The Art of ‘Mamori’: Why Son’s Defense Might Not Work This Time

Son was uncharacteristically low-key when he revealed on Thursday that the Vision Fund lost $27 billion on investments in the last fiscal year.

He gave up depicting the SoftBank goose laying the golden egg of the AI ​​revolution or a winged unicorn flying by”coronavirus valley”. He did not compare himself to Jesus Christ.

Instead, he started his speech with a giant Chinese character painted white against a dark blue background: Shou. “Defend” or “Protect”, Shou Heralding a dramatic shift from the billionaire founder’s aggressive, high-stakes strategy.

“We will hold umbrellas when it rains,” Son said. “Now is the time to strengthen our defenses.”

Son had been on the defensive before.two years ago he Commitment The reduction in excess checks to companies comes after bets in the market turmoil caused by Covid-19 disruptions led to previously record losses.

But the rebound was quick. He used an emergency $41 billion asset sale to fund the largest share buyback in Japanese history and reduce SoftBank’s net debt by $14 billion.

The difference between then and now, investors and analysts say, is that SoftBank’s fortunes are not so easily reversed and a quick recovery is far from guaranteed, raising fundamental questions about Son’s path forward.

“It looks like Masa may have no idea,” said one SoftBank investor.

The monetary stimulus that propelled high-growth, unprofitable tech companies around the world during the pandemic is coming to an end, while Russia’s invasion of Ukraine is adding to market volatility.

Expected U.S. interest rate hikes to control inflation sparked a massive sell-off in speculative assets, while Beijing’s crackdown on technology sent shares tumbling. SoftBank’s stake in Alibaba, or 22% of its net asset value, means Son is particularly vulnerable to Chinese regulation.

Risks were magnified in mid-March when shares of Jack Ma’s company fell to $73, the lowest level since 2016. That day, SoftBank was “crazy close” to a margin call on a $6 billion loan borrowed from Alibaba stock. A person familiar with the situation.

Chinese regulators made quick efforts to calm the market, but it was a nerve-wracking time for investors. “I think if China isn’t doing what they’re doing, it’s shutting down,” said a person close to Son, referring to such assurances.

“We do not comment on individual financing details,” SoftBank said. The company said: “The margin loan balance was US$6 billion, which is not worrisome considering its share of our group’s total asset-backed financing and liquidity on hand (290 million yen as of March 2022). “

Public companies in the Vision Fund fell an average of 62%. Of the 24 IPOs in 2021, only three have seen price gains since trading began, said Kirk Boodry, a tech analyst at Redex Research in Tokyo.

There appears to be no way for Son to restore investor confidence, and share buybacks have become less effective in preventing SoftBank’s stock price from sliding further.

Amir Anvarzadeh of Asymmetric Advisors said the 1 trillion yen ($7.8 billion) buyback plan announced last fall not only failed to stem a 40% drop in share prices over the past year, but also “concentrated systemic risk and destroyed value.”

The group could also sell its stake in Chinese e-commerce giant Alibaba or its Japanese telecoms arm SoftBank Corp, but divesting assets means Son will not be able to borrow against those stakes to fund new investments.

A longtime SoftBank shareholder noted that the telecom business is also highly profitable and brings steady cash to the group. Selling Alibaba shares for less than a third of the October 2020 peak was also painful for Son.

“It’s hard to say how long this will last,” said a person close to the Vision Fund. “These factors are very different [to the Covid-19 crisis]. “

Son is hopeful about British chip designer Arm, which was bought by SoftBank in 2016 for $31 billion.

SoftBank plans to take the company public after its sale to Nvidia collapsed due to regulatory hurdles. It has taken out billions of dollars in loans from participating banks to back Arm shares.

While SoftBank sank into its biggest loss ever, Arm reported a record $2.7 billion in annual revenue, up 35% from the previous year. Revenue from its licensing business rose by nearly two-thirds and royalties rose by a fifth to $1.5 billion, surprising some analysts after years of underperformance.

“When I look back at what we’ve achieved over the past year, I really see the validation of the strategy we set out three or four years ago,” chief executive Rene Haas told the Financial Times.

But Son has also had to trim his expectations for Arm, and his $66 billion target valuation is now in doubt as rising interest rates and shifting investor attitudes have chilled the listing.

“All I can say is we’re getting ready,” Haas said when asked if the IPO would be delayed.

“I don’t think Arm will raise any capital as hoped. . . it’s a failed flush, but given the IPO fees, there’s a lot of incentive for all investment banks to back, back and lend,” Anvarzadeh said.

SoftBank’s shares rose 12% the day after Son’s speech, but Boodry said that optimism may be premature.

“It looks like some people think that because of the record losses, things have been reset in some way — we don’t think so,” Boudry said. “We think there’s reason to be concerned.”

Additional reporting by Leo Lewis in Tokyo

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