June 25, 2017 12:00 pm JST
Company in focus

Maybe Masayoshi Son's successor will be AI

With $93bn to invest, SoftBank founder's timing must be impeccable

ALEXANDER MARTIN, Nikkei staff writer

TOKYO -- "The gold rush is about to begin."

Taking the podium at SoftBank Group's annual shareholders meeting in Tokyo on Wednesday, founder and chief executive Masayoshi Son was in full tech-mogul mode. "Some say SoftBank is a mobile phone company, but that's wrong," he said. "We are an information revolution company. A cellphone is just a device. From now on, we will be in an age where all infrastructure will be connected by information networks."

Son has about 30 targets lined up in emerging sectors such as artificial intelligence, robotics and the internet of things. SoftBank, he made it clear, intends to be at the forefront of all these fields.

The boss likes to think big. In 2010, Son announced a strategy for the next three decades, over which time he aims to forge some 5,000 partnerships and expand SoftBank's market capitalization to 200 trillion yen ($1.79 trillion). He did not stop there: He also described his vision for the coming 300 years, predicting a world where people live to 200 and communicate via "telepathy." During the shareholders meeting, Son talked about the SoftBank Vision Fund, a $93 billion technology investment fund launched with Saudi Arabia and other partners. Using this massive vehicle, Son said he wants to gather a group of innovative entrepreneurs, bonded by camaraderie and a common vision.

The basic idea is to create a loose-knit collection of companies that are both independent and collaborative. In Son's view, flexibility and autonomy are preferable to consolidating companies under a single brand or business philosophy, particularly in an age when even luminaries like Microsoft and Intel are seeing slowing growth. Diversity means things never get stale.  

With the closing of the tech fund, investors are anxious to learn where those billions are going to flow. Son's recent investments offer some hints on what to expect.

No half measures

Takayuki Kamaya, a former secretary to Son, said his old boss always aims to acquire the biggest players in a particular industry. "Fundamentally, it's not really his style to invest small amounts in fledgling startups that may take decades to produce returns," Kamaya said. "Rather, he aims for companies with top global shares in their fields, like ARM" -- a British chip designer SoftBank acquired last year for 24 billion pounds ($31 billion).

When Son buys into a company, he also prefers to jump in with both feet, obtaining 20% to 40% stakes to become the top shareholder in one shot. He has a proven track record, too: His company's internal rate of return, a benchmark for investment performance, stands at over 40%. That's around 10% to 20% higher than other major investment funds.

SoftBank bought all of ARM Holdings, whose technology is used in over 90% of the world's smartphones. Son has described the company as a "platformer," meaning it is the kind of player that sets industry standards and dominates, along the lines of Apple, Google, Amazon and Facebook. Son is convinced ARM's technology will become the fabric of the internet of things -- the expanding array of everyday devices with net connections.

Truly connecting the whole world, however, will require additional infrastructure. This is where Son sees OneWeb coming in. The U.S. startup, which received an investment by SoftBank last year, wants to use hundreds of low-orbit satellites to provide internet services in rural areas and developing countries.

The future, in Son's vision, will belong not only to people but also to robots, which he says are destined to run on advanced AI. SoftBank already has Pepper, a humanoid it began selling in 2015, but it recently beefed up its robotics business with the acquisition of Boston Dynamics from Alphabet, Google's parent company.

The U.S. venture is known for its agile robots that can traverse rough terrain and run like animals.

Son has his fingers in other potentially lucrative pies, too, including autonomous driving and health care. SoftBank holds an equity stake in U.S. graphics chipmaker Nvidia, which has emerged as a leader in self-driving technology and is seen as a future chip industry titan. SoftBank also led a funding round for U.S. cancer screening company Guardant Health, which uses machine learning and genomics to detect tumors at an early stage.

After all this, SoftBank is just getting started. In the past, the company invested with funds sourced from its domestic mobile business, which brings in free cash flow of 500 billion to 600 billion yen a year. Now, with the Vision Fund, the group will be able to invest on a far grander scale.

SoftBank will be putting up $28 billion of the $93 billion. The rest is coming from the state investment funds of Saudi Arabia and Abu Dhabi, as well as Apple, U.S. chipmaker Qualcomm, Taiwanese contract manufacturer Hon Hai Precision Industry, also known as Foxconn, and its Japanese electronics unit, Sharp.

Of its own contribution, SoftBank has said $8 billion will come through a partial transfer of ARM shares to the fund. So SoftBank, which controls the fund as general partner, gets to run the show while only chipping in about 20% of the actual money. This structure will allow Son to invest without further encumbering his company's balance sheet. 

The Vision Fund has the potential to substantially impact SoftBank's finances and earnings. As the fund's general partner, SoftBank is responsible for running the entity. The fund will also be included in SoftBank's consolidated financial statements. This means that once the fund consolidates its portfolio companies, their results of operations, assets and liabilities will be included in SoftBank's financial statements. If the fund does not consolidate an investment, then part of the profit from that portfolio company will be included in SoftBank's earnings, based on the ratio of SoftBank's contribution to the fund.

At this point, it is hard to predict how much profit will be reflected in SoftBank's earnings. Still, running the fund will likely add momentum to SoftBank's operating profit growth rate.

Meanwhile, in cases of negative returns, the burden will be shared based on the fund's contribution ratio. Saudi Arabia is the fund's largest partner, putting up $45 billion (SoftBank, remember, is anteing $28 billion). So SoftBank can run the fund without worrying about being overburdened in case of losses.

SoftBank has a history of spreading risk. When it bought the Japanese arm of Vodafone Group in 2006 for 1.75 trillion yen, it raised over 1 trillion yen through a leveraged buyout, using the target company's assets as collateral to finance the purchase.

Son has said that when it comes to investing, he aims for a winning percentage of 70%. He believes it is too early to place a bet when the chances are 50-50, but too late when the odds of success have hit 90%. His sense of timing will be crucial for the fund, especially since technological change is only accelerating.

The single most important factor, though, may be Son's vast business and political connections.

It's who you know

In 1995, Son decided to buy Ziff-Davis Publishing, the publisher of PC Week magazine. Years earlier, Microsoft's Bill Gates had recommended he read the weekly.

In what has become a Silicon Valley legend, the publisher's chief executive introduced Son to Jerry Yang, the co-founder of a fledgling web portal called Yahoo. SoftBank snapped up a third of the venture for $100 million.

Like Yang, Son "discovered" Jack Ma Yun, the executive chairman of Alibaba Group Holding, when he was still little known to the world. Upon meeting Ma, Son decided in just five minutes to invest 2 billion yen in his business. "I saw charisma in his eyes," Son later recalled.

Yet another connection that has become part of tech lore is Son's relationship with Apple's late co-founder, Steve Jobs. In 2006, just before SoftBank entered the mobile industry by acquiring Vodafone Japan, Son showed Jobs a sketch of a cellphone and asked him to develop it. It was a cross between an iPod, Apple's portable music player, and a Japanese handset.

Jobs, who was working on the iPhone at the time, rejected the request but later gave Son the exclusive rights to bring the iPhone to Japan.

In recent years, Son's web of ties has expanded into politics. He has met with Indian Prime Minister Narendra Modi to discuss investments in the country, and made headlines late last year by telling Donald Trump, then the U.S. president-elect, that he would create thousands of American jobs.

Cracks in the armor

Son's persistent networking and investing has built one of Japan's largest companies: SoftBank had a market cap of 10.16 trillion yen as of Friday, with its shares priced at 9,233 yen. Some equity analysts reckon the conglomerate is actually undervalued, considering its holdings in companies like Alibaba, Yahoo Japan and ARM.

At the same time, SoftBank was saddled with 14.8 trillion yen in consolidated interest-bearing debt as of the end of March, equivalent to roughly 10 years of its operating cash flow.

SoftBank also owns Sprint, the loss-making U.S. mobile carrier, which it acquired in 2013 for $22 billion. While the carrier has made some progress toward a turnaround, it remains on shaky financial ground.

Mitsunobu Tsuruo, an analyst at Citigroup Global Markets Japan, said investors would likely re-evaluate SoftBank if talk of a merger between Sprint and rival T-Mobile US comes to fruition. Such a deal would create a third giant in the American cellular market, alongside Verizon Communications and AT&T.

But if the realignment falls through, Sprint will find itself back at square one, warned Tetsuro Tsusaka, an analyst at Morgan Stanley MUFG Securities.

The biggest risk to SoftBank's prospects, though, might be its reliance on Son.

While he is known for his boundless energy and late-night conference calls, some aides wonder how long he can keep it up. SoftBank lists "unforeseen situations concerning key members of management," especially Son, as a business risk on its website.

At the general meeting, one shareholder urged Son, who was fighting a cold and occasionally coughing, to take care of his health.

Son is well-aware of the succession problem. When he was 19, he charted out a life plan, under which he aimed to wrap up his business affairs in his 50s and pass the torch in his 60s. He will turn 60 in August, but now he plans to stay on for another five to 10 years while seeking a successor from within the group. 

Finding someone with a similar knack for investment is no easy task. Nikesh Arora, a former Google executive whom Son had tapped as his successor, abruptly left the company last June. While shareholders approved Son's decision to stay on at the helm of SoftBank, it reflected the difficulty founders often face when trying to hand over the reins.

One person at the shareholders meeting offered an outside-the-box solution: an AI successor versed in Son's knowledge, experience and ideas. 

Even the uber-ambitious Son was not ready to go that far. "I'd like to have a real human being as my successor," he said. "It's better to have a real person lead a group of human beings."

Nikkei Staff wreiters Takashi Sugimoto, Taichiro Sunaga and Hirofumi Takeuchi contributed to this article.

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 61,992.9M
Shares: 17,328.7M
Asia300

Alibaba Group Holding Ltd.

China

Market(Ticker): NYS(BABA)
Sector:
Industry:
Retail Trade
Internet Retail
Market cap(USD): 450,581M
Shares: 2,529.36M

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