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Opinion

Masayoshi Son's 'crazy' act wears thin

SoftBank founder must use Tiger deal to reassure investors worried about Vision Fund

SoftBank CEO Masayoshi Son might do better reassuring investors rather than courting U.S. President Donald Trump.   © Reuters

Visionaries ahead of their time often run foul of shareholders with shorter time horizons. This tension rises exponentially when a CEO is hyped as amalgamating Warren Buffett's investing prowess, Elon Musk's brashness and Richard Branson's fearlessness. Welcome to Masayoshi Son's hell, one of his own making.

Until October 2016, the 60-year-old SoftBank founder and Japan's richest man was largely a telecommunications mogul. Son had generated many a headline with giant acquisitions, from Vodafone in 2006 to Sprint in 2012, and a smattering of tech bets here and there.

But Son's $100 billion Vision Fund changed everything. Single-handedly, it is revolutionizing the venture capital game.

Just ask Silicon Valley, where Son's aggressive mergers-and-acquisitions campaign is swelling valuations and diversifying SoftBank's balance sheet in dozens of directions. Along with commandeering the ride-sharing business, Son is bankrolling startups involved in everything from solar panels to chips, robots, satellites, indoor farms, e-commerce apps and shared-office hives.

Investors do not quite get the strategy. As the Nikkei 225 Stock Average rose 14% over the last 12 months, SoftBank shares gained just 4%. Given an earful about the underperformance at SoftBank's annual meeting in June, Son assured shareholders he is working to ensure they "can rest at night in peace."

Count Tiger Global Management among those buying that message. Since Son's pledge, Chase Coleman's $22 billion investment fund has announced a $1 billion-plus stake in SoftBank, claiming its shares are "meaningfully undervalued." It is an argument Son has been making for years, though he admitted in June that the "Masayoshi Son discount" must be addressed.

How much of a discount? In a letter to clients, Tiger put SoftBank's total asset value at $278 billion and net asset value at $190 billion. This latter figure is more than double today's $94 billion market capitalization.

Only time will tell if Tiger's numbers are correct. This could be a late bull-market punt on a company lagging the market. And given SoftBank's sizable debt load, Son's penchant for overpaying and complicated growth strategy, SoftBank could be the biggest loser when stocks do correct. But, more likely, this is both a re-rating for Son and a timely reality check.

Son has wowed investors with Musk-like spin and Branson-esque spunk. But Son must shift firmly into Buffett mode to prove SoftBank is more value investment than speculative bet.

The international media has long tried to cast Son as a Sage of Tokyo. In April, he even toyed with a Buffett-like investment in Swiss Re, the insurer. While the deal has not panned out, Son's flirtation with insurance showed he craves stable cash flows akin to Buffett's Berkshire Hathaway model. It also suggested a new determination to close the gap between the sum of SoftBank's parts and a discounted share price.

Son talks of making the Vision Fund more transparent and explaining how his startup investments should be valued. Yet we are long past the time for spin. Son must level with shareholders, and now, before a critical mass lose patience. And before a global stock correction many punters fear arrives.

There is a certain irony to the venture capital industry being revolutionized by a man from a place largely devoid of one. Japan's aging population and shrinking markets have Son and his ilk targeting would-be unicorns abroad.

Another irony: hedge fund Tiger is betting on a tech juggernaut that is looking more and more like its own highly-leveraged speculative investment outfit. In February 2017, Son even bought one -- U.S. hedge fund Fortress Investments.

Vision Fund's first $100 billion was partly bankrolled by a Saudi Arabian sovereign wealth fund. In May, Son said "Vision Fund 2," which would give him another $100 billion in deal-making firepower, "will definitely come. It is just a matter of time."

First, though, Son must enlighten investors on where he is taking SoftBank. At the June shareholders meeting, Son said of his startup buying binge: "we are doing it to win and to grow for the next 300 years. I am confident people will understand in time."

Actually, this sounds very much like overconfidence. Unless Son takes the time to rationalize the next three years, never mind three centuries, punters might start reducing exposure. Son is forgetting his is a publicly-traded company.

A planned initial public offering of SoftBank's mobile phone business in Japan is an ideal opportunity. Sometime in the next three months, Son hopes to unlock value -- as much as an estimated $62 billion. There also is talk of a tax-deferred spinoff of SoftBank's Alibaba stake.

The $20 million Son handed Jack Ma in 2000 was worth $50 billion by the time of Alibaba's 2014 IPO. Much of the patience with Son's scattershot investment style stems from that prescience. It is worth noting that SoftBank's giant stake in the ride-sharing space -- including Uber, Grab, Didi Chuxing and Ola -- is looking good so far.

Son likes to say he hopes posterity remembers him as a "crazy guy who bet on the future." In the short run, though, shareholders might not be so crazy about going along with the shoal of misfit startups Son is amassing. SoftBank's roughly $88 billion debt alone argues in favor of slowing the acquisition cycle. Son once characterized SoftBank as a "goose that lays golden eggs and dines on debt." How about a bit less gorging and a bit more digesting?

This tension makes Tiger's investment especially timely. There is a familiarity dynamic at play, for example. SoftBank and Tiger have an intriguing history of investing alongside each other -- from Uber to Hangzhou Kuaidi Technology to Indian e-commerce giant Flipkart.

Much of the focus is on Coleman's hedge fund giving Son a symbolic lift at a pivotal moment. Perhaps more should be on Tiger harnessing overlapping interests and core competencies to prod Son to drop the opacity that contributes to SoftBank's underperformance.

Even visionaries could fall hard as central banks yank away the monetary punchbowl and Donald Trump escalates his trade war. The risks for SoftBank are heightened, perhaps, as Son cozies up to the U.S. president.

Last month, Son joined Trump in Wisconsin to celebrate iPhone assembler Foxconn's $10 billion factory. There, Son hawked his plan to invest $50 billion in Trump's America. But Trump's assault on global trade poses the biggest risk to global share prices -- including SoftBank's.

Given Japan's modest growth, gargantuan debt burden and aging consumer base, the Nikkei would be hit hard should Trump break investor confidence. Then, Son's hodgepodge of pricey bets around the globe could pose big problems.

Tiger is not crazy to bet on SoftBank's vision, even at this uncertain economic moment. Son is easily among today's savviest CEOs. But he would be irresponsible to pass up this opportunity to keep investors in his corner.

William Pesek William Pesek

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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