62 Business The EconomistNovember 9th 2019
C
ompaniesandfinancialvehiclesthatgetintotroubleoften
have common characteristics: high debts, accounting that is
hard to understand, opaque assets that are hard to value and man-
agers who have a hard time facing reality. That more or less fits the
description of SoftBank, a giant Japanese telecoms and technology
conglomerate founded and run by Masayoshi Son, which on No-
vember 6th announced a $6bn loss after bailing out WeWork, a
loss-making property firm. Speaking in Tokyo, Mr Son put on a de-
fiant display and insisted that SoftBank has a valuable portfolio of
tech assets that the outside world does not appreciate. But soon
enough, like most troubled businesses, SoftBank will have to con-
front its underlying weakness: a lack of cashflow to back up all of
the hype. It may have to shrink and could end up being broken up.
Mr Son has cultivated an eccentric persona by making dramatic
predictions about how technology will change the world and in-
sisting his firm will last 300 years. But SoftBank is no curiosity.
After a long expansion binge it is the world’s fifth-most-indebted
non-financial firm, with gross consolidated debts of $166bn (after
deducting cash the net figure is $129bn). These are owed to banks
and investors around the world and to Japanese households. Soft-
Bank controls important companies, including Sprint, an Ameri-
can telecoms outfit, and Arm, a British tech firm that is a vital cog
in the semiconductor industry. Saudi Arabia has invested a pile of
public money in Mr Son’s tech-investment arm, known as the Vi-
sion Fund. This vehicle has gone on an acquisition spree, buying
stakes in tech “unicorns”, several of which, including WeWork and
Uber, a ride-hailing pioneer, have struggled of late.
SoftBank is hard to understand because it is complex and be-
cause Mr Son’s explanation of its purpose often changes. It was
founded in 1981 as a software distributor. In 2000 Mr Son was clev-
er (or lucky) enough to invest in Alibaba, which became China’s
most valuable company. Today SoftBank owns 24% of the e-com-
merce giant. Between 2006 and 2015 SoftBank morphed into a tele-
coms firm, buying first Vodafone’s Japanese arm and then Sprint.
The most recent phase started in 2016, when Mr Son pivoted again,
this time to investing in fashionable tech firms, and created the Vi-
sion Fund. The vehicle raises money from outside investors but is
run by SoftBank and enters into various transactions with it.
The results of all this can be baffling. Is SoftBank a conglomer-
ate or a venture-capital firm? Does Mr Son act in the interests of
SoftBank’s shareholders or the Vision Fund’s investors? Analysts
have struggled to find a coherent way to think about the firm, in
one case, optimistically, describing it as tech’s Berkshire Hatha-
way. Shareholders have been lukewarm; SoftBank’s share price has
gone nowhere for half a decade. Credit-rating agencies have been
tolerant. Never mind that SoftBank’s consolidated accounts—
which, roughly, tally the figures for all the assets that it controls—
show it has burned up a cumulative $2bn in free cashflow over the
past five years (see chart), even as it has booked a gargantuan
$43bn of profits.
The simplest way to view SoftBank is as an indebted holding
company that owns a basket of assets, which are of mixed quality
and often themselves indebted. These include Arm and stakes in
Alibaba, the Vision Fund, Sprint and a Japanese telecoms operator.
Mr Son argues that this holding company is financially strong. It is
legally responsible for only a subset of the group’s net debt—some
$41bn—with the rest owed by operating companies that could, in
principle, default without bringing the whole house down. Mean-
while, the value of the stakes that the holding company owns are
worth several times its debts, at $247bn. Half of this sits in Alibaba.Inotherwords,if youliquidated everything, the holding company
could easily pay off its obligations. What’s not to like?
It is a seductive story, with three big flaws. First, the holding
company still needs to receive enough income to pay its interest
bills, in the form of dividends and fees paid to it by the firms and
funds that it invests in. At the moment it does but the margin for
error is tight. That feeds into the second worry, that the underlying
performance of the firms that SoftBank invests in is weak, suggest-
ing that their valuations may fall. WeWork has got lots of attention
for its vast losses. But consider Arm, supposedly a jewel in the
crown, which SoftBank bought for $31bn in 2016. In the most recent
quarter its sales fell year-on-year and it made a loss—hardly a stel-
lar performance.
The third worry is that firms and funds that SoftBank invests in
have too much debt. The Vision Fund has $40bn of debt-like secu-
rities with a hefty coupon. Even if SoftBank is not legally liable it
may feel it has to bail out entities that it sponsors. This has just
happened at WeWork, into which SoftBank has pumped another
$6.5bn. Worries over borrowing levels are compounded by reports
that SoftBank and Mr Son have put in place unusual debt struc-
tures. For example, SoftBank is reported to have loaned money to
employees to invest in the Vision Fund. Mr Son himself is reported
to have taken out personal loans secured against his 22% stake in
SoftBank. Corporate structures that depend on layers upon layers
of debt are inherently fragile. When they come under pressure the
end result is often hard to predict.
Mr Son’s instinct is to expand by launching a second $100bn-
plus Vision Fund, from which SoftBank could presumably earn
fees and to which it could perhaps sell assets, while remaining in
control. But the WeWork fiasco raises profound doubts about his
judgment and SoftBank’s valuation process.From soft to soggy
Instead, the obvious path for SoftBank is a dose of austerity. That
would mean stemming the losses at the tech firms owned by the
Vision Fund and selling down more assets; SoftBank is already try-
ing to merge Sprint with t-Mobile, a rival. It would also require Mr
Son to cede control. His vision of SoftBank involves one man being
largely responsible for hundreds of billions of dollars—and for
juggling no small number of competing objectives and interest
groups. If you think that approach still makes sense you have to be
soft in the head. 7Schumpeter Hard times for SoftBank
After the WeWork fiasco Masayoshi Son’s empire of debt and optimism needs a rethinkFlying too close to the Son
SoftBank GroupSources:Companyreports;Bloomberg *April-SeptemberFinancials,$bn Netdebt,$bnFinancialyearsbeginningApril-50510152015 16 17 18 19*Net profit Free cashflow0309015060120Sep30th 2019Holding
companyJapanese
telecoms
unitSprintVision
FundOther