In what he claimed was his last presentation to investors in November, Masayoshi Son lamented that his entrepreneurial knack would be wasted as SoftBank shifted to a full defensive mode to cut losses. To avoid that, he pledged to devote himself entirely to growing Arm, the UK chip designer owned by the Japanese technology group.
Four months on, it’s not exactly clear to the outside world what the 65-year-old founder is up to. For the first time in decades, and being true to his word, Son did not appear on stage last week as SoftBank revealed fresh investment losses of $5.5bn for the latest quarter.
What was clear, though, to investors, was just how much the future of SoftBank, which Son dubs as “a vision capitalist”, rests on one company: Arm.
Following a historic selldown in Alibaba, an investment on which Son built his name as one of the world’s greatest technology visionaries, Arm now accounts for a bigger percentage of SoftBank’s net asset value than the Chinese ecommerce group. At 16 per cent, Arm is also bigger than the 13 per cent share of the overall NAV for SoftBank’s domestic mobile business.
In a note to clients, Macquarie analyst Paul Golding said it seemed “prudent” for Son to focus on Arm considering that SoftBank’s future and its share performance “now rests squarely with” the British chip subsidiary and the Vision Funds, one of which holds a 25 per cent stake in Arm.
The good news is that Arm’s performance has improved during the October to December quarter. Its three-month revenue increased from $581mn to $746mn, and its pre-tax profit increased 77 per cent from a year earlier for the nine-month period. At its earnings presentation last week, executives said SoftBank was on track to list Arm’s shares during the fiscal year through March 2024.
But that is where the good news ends. After launching its first Vision Fund in 2017, Son unveiled a grand plan to turn SoftBank into a “strategic holding company” from a telecoms group. Since then, it has committed $162bn in investments via the two Vision Funds and a Latin American fund, but cumulative losses stand at $4.8bn.
As one analyst put it, SoftBank is now looking more like “a momentum investor” than “a vision capitalist”. It invested in struggling office company WeWork, collapsed Greensill Capital and cryptocurrency exchange FTX as valuations of technology start-ups were soaring.
Now it is in full protective mode, hoarding cash and reducing debt to survive a prolonged tech rout, higher interest rates and a global economic slowdown. That is a relief for some investors, but it does raise questions of whether with valuations falling, the Vision Funds are missing an opportunity to invest in good start-ups at reasonable prices.
Following the frantic pace of deal activity in recent years, the Vision Funds made only two investments in the last quarter. Navneet Govil, finance chief of the Vision Funds, says their late-stage portfolio is worth more than $37bn and will be ready to list once market conditions improve. That includes the Vision Fund I’s 25 per cent stake in Arm, which SoftBank bought for $33bn in 2016 and it now estimates is worth ¥2.6tn ($20bn).
With the massive sale of its stake in Alibaba, Arm will be one of the last major assets that SoftBank can monetise.
The question is whether Son is now going on an offensive to make sure that Arm’s initial public offering, most likely in the US, succeeds.
Before the IPO, analysts say that it makes sense for SoftBank to first assemble a consortium of the biggest technology companies that would buy some of SoftBank’s stake in Arm — an idea that has previously been floated by US chipmaker Qualcomm. If SoftBank then lists Arm, it will ensure that its semiconductor technology remains widely available and, crucially, allow Arm’s share price to avoid an overhang if investors fear that the Japanese group will keep selling its stake in its British subsidiary to plug its losses.
The Vision Funds are mostly dormant for now, but Son can no longer walk away from them since he owes the company he founded more than $5bn due to the widening losses at the group’s various investment vehicles. If SoftBank shuts down the Vision Funds, Son will face the obligation to repay the money the company fronted him to invest in the technology-related funds. For SoftBank’s fortunes to recover, Son needs a rebound in global markets but more immediately, he needs to work his magic on Arm.