Date first published: 10/12/2020
Key sectors: telecommunications; technology
Key risks: credit risks
SoftBank continues to evolve. In recent months there have been reports that that the company is considering gradually buying back outstanding shares, effectively allowing its founder Masayoshi Son to take the company private again. If such a move occurs, it would mark another shift for the company, although that is only one of several options for SoftBank’s future direction.
Why it matters?
SoftBank was once primarily a PC software distributor (SoftBank was the ‘Software Bank’). It then become a major telecommunications company. Over the last several years it sold most of its telecommunications holdings and evolved into a massive venture capital firm. Its US$99bln ‘Vision Fund’, helped it become the largest tech fund in the world. The Vision Fund alone invested just under US$100m a day from mid-2017 to September 2019. It is thus one of the most important players in the tech space.
SoftBank’s recent tech investments are been mixed. It had a difficult 2019, with Uber’s IPO underperforming expectations, WeWork collapsing and several of the other major companies in its portfolio struggling. SoftBank continued to struggle at the start of 2020 and by the time the COVID-19 pandemic hit it was heavily indebted, with assets of questionable quality.
The company had a difficult 2019 and recorded a US$8.8bln loss for the year to FY March 2020. Its market capitalization fell to around US$50bln, even as its assets were worth close to US$150bln. Yet over the last nine months, SoftBank has recovered. Its massive asset divestment program has left SoftBank with around US$80bln in cash – due to divesting US$52bln in assets, and the planned sale of a third of semiconductor company ARM.
The question is what will Masayoshi Son do with those funds? One option for SoftBank is to use its cash to take the company private. There is a sizable spread between the value of SoftBank’s market capitalisation and its assets – although this has narrowed over the last nine months. However, no one has pulled off a buyout worth anywhere close to SoftBank’s current +US$130bln valuation. And while Son would like the freedom to invest as he chooses, the lack of external accountability frightens investors. Furthermore, privatising the company would reduce SoftBank’s ability to invest in new areas, and thus there is a trade-off. Reports indicate that Son is alone amongst the company’s upper management in supporting the idea.
A second option is to redeploy its capital into public equities– effectively transforming SoftBank into a hedge fund. Earlier this year, SoftBank took huge options’ trades on publicly listed companies. Its actions drove US technology stock prices to record highs, but SoftBank’s trading arm lost US$3.7bln, including US$2.7bln in derivates losses for Q3 2020. SoftBank will still likely continue to invest in large US tech stocks but reduce its derivates exposure.
A final option is for SoftBank to continue to use its funds to make large bets in private technology companies – effectively continuing its previous strategy. Attempts to create a larger Vision Fund II failed, which left it with limited capital. However, as the original Vision Fund recovers, and if SoftBank is willing to deploy more of its capital to the new fund, it could engage in another massive investment spree. A second fund would likely take smaller stakes than the original Vision Fund, although it would remain a higher risk for investors.