Sideways: SoftBank's Son – the emperor’s new techno clothes

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By:
Jon Macaskill
Published on:

Outsiders struggling to make sense of the investing tactics of SoftBank founder Masayoshi Son can take some comfort: his own directors often seem just as puzzled.

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A recent news report quoted SoftBank board directors past and present admitting that they are confused by Son’s reasons for taking stakes and, in particular, by the valuations he is willing to pay for untested business ventures.

Son certainly likes to go with his gut – almost literally with a decision made after a 30-minute pitch to invest $200 million in a San Francisco startup with plans to grow vegetables indoors, for example.

He is not alone in letting a memorable anecdote affect a big business decision. When Comcast chairman and chief executive Brian Roberts unveiled a £22.1 billion bid for Sky at the end of February, he mentioned a conversation he had with a London cab driver about the superiority of Sky service to Virgin Media as one reason for his move.

Roberts’ comment may have been tongue-in-cheek as there are other motivating factors for a bid, not least the delivery of a blow to the planned sale by Rupert Murdoch of much of 21st Century Fox to Disney. 

But independent shareholders in Sky will have reason to thank the London cab driver if the result is a much higher price for their stock than they would have obtained from Murdoch’s original plan to buy them out.

Son, Roberts and Murdoch are all in charge of listed companies where there are effectively few constraints on their ability to invest on a whim. That leaves shareholders exposed to decisions that are binary in their outcome, with big misses accompanying hits.

Murdoch’s $580 million purchase of MySpace in 2006 is a classic example of this risk, as what seemed a promising social media investment quickly lost most of its value when users migrated to Facebook.

Big hit

SoftBank’s big hit so far has been Son’s early investment in Chinese internet firm Alibaba. Any signs that subsequent stake purchases in firms such as Uber, DiDi or WeWork are losing value will worry both investors in SoftBank and its debt counterparties.

Lenders are generally reluctant to challenge imperial chief executives, preferring to take comfort in debt covenants and collateral holdings. But if shareholders have no real control over company founders – or, in Roberts’ case, the son of a founder – then lenders can end up running comparable risks to investors, who at least have some upside exposure to any potential success.

When Murdoch’s News Corporation came close to bankruptcy in 1991, his many lenders were split on whether or not to allow a delay in debt repayments. In the end, they extended more cash and gave him time to restructure his empire.

The current boom in technology investments may pose fresh challenges to lenders, as many valuations are based on private holdings in new companies. That could put creditors to a listed company such as SoftBank, which combines a heavy debt load with investments that can be both illiquid and hard to value, in a difficult position.

Another issue is the speed at which a valuation can change in the market for new technology ventures. 

Once he had placated his borrowers in 1991, Murdoch was able to take years turning Fox in the US and other assets into a success that enabled him to shrug off the later blunder in buying MySpace.

The pace of success or failure in new media and technology ventures is now accelerating. That should be enough to worry lenders as well as shareholders in firms such as SoftBank that combine bold investments with substantial debt issuance.