SoftBank’s experiment has failed. Time to go private?

SoftBank's experiment has failed.  Time to go private?

Softbank CEO Masayoshi Son on new $24 billion loss: “I’m quite embarrassed and remorseful.”

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The stock market can be a humbling place; just ask Masayoshi Son.

The founder and CEO of

SoftBank Group

(Ticker: SFTBY), “Masa” made one of the best venture investments of all time, providing a $20 million bet to Jack Ma when he started the e-commerce company.

Alibaba Group Holding

(BABA) in 2000. This bet has paid off big. Even after selling some of its stake, SoftBank still owns $34 billion in Alibaba stock. Masa has not stopped making big bets since then.

Son’s reputation as an investment gunslinger led to the 2017 launch of the SoftBank Vision Fund, the largest venture capital portfolio ever. Aiming to be $100 billion, Masa focused the Vision Fund on companies poised to benefit from the widespread adoption of artificial intelligence software.

The approach has had wild ups and downs, as seen in SoftBank stock. Less than two years after Barron’s featured SoftBank in a bullish cover story in July 2019, the stock had more than doubled as tech valuations rose and the company bought shares aggressively. But pressured by some bad bets and the broader decline in tech stocks, the stock has since given up all of those gains and then some, losing about 13% since our story was published.

The Vision Fund, and a smaller sequel called Vision Fund 2, have invested in 47 companies that have gone public, including

DoorDash

(SCRIPT),

Uber Technologies

(UBER),

Qualtrics International

(XM) and Slack, later acquired by

Sales force

(CRM). But there have also been embarrassing missteps, like dramatic overcommitment

we work

(WE) that led to billions in losses and an investment in financial technology lender Greensill, which has collapsed and closed.

This year’s bear market for tech stocks has been the toughest test yet for SoftBank and its underlying thesis that bigger is better when it comes to investing in early-stage companies.

Last week, SoftBank reported a loss of $24 billion, including losses of about $20 billion combined in the two vision funds. The difficult quarter reduced the cumulative performance of Vision Fund 1 by almost a third, to $20.4 billion, on a total investment of $87.7 billion. Vision Fund 2, launched in 2019, now has a cumulative loss of $9.3 billion on investments of $49.1 billion.

In a press conference last week, Masa apologized for the poor performance. “I’m quite embarrassed and remorseful,” he said. The company’s funds have now slowed their pace of new investments.

One of the big frustrations for investors in SoftBank stock is that the value of the company’s underlying assets has almost always far exceeded its stock price. SoftBank owns chip design firm Arm Holdings; holdings in both

T-Mobile USA (TMUS)

i

Deutsche Telekom

(DTE. Germany); a substantial minority stake

SoftBank Corp.

(9434.Japan), a wireless telecommunications provider; asset management firm Fortress Group; a Japanese baseball team; your stake in Alibaba; nearly $35 billion in cash; and various other bits and bobs. And that’s before the two vision funds: The company contributed a portion of the capital from the first vision fund and all the cash from the vision fund 2. At the end of the June quarter, SoftBank’s net asset value was $139 billion, roughly double its current market value.

In a rare interview with Barron’s in May 2021, Masa said, “Investors still don’t trust our ability to make good profits continuously. We have to prove that in the coming years.”

But the continuing disconnect between asset value and stock value suggests that Masa’s SoftBank experiment has failed, at least as a public company. There has been speculation that Masa could take the company private. The idea has strong merit.

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Going private could make the job easier. For one thing, SoftBank could end the practice of providing quarterly updates to the public on the performance of its venture funds, highlighting their short-term results. Private venture firms have no obligation to report results, so they don’t. The question is whether Masa could financially engineer a private deal. The math suggests it’s doable.

A wild card is the initial public offering of Arm, which SoftBank bought for $32 billion in 2016. Arm has grown considerably since SoftBank’s acquisition six years ago, but let’s be conservative and assume it gets a valuation of $30,000 million dollars in an IPO. Add to that the company’s $35 billion in cash, Alibaba’s remaining stake, proceeds from an eventual sale of Fortress (SoftBank is looking for a buyer) and roughly $10 billion in leftover telecom stakes from a prior investment in Sprint, and you have liquid. assets that far exceed current market value. Still lurking in the Vision Fund are stakes in startups that could one day have big exits, including TikTok parent ByteDance, sportswear company Fanatics, and logistics provider Flexport, among many others.

Alternatively, SoftBank could choose to wait out the current downturn. At some point, the IPO market will reopen and tech stocks are likely to regain favor.

New Street Research analyst Pierre Ferragu notes that SoftBank has a high-quality asset portfolio and continues to buy shares at a 50% discount to net asset value. His view is that “with only a partial recovery of the vision fund,” the stock could easily double from here.

Write to Eric J. Savitz at eric.savitz@barrons.com



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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!