TOKYO -- SoftBank Group Chairman Masayoshi Son went to great lengths to raise cash quickly for his gamble on British chip designer ARM Holdings, including taking the risk of adding to the technology giant's already massive debt pile.
Paving the way
On June 1, SoftBank contacted subsidiary GungHo Online Entertainment to inquire about selling part of its stake back to the smartphone game developer. Even though SoftBank would take a loss on the deal, its representative pushed hard for a quick response.
A top GungHo official concluded that even if the company refused, SoftBank would just look for another buyer. President Kazuki Morishita announced a tender offer June 3, and SoftBank raised about 73 billion yen ($689 million) from the sale.
Later that month, SoftBank sold its majority interest in Finnish game developer Supercell to China's Tencent Holdings for around 770 billion yen, far more than the roughly 200 billion yen the Japanese company is believed to have paid for the shares. SoftBank also unloaded a partial stake in Alibaba Group Holding for more than 1 trillion yen.
The acquisition of ARM cost SoftBank 3.3 trillion yen. While Son had raised nearly 2 trillion yen in a remarkably short time, he still had a ways to go.
The deal was announced July 18. Five days earlier, Mizuho Financial Group was a hive of activity, with a flurry of top-secret internal discussions and board meetings, all over a 1 trillion yen loan to SoftBank.
The normally time-consuming process was streamlined thanks to the strong ties between Mizuho and SoftBank, dating back to the days of Fuji Bank, one of the institutions that joined to form Mizuho. Mizuho was part of syndicates funding SoftBank's 2006 purchase of Vodafone's Japanese unit and its 2013 acquisition of U.S. cellular carrier Sprint. Son and Mizuho Financial President Yasuhiro Sato often dine together. The two were in close communication about the ARM deal, a source said.
Dangers of leverage
SoftBank's growth has been driven by leveraged buyouts taking full advantage of the power of debt. The ARM deal brings the company's interest-bearing debt to roughly 12 trillion yen -- 1.3 times annual sales.
Yet Son does not hesitate to call the company effectively debt-free. He bases this argument on 7.5 trillion yen in unrealized capital gains on companies such as Alibaba and Yahoo Japan. Tacking on the value of stakes in promising unlisted companies in such countries as China and India brings paper profits to a level that balances out SoftBank's debt, Son says.
Son's heavy use of leverage carries risks. SoftBank's string of acquisitions has massively expanded its balance sheet. ARM's net assets total about 250 billion yen, leaving more than 3 trillion yen in goodwill. Adding this to SoftBank's current goodwill brings the total to nearly 5 trillion yen, double the company's shareholders' equity. If SoftBank's acquisitions do not perform as hoped, the company will be forced to write down goodwill.
ARM's contribution to SoftBank's bottom line will be minor. The chip designer logged net profit of 339.7 million pounds ($446 million) for the year ended in December -- equivalent to just 10% or so of SoftBank's annual group profit.
The Japanese company is also vulnerable to higher interest rates. Even with rates in negative territory, the interest rates on SoftBank's debt average nearly 4%. The company paid about 440 billion yen in interest in the fiscal year ended in March. A percentage point rise in interest rates would increase annual payments by roughly 120 billion yen.
Son himself has acknowledged that ARM has no synergy with SoftBank's existing businesses. The Japanese company's stock remains below where it was when the deal was announced. Market players are still uncertain about Son's grand plans.