegations, drawing scrutiny SoftBank’s way. It’s fueling fresh doubts about Son’s self-described ability to “sniff” out hidden gems.
Son missed the stink of one bad wager after another. After the WeWork debacle and SoftBank’s stumbles on Indian hospitality startup Oyo, “perhaps the Vision Fund requires new vision in its investment strategy,” says analyst Neil Campling of Mirabaud Securities.
Of late, Son’s strategy, he says, “has been somewhat clouded through a plethora of mistakes.”
Paul Singer’s Elliott Management Corp. wins a gold star for prescience. In February, markets buzzed about how the $40 billion hedge fund, one of the globe’s most prominent activist investors, harnessed its nearly $3 billion SoftBank stake to demand change. Singer’s team was demanding answers about the nature of nearly $10 billion of securities on SoftBank’s balance sheet.
It was but the latest investor demand for clarity on SoftBank’s overall governance. A key Elliott demand was for greater diversity and independence on SoftBank’s all-male board. Son’s larger-than-life presence can at times overwhelm dissent on Vision Fund investment decisions.
By March, Son’s team seemed to be bowing to Elliott’s recommendation when they announced a $4.7 billion share buyback. Elliott was agitating for buybacks in the neighborhood of $20 billion. SoftBank may indeed be moving in that direction.
That could keep investors quiet, for now. “De-leveraging should mitigate worries on balance sheet stress,” says analyst Kirk Boodry of Redex Holdings.
Now, investors’ eyes are on what SoftBank does with Arm Holdings. Does it sell part of the chip-design giant either through a share listing or a private deal?
Or, SoftBank could just hold on to Arm, betting that demand for semiconductors will be brisk even as the pandemic savages most industries. Odds are, Son’s team will do the former, opting for the best price it can muster to fund more share buybacks.
Yet this, too, is short-termism at a moment of maximum uncertainty for the global economy.
2020 was the year Son hoped to open a second $100 billion Vision Fund, but things had already looked dicey in the closing months of 2019. It became clear then that Son’s earlier benefactors, especially Saudi Arabia, were reluctant to front Son loads of new investment.
Before a Vision Fund 2.0 is needed, Son must arguably answer three questions. First: What, really, is your investment theme?
His disparate gambles on ride-sharing giants, online lenders, robot pizza makers, food-delivery startups, solar panels and even US fund Fortress Investments have a Moneyball quality.
The reference here is to the Michael Lewis book, and Brad Pitt-led movie, about recreating great athletes in the aggregate. In Son’s case, trying to recreate Buffett’s income streams by investing virtually everywhere.
Might it work? Analyst Mitsunobu Tsuruo of Citigroup thinks there’s “significant scope for a rebound in the valuations of non-listed firms” in the portfolio. All investors can do, though, is hope Son really knows what he’s doing.
Two: Can Son find his own General Re?
A key secret to Buffett’s success in anchoring his Berkshire Hathaway conglomerate is reliable income from his reinsurance empire. That bedrock empowers Buffett to swing for the fences now again without putting shareholders at grave risk.
In 2018, Son mulled grabbing his own reinsurance shock-absorber: a nearly US$10 billion stake in Swiss Re AG. It seemed a sage ploy to close the gap between a discounted SoftBank share price, Son’s outsized ambitions and a uniquely eclectic universe of Vision Fund investments.
For whatever reason, Son opted out. His empire sure could use a stabilizing cash cow now.
Three: What if Covid-19 is here for quite some time to come?
Son’s outsized investments in the sharing economy will veer even further into the red if no coronavirus vaccine emerges by year-end, or if second infection waves materialize as feared.
Son needs to reconcile his investments to date. But he also needs to find a Plan B strategy as so many of his earlier bets go awry.
Asset sales and buybacks are Band-Aids. What’s needed is stronger medicine: Son needs to prove he has a clear plan to raise the Vision Fund’s game over the next 300 days, not 300 years.
Even so, there is reason to think SoftBank can do it. Investors have just learnt anew of the perils of shorting Japan’s swashbuckling tech guru, witnessed in his share bounce back.
But that is today. What of tomorrow? It’s high time Son dispensed with the financial window dressing and proved his sniffing skills have still got game.