Bloomberg Businessweek USA 09.30.2019

17

We’llsoonfindoutif SoftBankfounderMasayoshi

Sonis a techvisionaryora geniusinfinancialengi-

neering.Hestartedthe$100billionVisionFund

barelythreeyearsago,andSoftBankis alreadymak-

inggoodmoneyfromassetmanagement.Inthefis -

calyearendedinMarch,morethanhalfofSoftBank

GroupCorp.’soperatingincomecamefromunreal-

izedvaluationgainsofinvestmentsit madeviathe

VisionFund,eclipsingearningsfromcoreopera-

tionssuchasitsdomestictelecommunications.

ButnowSoftBankhasa problem:WeWork.The

initialpublicofferingofitsparentcompany,WeCo.,

is beingdelayed,andwhenit doesoccur,thestock

marketmayvaluethecompanyataslittleas$15bil-

lion,aboutone-thirdofthe$47billionvaluationit

hadwhenSonlastputmoneyintothecompany.As

theSeptemberquarterdrawstoa close,SoftBank

willneedtodecidewhethertowritedownthevalue

ofits29%stakeinWeWork.A representativefor

SoftBankdeclinedtocomment.

Fair-valueaccountingrulesdogiveventurecap-

italfirmsa lotofleewayinpricingtheirinvest-

ments.Thereis notruemark-to-marketnumberfor

WeWork,becauseitssharesaren’tpubliclytraded.

TherearenopubliclylistedpeersSoftBankcan

benchmarkto,either,becauseSon’sunicornsareall

unique.Hecoulduseanincome-basedaccounting

modeltojustifyhispricetag,arguingthatWeWork’s

businessoutlookhasn’treallychanged.

Butthatwouldn’tbeprudent.WeWorkandUber

TechnologiesInc.arethetwohighest-profileuni-

cornstheVisionFundhasboughtinto,andbynow,

thewholeworldknowsSonoverpaid.SoftBank’s

bookslooka bitliketheemperorhasnoclothes.

Peoplemaythinkhehassomethingtohideif he

doesn’tupdateWeWork’svaluation.“Fairvalue

shouldbeaffectedbya failedIPO,”soSonshould

bepreparingfora writedown,saysAllenHuang,

associateprofessorofaccountingattheHongKong

UniversityofScienceandTechnology.

Nottomentionthatconsistencyisimportant

infair-valueaccounting.Inthepast,SoftBankhas

beenquicktowriteupitsstartups’stakes—even

if theso-calledfairvaluewasbasedonlyonlater

fundingrounds—soit shouldberesponsivewitha

writedown,too.Forexample,intheJunequarter,

SoftBankbooked408.5billionyen($3.8billion)in

unrealizedgains,partlybecauseofitsinvestmentin

IndianhotelchainOyo,whosevaluationhaddou-

bledfrom$5billioninSeptember 2018 to$10bil-

lion. Analysts have already raised eyebrows: The

biggest investor at Oyo’s latest funding round was

its own founder, Ritesh Agarwal, whose share pur-

chase was financed by a group of Japanese banks

that also count the debt-laden SoftBank as one of

◼ TECHNOLOGY Bloomberg Businessweek September 30, 2019

their biggest clients. Refusal to report the valuation

loss on WeWork would only raise more concerns

aboutcorporategovernance.

Andembarrassingly,a realisticvalueforWeWork

rightnowwouldbeevenlowerthanthe$15billion

that’s floating around on Wall Street. That figure

is based on a successful IPO, which would gener-

ate $3 billion from share sales and be accompa-

nied by $6 billion in loans that are contingent on

a listing. Without an IPO, will SoftBank be able to

arrange the $9 billion WeWork needs to reach its

full potential? If not, its valuation should be lower.

We’re staring into billions in losses. Since January

2017, SoftBank, directly and through its Vision Fund,

has invested into the startup at an average valuation

of $24 billion, according to estimates from Bernstein

Research analyst Chris Lane. So if, say, the fair value

of WeWork drops to $15 billion, SoftBank could face

up to $2.8 billion in writedowns, practically unwind-

ing the unrealized valuation gain it recorded in the

quarter ended in June.

Of course, Son could choose to not write down

the value at all. But he runs a venture capital fund,

and we all understand that not every investment

needs to be successful. Fair value of such a fund goes

up and comes down. If the Vision Fund’s value only

rises or is somehow kept eerily stable, then inves-

tors may have questions about the credibility of its

accounting.�ShuliRen,BloombergOpinion

PHOTO ILLUSTRATION BY 731; PHOTOS: BLOOMBERG, GETTY IMAGES

THE BOTTOM LINE Wall Street’s shrinking valuation of

WeWork is forcing SoftBank to confront the fair valuation of its

investment—or face questions about corporate governance.

● Procter & Gamble has found a way to clean

polypropylene so more can be recycled

Recycled Plastic

You Can Use

In the U.S., more than 25 million tons of plastic

a year ends up in landfills. Polypropylene—the

rigid plastic favored for deodorant containers and

shampoobottles—isoneofthebiggestculprits.

Just3%ofit getsrecycled—comparedwithabout

29%forpolyethylene terephthalate soda bottles—

because of technical problems. Now a scientist at

Procter & Gamble Co. thinks he’s solved them.

It’s difficult and expensive to rid recycled poly-

propylene of the smell of the product it housed

● WeWork’s valuation

when Son made his

most recent investment

$47b

● What investors are

estimating the business

is now worth

$15b