The Economist February 12th 2022 Business 59DoesMasahavehistrunks on?
F
ew companies are more emblematic of the techobsessed,
easymoney era of the early 21st century than SoftBank, the Jap
anese investment conglomerate founded and run by Son Ma
sayoshi, or Masa for short. Starting life as an obscure Japanese
software distributor in 1981, it has made one debtfuelled bet after
another to become an internet firm, a telecommunications giant,
and then what Mr Son last year called the world’s biggest venture
capital (vc) provider, comfortably ahead of Tiger Global, a New
York hedge fund, and Sequoia Capital, a vc powerhouse. Parts of
its balancesheet are opaque yet it continues to borrow heavily
and is one of the world’s mostindebted nonfinancial firms. Like
many of the Silicon Valley firms it invests in, it has a dominant
founding shareholder who is not averse to spouting gobbledy
gook. Mr Son says he invests with a 300year horizon, making
SoftBank as close to immortal as financial firms get. But it is the
here and now that he should be most concerned with.
That is because the tech boom, which SoftBank has both fu
elled and benefited from, may be coming to an end. In the face of
the highest rates of inflation in decades, central banks have start
ed to raise interest rates. That threatens to tighten credit markets
for highly leveraged entities like SoftBank. More important, high
er rates make a big difference to the longterm value of the sort of
highgrowth tech startups it invests in, whose profits are in the
distant future. As one of the highest rollers in two of the business
megatrends of the past few decades, it is worth asking what would
happen if tech fandom and easy money prove evanescent. As War
ren Buffett once said, it’s only when the tide goes out that you can
see who is swimming naked. What, Schumpeter wonders, is the
state of Mr Son’s bathing attire?
Mr Son, like Mr Buffett, enjoys a colourful turn of phrase. On
Feb 8th, reporting an 87% yearonyear slump in SoftBank’s net
profit in the nine months to December, he was blunt. Not only was
the company in the midst of a blizzard that started last autumn, he
said. The storm had got worse in America and elsewhere because
of the threat of rising rates. Though SoftBank eked out a small pro
fit in the most recent quarter, the two most important variables
that Mr Son watches like a hawk deteriorated sharply. One was the
net value of SoftBank’s portfolio of assets, which fell by $19bn to$168bn. The other was the value of its net debt relative to equity,
which reached the highest level since 2018 when SoftBank floated
its Japanese telecoms business.
To gauge the risks, start with the asset side of those calcula
tions. However much of a brave face Mr Son puts on it, good news
is scant. On the day of its results SoftBank confirmed that it had
called off the sale of its British chip business, Arm, to Nvidia, a Cal
iforniabased semiconductor firm, because of regulatory pres
sure. At Nvidia’s highest price, the implied sale value was above
$60bn, or about twice what SoftBank paid for Arm in 2016. Instead
SoftBank will sell shares in Arm in an initial public offering (ipo)
in the next financial year. Mr Son noted that the underlying profits
of Arm’s chip business are estimated to have improved recently,
which may make it more attractive. Yet Kirk Boodry of Redex Re
search, an investment adviser, reckons an ipohas little chance of
generating as much value as a sale. Moreover, potential investors
need only look at the poor publicmarket performance of almost
all the 25 companies SoftBank listed in the past ten months to
know that tech ipos are no longer a gravy train.
Also on the asset side are SoftBank’s troubled investments in
China and in its two Vision Funds, which invested in a whopping
239 young companies last year. Alibaba, the embattled Chinese
tech giant, was once the cornerstone of SoftBank’s investment
strategy, accounting for 60% of net assets. Now SoftBank treats it
like a getoutofjailfree card, selling stakes to fund riskier ven
tures elsewhere. Its weight in the portfolio has shrunk to 24%. On
February 7th Alibaba’s share price fell by 6% on fears that SoftBank
would cut its stake yet more. For SoftBank, Alibaba is now vastly
eclipsed in importance by its two Vision Funds, which account for
almost half of the group’s net assets. These inched up in value in
the most recent quarter, mostly because of valuation gains in un
listed firms. If the stark selloff of SoftBank’s publicly traded firms
is any guide, however, it may be only a matter of time before valua
tions of firms in the preipo stage stagnate or even in some cases
start to slide.
SoftBank’s debt is worrying, too. It said its loantovalue (ltv)
ratio, or net debt as a share of the equity value of its holdings, was
22% at the end of December, up from 19% three months earlier; it
considers 25% to be reasonable in normal times. However, others
calculate the ratio more conservatively, including additional
liabilities such as margin loans, investment commitments and
share buybacks that SoftBank excludes. Sharon Chen of Bloom
berg Intelligence, a financialanalysis firm, says that based on her
measurements, SoftBank is getting close to the 40% ltvthreshold
that s&p Global, a ratings agency, has said could be a trigger for a
debt downgrade (though the plan to list Arm could ease the pres
sure). A further sale of Alibaba shares could be used to cut debt,
but might also lower the quality of the portfolio—another rating
agency red flag. Wetsuit, speedos or nothing at all?
SoftBank has had enough debtrelated troubles in the past for Mr
Son to realise the dangers. It has long pledged to keep enough li
quidity on hand to fund two years of debt payments. It also bene
fits from a pool of banks and ordinary savers in Japan who like the
high yields it provides compared with other Japanese borrowers.
But its longerterm financial stability rests on two variables—the
value of its assets and the size of its debts—whichincurrent cir
cumstances would benefit more from prudence thangrowth.
More than a pair of speedos, Mr Son needs a wetsuit.nSchumpeter
As the tech tide turns, SoftBank’s assets are looking a bit skimpy