The art of ‘mamori’: why Masayoshi Son’s defence might not work this time

Masayoshi Son was unusually restrained when he revealed on Thursday that the Vision Fund had lost $27 billion in investments last fiscal year.

He refrained from ironic slides depicting SoftBank geese laying the golden eggs of the AI ​​revolution or a unicorn with wings flying over the “Valley of Coronavirus”. He did not compare himself to Jesus Christ.

Instead, he started his presentation with a huge Chinese character painted in white against a deep blue background: mamori† To “defend” or “protect”, mamori heralds a dramatic shift in the billionaire founder’s aggressive risk strategy.

“We put up an umbrella when it rains,” Son said. “Now is the time to strengthen our defence.”

Son has been on the defensive before. Two years ago, he pledged to cut back on excessive checks to businesses after a previous record loss due to bets soured in the market turmoil caused by the Covid-19 disruption.

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

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

“Looks like Masa has run out of ideas,” said one SoftBank investor.

The monetary stimulus during the pandemic that fueled high-growth, unprofitable technology companies around the world is coming to an end as the Russian invasion of Ukraine fuels market volatility.

An expected hike in US interest rates designed to contain inflation has led to a massive sell-off of speculative assets, while Beijing’s crackdown on technology sent stocks tumbling. SoftBank’s stake in Alibaba, which represents 22 percent of its net asset value, means Son is particularly vulnerable to the Chinese regulatory attack.

The risk was heightened in mid-March when shares in Jack Ma’s company fell to $73, the lowest level since 2016. On that day, SoftBank came “insanely close” to a $6 billion margin call on the loan lent against its stock. Alibaba, one person familiar with the situation.

Chinese regulators worked quickly to reassure the markets, but it was a nerve-wracking moment for investors. “I think the lights would be out if China didn’t do what they did,” said a person close to Son, referring to the reassurance.

“We do not comment on individual funding details,” said SoftBank. “The balance of margin lending is $6 billion, which is not a concern given its share of our group’s total asset-backed funding, as well as available liquidity (¥2.9 trillion as of March 2022),” the company said. .

Listed companies in the Vision Fund are on average 62 percent lower than their quotes. Of the 24 IPOs in 2021, only three have risen in price since trading began, said Kirk Boodry, a tech analyst at Redex Research in Tokyo.

Son appears to be running out of options to restore investor confidence, with share buybacks becoming less effective at preventing a further decline in SoftBank’s stock price.

The ¥1 trillion ($7.8 billion) buyback program announced last fall was not only able to counteract the stock’s 40 percent decline over the past year, but it has “concentrated systemic risk and destroyed value,” said Amir Anvarzadeh of Asymmetric Advisors. .

The group could also sell its stake in Chinese e-commerce giant Alibaba or its Japanese telecom unit SoftBank Corp, but the divestments would mean Son would not be able to borrow against these shares to fund new investments.

The telecoms business is also very profitable and generates stable cash for the group, notes a longtime SoftBank shareholder. Selling Alibaba shares at less than a third of their peak value in October 2020 would also hurt Son.

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

Son was hopeful about the listing of Arm, the British chip designer SoftBank, which bought it for $31 billion in 2016.

SoftBank plans to IPO after its sale to Nvidia collapsed due to regulatory hurdles. It has already secured billions of dollars in loans from banks involved in the listing against Arm’s stock.

While SoftBank posted its biggest loss ever, Arm reported record annual revenue of $2.7 billion, up 35 percent from the previous year. License revenues grew nearly two-thirds, with royalties rising one-fifth to $1.5 billion, surprising some analysts after years of meager performance.

“When I look at what we’ve accomplished in the past year, I really see the validation of the strategy that we put in place three or four years ago,” CEO Rene Haas told the Financial Times.

But Son has also had to reverse his expectations for Arm, as his target valuation of $66 billion is being questioned by rising interest rates and changing investor attitudes that are ignoring quotes.

“All I can say is that we are preparing,” Haas said when asked if the IPO will be delayed.

“I don’t think Arm will raise anywhere near as much as hoped. † † this is a failed flush, but all investment banks have great incentive to back and borrow given the IPO fee,” Anvarzadeh said.

Shares of SoftBank rose 12 percent the day after Son’s presentation, but Boodry said the optimism could be premature.

“It seems some people think that because there was a record loss, things have somehow reset — we don’t think so,” Boodry said, “we think there’s reason to be concerned.”

Additional reporting by Leo Lewis in Tokyo

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