SoftBank (9984) – Should You Invest?
The situation for SoftBank is becoming more tangled by the day. Whereas on the one hand, the underlying value of the company continues to rise, on the other hand, the company seems caught between a rock and a hard place as to its strategy. SoftBank’s main operating business is maturing, while it dithers over whether to keep Sprint, or offload it. Then there is the Focus Fund, whose Byzantine structure no doubt benefits someone, it is just not clear who.
Investors with long memories will recall that we’ve been here before, for example when Masayoshi Son “reorganized” SoftBank and Yahoo Japan (4689 JP) such that the Yahoo BB ADSL business fell under SoftBank’s business remit. More recently, we’ve briefly had SoftBank being split into a domestic and international business, the latter run by heir-apparent Nikesh Arora, until he fell out of favour. As for Son’s history of major acquisitions, be they Comdex, Vodafone Japan, Sprint (S US) or ARM, all have invariably raised eyebrows when announced.
The record thus far suggests that, as has been the case with another great investor, Warren Buffet, who is increasingly referenced with regard to Son, the trick will be simply to stay invested in SoftBank, and to ride out the bumps. However, there are two arguments against this. One is that, while in any casino, you’ll get someone with a winning streak at the roulette table, it would be foolish to assume that their record going forward would be better than average; and you can argue that SoftBank is where it is thanks to a lucky streak that may run out.
The other argument, and one that I think is actually more pertinent, is that SoftBank’s record as a stock is not all that it seems, in that:
Key Points
· Performance of the shares from the first day of trading (Jul 94) to date (a 25-fold rise) is a fraction of the performance in OP (up 237x);
· Valuation compression has seen market cap to OP go from 42x to 8x. One reason why valuation compression has been so great is the huge amount of debt the company has taken on;
· SoftBank has been no more successful as an investment than a leveraged investment policy on Nasdaq; and
· We see the current corporate structure as pitting the operations of the VC firm against the investment decision-making of the holding company.
· We set out what we’d like to see in terms of restructuring so investors in SoftBank stock are able to realize the value of Son’s past successes, and choose how to invest in Son’s acumen going forward.
· Until that happens, the corporate knot that is SoftBank is likely to continue to limit performance.
SoftBank Group is a holding company. Domestic Telecommunications business provides mobile communication services, mobile devices, broadband services to retail customers, and telecom services to corporate customers in Japan. Sprint business provides mobile communication services and fixed-line telecommunication services in the U.S. Yahoo Japan business operates Internet-based advertising and e-commerce business. Distribution business distributes mobile devices overseas, and sells software and mobile device accessories in Japan. ARM business designs microprocessor intellectual property and related technology. SoftBank Vision Fund & Delta Fund business is engaged in the investment activities.
Founded in 2009, Pelham Smithers Associates (PSA) provides market intelligence on Asian technology, focusing in particular on Japan. The industries covered by our team of specialists are: consumer electronics, telecomms, pharmaceuticals, internet, electronic parts and materials, automotive technology, retail and capital goods.
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