SoftBank: technology evangelist or hedge fund?

In fairy tales, a crystal ball can be many things: it can reveal the future, but it can also be a malevolent charm that drives peaceful villagers insane with greed. The former rather than the latter is what Masayoshi Son had in mind in 2016 when, after paying $32bn to buy Arm — the most aggressive gamble of his life at the time — he described the UK chip designer as “my crystal ball”. 

As an investor obsessed for decades with the evolution of communications and software, the SoftBank founder had just bought a company through which he believed he could see the future of every trend in computing, artificial intelligence and the internet of things.

The idea that he possessed magical insight became a formidable tool for one of Asia’s greatest salesmen. It was a pitch that allowed Mr Son to entice billions of dollars from Middle Eastern investors with the promise of betting on the start-ups that would dominate centuries into the future.

Project Crystal Ball, after a quick rebranding, was introduced to the world later that year as the groundbreaking $100bn SoftBank Vision Fund — and its new Gulf backers demanded that a portion of Arm be put in the portfolio.

Today, the vision unlocked by the crystal ball is gone. Mr Son is disposing of Arm for up to $40bn to Nvidia, a US chip company that was worth less than the UK group at the time of SoftBank’s acquisition and is now valued at $330bn. The Vision Fund is fighting to recoup losses in its portfolio and struggling to raise fresh outside money for a sequel fund following a series of disastrous investments in WeWork, the shared workspace company, and other start-ups.

Masayoshi Son at a 2016 press conference announcing SoftBank’s £32bn takeover of Arm © Chris Ratcliffe/Bloomberg

The group is also distracted by infighting between different factions inside the organisation. Following a six-month flurry this year in which SoftBank sold $90bn of holdings in T-Mobile, Alibaba and its domestic mobile business SoftBank Corp, the company went off at an unexpected tangent with its diversification into trading of listed US tech stocks.

SoftBank may have cash, it may have an inspirational and mercurial leader, but the group lacks, say investors, a clear statement of where these two things will take the company a month, a year or a decade from now.

“A year ago, it was all about the Vision Fund,” says one of SoftBank’s larger UK-based shareholders, “now I hardly hear about that. Before, it was about Arm and the internet of things. Now it isn’t. Then it became about investing like a hedge fund.

“The decision on what SoftBank is as a company seems to be the whim of Son,” he adds, noting that he will continue to hold SoftBank stock as long as it represents what he sees as the most adventurous tech play in one of the world’s biggest stock markets.

Still, without Arm to provide the company with the easy-to-grasp narrative of a crystal ball, Mr Son — along with even some of his closest allies in the company — seem unable to clearly answer the much asked question: what is SoftBank?

SoftBank is expected to become one of the largest shareholders in Nvidia with a stake of up to 8.1 per cent © Tyrone Siu/Reuters

Restructuring spree

In the absence of a clear response from Mr Son, people both inside and outside SoftBank have begun crafting their own definitions of the company.

“SoftBank is headed in the direction of being a giant hedge fund,” says one person who has worked closely with Mr Son. The idea, at least superficially, is seductive. 

“The idea that SoftBank’s jettisoning of businesses that it directly operates means it is more like a Bridgewater [hedge fund] or a Blackstone [private equity group] makes some sense for now. At least until Son changes the DNA again,” says one long-term investor. He adds that descriptions of SoftBank’s internal management as confrontational and factionalised add to the image of it as a swashbuckling risk-taking machine rather than a sober tech giant.

Several SoftBank executives, argue that the hedge fund description underplays the group’s investment style led by Mr Son, which allows it to bridge geopolitical tensions to strike sophisticated technology deals.

Softbank ¥ per share (’000)

Others say that SoftBank can now be best characterised as primarily an investment firm. A member of the founder’s inner circle describes it as “a visionary’s gigantic family office”. Another says that the company is “a projection of Mr Son’s mind” but adds that its strategy is prone to sudden huge shifts “when Mr Son gets bored”. 

To some investors, these tortured efforts to nail down a description of SoftBank and explain a corporation in constant evolution are a central part of the appeal.

When you are buying SoftBank shares, says one of its long-term UK-based investors, you are not just buying Mr Son’s vision and his past investment record. Instead, you are betting on someone who has a long history of challenging the business establishment — especially in Japan — and who believes he can adapt more quickly than anyone else out there. 

“SoftBank’s asset mix may change but its investment approach and belief in outsize returns by picking winners in technology has been remarkably consistent,” says CLSA analyst Oliver Matthew. 

SoftBank’s Vision Fund lost $6.8bn on shared workspace company WeWork in the last fiscal year © Justin Lane/EPA-EFE

Other investors argue that SoftBank’s breakneck pace of reinvention, combined with its vulnerability to Mr Son’s regular shifts of attention, is the reason shares in the company trade at a massive discount to the value of its holdings. Even as SoftBank shares climbed to a 20-year high in early August, boosted by a sharp rally from its holding in Alibaba, its market capitalisation of $137bn represented a 45 per cent discount to the value of its portfolio. 

The rebound was driven by a restructuring spree that began in March, when shares in SoftBank plummeted due to the market rout triggered by the pandemic. It exposed Mr Son’s own fortune, which is tied to his 26 per cent stake in the company and his heavy personal borrowings against that stake. 

Since spring, Mr Son has placed a bigger focus on securing investment returns, but people close to the SoftBank founder say his underlying vision remains unshaken and he has displayed no sign of wishing to compromise on it even at the height of the market turmoil. “Most people would have panicked, but he’s supremely confident and there was never a moment of doubt,” says one of those close to him.

Yet, without the 52 per cent drop in share price in the month up to March 19, the sale of Arm to Nvidia may never have happened. Nor would Nvidia, which Mr Son had once considered acquiring, have approached SoftBank about selling one of Britain’s most important homegrown technology companies. 

A six-month flurry this year saw SoftBank sell $90bn of holdings in T-Mobile, Alibaba and its domestic mobile business © John Taggart/Bloomberg

The sale of Arm has cemented Mr Son’s transition from an operator focused on the telecoms and tech industries to one who is a global manager of assets. And while Mr Son has not publicly discussed the sale of the chip designer, the chief executives of both Nvidia and the UK group have defended the deal as a continuation of his technology bet in the era of AI. SoftBank is expected to become one of the largest shareholders in Nvidia with a stake of up to 8.1 per cent.

“Masa will tell you in a heartbeat that Nvidia and Arm are his two favourite technology companies for the era of AI,” says Jensen Huang, co-founder and chief executive of Nvidia. “If you look at the result of our combination, this is a continuation of that vision. It just happens that Arm and Nvidia will be together and Masa will be a large shareholder [in the combined group].”

Some long-term SoftBank investors share that view, saying there is a consistency even in the string of strategic decisions Mr Son has made in the midst of the coronavirus crisis. 

“I still believe in Mr Son and I still believe in the SoftBank vision of finding innovative platforms early, investing in them and putting them together. That’s been the premise of our investment in SoftBank since 2006 when it took over Vodafone in Japan,” says Richard Kaye, a portfolio manager at Comgest, a SoftBank shareholder with a $95m stake. 

“I can’t pretend that everything at SoftBank is entirely transparent,” Mr Kaye adds. “It’s a very large complex company but I think we have often seen with the benefit of hindsight that SoftBank has a pretty consistent policy and it executes generally very well on that.”

Landing the ‘Nasdaq whale’

Even people who have worked closely with Mr Son, however, have begun to seriously question what visions remain after the Financial Times revealed in early September that SoftBank was the “Nasdaq whale” behind billions of dollars’ worth of US equity derivatives that stoked a rally in big tech stocks. 

Using some of the money from asset disposals that was initially planned for share buybacks and debt reduction, its aggressive foray into publicly listed tech stocks has only reinforced the idea of a company completely beset by the whims of one man. 

A string of longtime board members have left SoftBank over the past year, including Fast Retailing chief executive Tadashi Yanai © Akio Kon/Bloomberg
Alibaba founder Jack Ma also quit SoftBank’s board amid Mr Son’s pivot towards asset management © Jean Chung/Bloomberg

“The reason the share price trades at a discount is because there is an element of ‘what crazy thing is this guy going to do next and where is the governance in this company’,” says a person who has worked closely with Mr Son.

Longtime fans admit the risks surrounding the billionaire founder have amplified as his empire has grown. Advisers and investors have questioned his choice of lieutenants to execute his investment ideas, while others including Elliott Management, the US hedge fund, have sought higher governance standards at SoftBank and the Vision Fund. 

A string of executives and longtime board members have left the group over the past year amid Mr Son’s pivot towards asset management, including Fast Retailing chief executive Tadashi Yanai and Alibaba founder Jack Ma. More recently, Chad Fentress also resigned as the group’s chief compliance officer after just two years in the role where he led the establishment of SoftBank’s global code of conduct. Mr Fentress, who also sat on the WeWork board, left the group due to concerns that the company was not addressing its governance issues, according to people close to SoftBank.

Mr Fentress did not respond to a request for comment. But SoftBank said its “management is constantly considering appropriate ways to enhance its group-wide corporate governance” and thanked Mr Fentress for strengthening “its compliance functions”.

Jensen Huang, co-founder and chief executive of Nvidia: ‘Masa will tell you in a heartbeat that Nvidia and Arm are his two favourite technology companies for the era of AI’ © Mandel Ngan/AFP via Getty

Inside SoftBank, the persistent discount to its share price has prompted discussions among senior management over whether the company would be better off taken private in a management buyout. Long-term SoftBank watchers suspect the answer will again be “no”, but speculate that the company’s deepest ever cash war chest will be used for transformational AI deals that could extend into sectors as diverse as the car industry and video games.

A web of minority investments in leading tech companies picked up through the Vision Fund in recent years has allowed SoftBank to influence multiple industries without having to manage individual companies. But people close to the Japanese group say Mr Son may now pursue full takeovers with the money he has at hand.

While the scale is unprecedented, the disposal of assets since March echoes the preparations Mr Son has made previously before big deals.

“If I really need to have a real fight, I would have no hesitation to sell to have a paradigm shift and make a big investment,” Mr Son told the Financial Times following the Arm deal in 2016. “I make a calculated risk. It’s just that the scale is somewhat bigger than other people.”

Masayoshi Son with Saudi Arabia’s crown prince Mohammed bin Salman. Mr Son has enticed billions of dollars from Middle Eastern investors © Jeenah Moon/Bloomberg

Ultimately, assessing scale rather than the type of business it has become may be more useful in defining SoftBank. Mr Son, says one SoftBank executive, will continue to run a company that defies easy description until it is of a size where it can straightforwardly be numbered among the 10 most valuable on the planet. Mr Son himself has been explicit about the link between market value and the company’s “significance to humanity”.

When he was unveiling the company’s 30-year plan in 2011 and asking, once again, for the market to accept yet another reinvention of SoftBank, he stressed how critical market capitalisation was to that process. 

“In every age, the top 10 list includes companies that were the most needed by people at that time. In other words, these companies provided functions that were indispensable to everyone. This means that market capitalisation can be considered to be a standard global yardstick for gauging how much people need a company,” Mr Son said at the time, making his desire to enter the global top 10 an explicit target.

Today SoftBank barely scrapes into the top 100. That is partly due to being listed on the Japanese market and also the discount at which its shares trade compared with the massive value of SoftBank’s assets. Yet, if Mr Son wants to know when and how the group can achieve his top 10 ambition, he may need to find a new crystal ball.

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