SoftBank Falls After WeWork Fiasco Leads to Record Loss
SoftBank Group Corp.’s shares fell as much as 4.2% in Tokyo trading on Thursday, the biggest intraday decline in about six weeks.
(Bloomberg) -- Masayoshi Son wants investors to believe that a record loss from investments in money-losing startups WeWork and Uber Technologies Inc. is but a bump in the road. Some aren’t buying it.
SoftBank Group Corp.’s shares fell as much as 4.2% in Tokyo trading on Thursday, the biggest intraday decline in about six weeks. The Japanese conglomerate recorded an operating loss of 704.4 billion yen ($6.5 billion) after writedowns in WeWork and other investments, its first such loss in 14 years and the biggest quarterly shortfall ever. The $100 billion Vision Fund, the unprecedented investment fund that had been producing big profits, lost 970.3 billion yen.
At a briefing in Tokyo yesterday, the billionaire admitted that “earnings are a mess.” He allowed that overvaluing WeWork was a judgment error, but then spend the bulk of the nearly two-hour event defending his approach, highlighting the potential of his technology investments and boasting about his returns compared with traditional venture capitalists. He made it clear that he has no plans to back off a strategy that has rattled Silicon Valley and raised concerns of a bubble in startup valuations. Indeed, he said that fundraising for a second Vision Fund is on track and the fund will debut soon.
“SoftBank’s performance brings to mind Everett Dirksen’s famous quote ‘a billion here, a billion there, pretty soon you are talking real money,’” Pelham Smithers, whose London-based firm offers equity research on Asian technology companies, wrote in a note to clients. “The problem the fund has is that to get more investments IPO-ed, it will need a healthy U.S. stock market. This in turn means that the fund would have a tough benchmark to beat.”
SoftBank’s strategy has been to put enormous sums -- its smallest deals are $100 million or so and the biggest are in the billions -- into the most successful tech startups in a given category. Son sometimes refuses to take no for an answer, pressing founders to take more money than they requested or threatening to take it to a rival. SoftBank is operating at a scale never before attempted in Silicon Valley, driving up valuations and making it difficult for traditional venture capital firms to get in on the hottest deals, according to some partners.
Of the 88 companies in the Vision Fund’s portfolio, 37 have recorded an increase in the valuation, while 22 are worth less than when SoftBank invested. That amounts to a profit of about 1.2 trillion yen on 8.2 trillion yen of investments, or about double the average return of global venture capital firms, Son said, without giving specific figures.
SoftBank has backed ByteDance Inc., the most valuable startup in the world at $75 billion, and the second-most valuable, China ride-hailing giant Didi Chuxing. But several startups have had trouble living up to their private market valuations, including WeWork and Uber. The U.S. ride-hailing company has tumbled more than 35% from its IPO in May.
Son also pointed out that SoftBank’s shareholder value grew by 1.4 trillion yen since the previous earnings report in August to 22.4 trillion yen. The increase was largely driven by the gain in the value of SoftBank’s stake in Alibaba Group Holding Ltd., worth 13.3 trillion yen.
“There is no change in our journey, no change in our vision,” Son said.
The WeWork fiasco weighed on SoftBank’s shares, which are down almost 30% from this year’s high in April. SoftBank and the Vision Fund had invested more than $10 billion in the co-working giant ahead of its planned initial public offering in September, pushing its valuation as high as $47 billion. But investors balked at buying shares in the money-losing startup and WeWork pulled its IPO. That left the company desperate for cash, prompting SoftBank to extend a $9.5 billion rescue package and take an 80% stake in the company. WeWork’s valuation sank to less than $8 billion in the bailout.
“Management said that it will not provide a rescue package to its portfolio companies, but at the same time also confirmed that it did not see its follow-on investment in WeWork as a rescue package,” Jefferies Group senior analyst Atul Goyal said in a report. “That leaves the door open for such investments in the future.”
Still, Son said he plans to keep making his investments. The second Vision Fund is on track to close soon, he said. It was originally planned to be larger than the first fund, but it’s likely to be about the same size now because investors are more careful about the market. He also said he still plans a third fund.
“The WeWork debacle has eroded investor confidence,” Chris Lane, an analyst at Sanford C. Bernstein, wrote in a report. Lane recommends buying the shares, citing the potential of Vision Fund and deep discount to total value of assets held by SoftBank. “Be greedy when others are fearful,” he wrote.
To contact the reporter on this story: Pavel Alpeyev in Tokyo at palpeyev@bloomberg.net
To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Peter Elstrom
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