(Mar 27): If you are searching for a high profile global corporate icon of the Covid-19 crisis, look no further than Japan’s SoftBank Group, the world’s largest tech investor, which has seen its shares plummet 54% since mid-February.
The tech giant’s slide has accelerated since the ratings agency S&P cut its outlook to negative last week. On March 23, Softbank fired a bazooka announcing the sale of US$41 billion ($59.7 billion) in assets to shore up its balance sheet as it moved to cut debts, buy back more of its own shares and bonds and help prop up some of the distressed ventures in its stable.
The move helped SoftBank shares soar 19% on March 23 and another 21% on March 24 though they are still 60% below their February 2000 dot-com peak when founder Masayoshi Son was, for three brief days, the world’s richest man with a net worth of US$72 billion at his peak. But in the aftermath of the Tech Wreck, SoftBank shares lost 98% of their value and Son struggled to avoid personal bankruptcy until a lucky break with Alibaba resurrected him and his Tokyo-listed flagship.
Twenty years on, in the midst of a new crisis, Son is again trying to salvage his company, its US$100 billion Vision Fund affiliate and his own reputation before things take a turn for the worse. The Giant Tech investor plans to use US$18 billion for share buybacks and US$23 billion to pay down debt and rebuild depleted cash reserves over the next four quarters. The latest buybacks are in addition to the US$4.5 billion buybacks announced just 10 days ago.
Pierre Ferragu, New Street Research’s tech analyst in New York calls the repurchases “the buybacks of the century” because they represent nearly 40% of the group’s total based on the stock price on March 23.
Dubbed the “Berkshire Hathaway of Tech” after billionaire Warren Buffett’s value investing conglomerate, SoftBank has traditionally used the cash flow from its core Japanese telco operation to make oversized bets on technology start-ups that aim to disrupt traditional industries just as the Oracle of Omaha has leveraged cash from his insurance business to invest in Coca Cola, Apple, BNSF Railways as well as an array of US banks and airlines. SoftBank’s focus has been mainly on a range of new disruptive technologies including AI, Internet of Things and robotics. Key investments include ride hailing firms like Uber Technologies, China’s Didi Chuxing, Southeast Asia’s Grab, India’s Ola, subscription-based softwareas-a-service play Slack Technologies, British microprocessor design firm ARM Holdings, co-working giant WeWork and Indian hospitality firm OYO Rooms.
Softbank’s biggest asset is its 26% stake in Chinese e-commerce behemoth Alibaba Group Holdings. In 2000, SoftBank invested US$20 million in Alibaba, a then-fledgling Chinese Internet venture which is now worth US$120 billion stake. Its second biggest asset is confusingly named SoftBank Corp KK, Japan’s No 2 telco.
SoftBank plans to sell US$14 billion of US$130 billion worth of Alibaba shares that it owns as part of its restructuring exercise. It will also trim stakes in SoftBank Corp KK currently worth US$40 billion, as well as sell US$26 billion worth of shares in Sprint Corp, which is merging with T-Mobile, to boost its cash pile.
The deleveraging exercise was forced on Softbank which had piled up gross consolidated debts of nearly US$170 billion and net debts of over US$130 billion. As the Covid-19 crisis pushed the global economy into a recession, SoftBank’s strategy of overpaying for start-ups while it continued to pile up leverage was beginning to come undone. Its credit rating downgrade came after its credit-default swaps — the price of insuring its debts against defaults — had spiked to the highest since the Tech Wreck two decades ago. “We believe SoftBank’s aggressiveness in pursuing growth and managing its finances makes its financial standing weak,” says S&P. The ratings agency argued SoftBank’s relentless pursuit of aggressive debt-laden strategy “raises questions over its commitment to financial management”.
The Covid-19 crisis has severely impacted travel, hospitality, and even the workplace. As more people “work from home”, WeWork suffers, notes Atul Goyal, an analyst for Jefferies & Co in Singapore. Moreover, as people commute less for work, Uber, Didi, Grab take a big revenue hit, he says. Restrictions on travel and lockdowns around the world impacts hotel firms like OYO. As the crisis drags on, companies in SoftBank’s stable face incrementally more balance sheet pressures while their losses keep piling up.
Yet CEO Son has long argued that the market massively undervalues SoftBank Group’s sum-of-the-parts even under a doomsday scenario. In recent years, Son has on several occasions authorised share buybacks by either borrowing against the value of some of its assets or selling some Alibaba shares. Despite several rounds of buybacks, SoftBank shares have steadily declined.
Last month, billionaire activist investor Paul Singer’s hedge fund Elliott Management Corp built a US$2.5 billion stake in SoftBank as part of its campaign to improve the value of the Japanese conglomerate. Elliott pressed SoftBank for details of nearly US$10 billion of securities on its balance sheet. Items listed as investment securities on a balance sheet are often tradable financial assets such as listed equities but investors have long suspected those on SoftBank’s balance sheet are mostly overvalued unlisted shares in start-ups.
The legendary tech investor who often touts his “300-year vision” for SoftBank, has been forced to move at a brisk pace to assuage concerns by investors over governance since Elliott began pestering him for prompt action. Softbank recently announced it plans to appoint three new independent directors to its board.
In early March, Son was in New York for a preIPO summit introducing investment banks and fund managers to some of SoftBank companies that are ready to list like British FinTech firm OakNorth and data storage company Cohesity.
In mid-March, SoftBank backed away from part of its planned bailout of WeWork to buy US$3 billion worth of the co-working startup’s shares from existing shareholders including nearly US$1 billion from its controversial co-founder Adam Neumann who was forced out as CEO in September. SoftBank cited regulatory probes into WeWork’s business — including from the Securities and Exchange Commission and Justice Department — for pulling out of the deal. As part of bailout package in October, SoftBank made a tender offer worth up to US$3 billion to all non-SoftBank shareholders at a price of US$19.19 per share — implying an US$8 billion valuation for WeWork. SoftBank also invested US$1.5 billion and agreed to lend up to US$5 billion to WeWork. It has not withdrawn those commitments.
The pandemic has struck at the very heart of WeWork’s business model. WeWork leases buildings for the long term, spruces them up and leases them out to smaller firms or individuals on shorter-term leases. With the Covid-19 outbreak taking hold, small companies and freelancers are eager to terminate their short term leases.
The cash raising will also allow Softbank to shore up its problematic US$100 billion Vision Fund, particularly in cash-burning portfolio companies like WeWork, OYO and its ride hailing affiliates like Grab, Ola, Didi Chuxing that have been hit hard by the pandemic. Vision Fund was counting on several companies in its stable to list this year or early next year but the Covid-19 outbreak has closed that window and most of them now need an injection of cash by Vision Fund itself, or SoftBank to tide them over for a couple of years.
SoftBank has also indicated that it has deferred the audacious $108 billion Vision Fund 2.
Son had conceded in February that the launch of Vision Fund 2 has been delayed due to investor concerns about the performance of the first Vision Fund. Initially, SoftBank had told investors that it is considering investing its own money in a bridge fund for two years to build a portfolio that will give investors enough confidence to participate in a second Vision Fund.
Now as the Covid-19 pandemic drags on, the Japanese tech giant seems more focused on propping up its first fund.
The original Vision Fund, partly funded by Saudi Arabia’s Public Investment Fund and Abu Dhabi state fund Mubadala Investment Co, showed total investment gains of US$9.5 billion in December. Since then, the US and Japanese markets have lost 30% of their value and VC-backed privately held firms and start-ups have seen their valuations decline more steeply. Uber, one of Softbank’s key investment has seen its stock decline 65% since its IPO, Slack shares are down 20% and cancer testing firm Guardant Health shares are down 26% over the past month.
Many of Vision Fund’s private investments have fared more poorly. The fund invested US$1.5 billion in budget hotel firm OYO for a 46% stake. The Indian hospitality firm was valued at about US $8.5 billion last year. In recent weeks, OYO, run by 26-year-old founder and CEO Ritesh Agarwal, has been forced to lay off thousands of employees in China and around the world. Other travel-related firms in Vision Funds’ portfolio are reeling as well. Hong Kong-based Klook and Berlin-based GetYourGuide offer tickets to museums, bus tours and other travel experiences. Bookings have collapsed and the two firms reportedly need more money to tide them over through the Covid-19 crisis. Yet another privately held firm, satellite start-up OneWeb, which got US$1 billion from SoftBank three years ago, is reportedly mulling a bankruptcy filing.
Even if the Vision Fund rakes up huge losses over the next several quarters, SoftBank’s own future is now secure with the recent asset sale, deleveraging and buybacks.
For years, SoftBank founder Son had argued that he was just seeking the great “value” investments in technology. After losing billions investing in dozens of start-ups including high profile fiascos like WeWork, the irony is that Son only needed to look in the mirror to find the best value in technology.
Assif Shameen is a business and technology writer based in North America
