Not Even SoftBank Can Escape Activism Unscratched

Since the failed WeWork IPO, SoftBank has received increasingly negative press coverage. However, perhaps nothing compares to reneging on the tender offer to purchase WeWork and the lawsuit alleging breach of contract by WeWork’s board. Son, once a revered figure and the most powerful man in the startup world, suddenly is on the defense. What led to the dramatic shift?

Elliott Management might be part of the answer. Elliott, founded by activist investor Paul Singer, is known for building a significant stake at companies and demanding management changes to unlock shareholder values. In early 2020, Elliott has built more than $2.5 billion stakes in SoftBank. Though only represent about 3–5% of the total value of SoftBank, Elliott’s stake makes it one of the largest shareholders with outsized control.

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Reuters

Elliott has not come to the public exactly about what the plan is. However, the move was very well received. SoftBank’s stock rallied 14% on the announcement. This is good news for Elliott- proof that he got other investors on his side. However, what does this mean for SoftBank and its portfolio companies?

A major component of Elliott’s plan might be to break up SoftBank. In as early as 2018, Barron’s has noted that SoftBank’s stake in China’s Alibaba (BABA) was worth $166 billion, surpassing SofBank’s $100bn market capitalization. Sum-of-the-parts is a widely used analysis that activist investors use in evaluating potential targets. It could be a low-hanging fruit for Elliott to execute. Furthermore, SoftBank also holds significant stakes in other high-performing companies, namely an 89% stake in Sprint, a 66.8% stake in the mobile company SoftBank Corp, among others.

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Quartz

Separating SoftBank’s Alibaba stake would give SoftBank’s investor a chance to fully realize its value. The newly separated entities of Alibaba-SoftBank, Sprint-SoftBank, Boston Dynamics-SoftBank might mean the end of the conglomerate, but also the founding of a series of correctly valued holding companies.

The second part of Elliott’s plan, which was speculated to be the reason for the reneged WeWork deal, would be to consolidate its portfolio companies. In the case of WeWork, the dire situation of the company’s finances and Covid-19 challenged might be just too much for Elliott and SoftBank. However, even for the surviving portfolio companies, consolidations might be coming soon.

SoftBank has a razor-focus investment thesis- the future of mobility and work. Such specialization meant that many of WeWork’s portfolio companies have similar business models, technologies and are competing for the same pool of talent and market share. For example, 19 of SoftBank’s investment is focused on robotics and automation and 7 focused on specialty finance/neo-lender. Finding synergies among its own portfolio might be inevitable as the economy grinds to a halt and the companies race to improve operational efficiency.

The third part of Elliott’s plan will be a massive share buyback program. To some degree, this has already happened. SoftBank announced in late March that it will buy back 2 trillion yen of its shares, making its biggest daily gain in nearly 12 years. Though impressive in scale, this might not be the end of the buybacks as Softbank’s market cap is still far below all its knowns and public holdings.

Where does Softbank go from now? A South African company might hold a preview for SoftBank. Naspers has a similar beginning as SoftBank. Founded as a publishing company during the apartheid, it gradually invested in emerging internet companies and became a conglomerate and the largest company in South Africa. Just as Alibaba became SoftBank’s claim to fame, Naspers invested early and heavily in the now omnipresent Chinese tech giant Tencent, an investment worth at least $133bn around mid-2019.

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Barron’s

Similar to SoftBank, Naspers was valued just at $100bn at the same time. A 30% valuation gap from its Tencent holdings, let alone other investments including Indian’s giant Swiggy. Also not unlike Elliott’s pressure to the management for a sale of assets, Naspers came under fire from its investors. In Naspers’ case, rather than one investor leading the campaign, it was a class of supervoting investors who had almost a founder’s sway to the company.

In March 2019, Naspers announced that it is spinning off its subsidiary Prosus to be listed on the Euronext Amsterdam exchange. Prosus is the holding company for Naspers’ Tencent shares. Subsequently, Naspers has also spun off MultiChoice, an African pay-TV business, Takeout, Africa’s largest online retailer, and PayU, a fast-growing fintech. And just yesterday, Naspers announced that it has completed an R22.4bn share buyback program, and has only recently started new investments.

The parallel between the 2 companies might offer what’s to come for SoftBank, and other corporate ventures/holding companies. The passive index investing of the past decade has made activism investing much more effective. In a way, this might be the end of the deep-pocketed corporate venture backers and conglomerates. Start-ups that were funded by this type of investors might be shocked to learn one day at the mercy of activists that their long-term investors are not long-term after all.

Speak soon,

Whitney

Written by

Musings on corporate finance, investments, and the economy. Beijing born, Auckland (NZ) raised New Yorker with a pit stop in Boston.

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