New Deals & Wrong Bets: The Story Of SoftBank’s Strategy
We all know SoftBank. They have invested in several Indian startups, including Ola, Oyo, Paytm, PolicyBazaar and so on. They were also in the news a couple of months ago for how their bet on WeWork went wrong after the company ran into some problems.
Now, they are back on the news again.
- The Wall Street Journal reported that SoftBank Group will be selling Arm Holdings, the British chip designer, to Nvidia for over $40 billion.
- There have been reports that the company’s senior executives will be revisiting a plan to take the company private.
After the above news came out, the shares of SoftBank gained nearly 10% in Tokyo on Monday, the most in around six months.
More About The Deal
Nvidia will pay $21.5 billion in stock and $12 billion in cash for Arm Ltd, which includes a $2 billion payment at signing. SoftBank might also receive an additional $5 billion in cash or stock if Arm’s performance meets certain targets. An additional $1.5 billion will be paid to Arm employees in Nvidia stock.
Taking The Group Private
The discussions to take the company private isn’t new for the SoftBank Group. Masayoshi Son, the founder of SoftBank, considered a buyout in 2015 as well. However, that plan couldn’t come together as the company’s market capitalisation had been brought down by the rising debt and losses at Sprint Corp. to $65 billion.
Why Is This Important?
The sale of Arm will help the company to boost liquidity and let Son focus on the more tactical investing he has said he wants to pursue. The most important thing to notice here is Son’s investment strategy.
Recently, SoftBank has been criticised for a strategy of using derivatives to invest in technology firms. Media reports disclosed details of how SoftBank’s derivatives bets upset investors and triggered around a $9 billion loss in market value for the company the first day of trading after the reports.
And we understand the reason behind the criticism. Over the past three years, Son has made 88 bold bets at ginormous valuations. Firstly, SoftBank’s $100 billion Vision Fund invested in Uber and that led to hundreds of millions of losses. Then, came WeWork. Since 2017, SoftBank has infused over $10 billion and after the withdrawal of Wework’s IPO, followed by the exit of its CEO, we can say that that wasn’t a great bet either.
According to Tim Culpan, mentioned in an article by The Washington Post, “Son’s insistence that startups grow faster than their founders planned, and strong-arm them into taking more money than they might have wanted, has turned into a burden. And that’s become a huge liability to investors in the Vision Fund and SoftBank, too”.
So, there it is! The problem with SoftBank could be Son’s passion to find another company that can do what Alibaba did for his investment. Because SoftBank’s $20 million-bet in Alibaba turned into $60 billion when Alibaba went public. However, this aggressive strategy of investing large amounts of money in tech startups for massive valuations have to be reevaluated by the company. Because, right now, SoftBank is under pressure to reduce the gap between the value of its holdings and its own enterprise value.
We have to wait and see how the deal to sell Arm goes through in the future and whether SoftBank takes itself private.
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