Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Arm is giving SoftBank founder Masayoshi Son a helping hand on several fronts. The US-listed chip designer’s rising market value has boosted the Japanese tech group’s earnings. It helps Son, who has long suffered from a bad rep for a string of failed investments, recover some lost street cred. Now, it may also give him a way to stand up to activists.
Elliott Management has rebuilt a substantial stake in SoftBank and is pushing it to launch a $15bn share buyback. The US-based activist, with a position worth more than $2bn, has engaged directly with SoftBank’s senior management in recent months. This is the second time Elliott has targeted SoftBank. The previous time it amassed a position worth roughly $3bn and pushed for a $20bn buyback in 2020.
Back then, Son had little defence against disappointed investors. The founder was still obsessed with troubled co-working space provider WeWork. SoftBank was dealing with rapidly declining investment valuations amid a tech sell-off. The market value of newly-listed portfolio companies such as Uber and Slack were falling. It needed to find ways to avoid mark-to-market losses.
Buybacks made sense given the weak performance of SoftBank’s wide range of unfocused investments across everything from consumer goods to hotel start-ups. Even its investment in Arm, which is behind the profit in its Vision Fund in the fiscal year to this March, was not regarded as a very promising bet back then. Arm’s revenue was at the time heavily reliant on demand for new smartphones — which had been seen as a market in permanent decline. By July of that year, shares in SoftBank traded at a rock bottom 7 times forward earnings, even after buybacks.
But things have changed. This year SoftBank shares are up 56 per cent and trade at more than 50 times forward earnings. Net asset value rose to a record high of Y27.8tn at the end of March, doubling from the previous year due to the significant increase in Arm’s market value.
Another difference is that four years ago, Alibaba accounted for nearly half of SoftBank’s asset holdings on an equity value basis, exposing it to slowing growth in the Chinese ecommerce sector. Today, Arm accounts for about half of the total. SoftBank’s focus has also been narrowing on investments in AI and chip-related themes.
All this means that Elliott faces a tougher task getting its call for buybacks to stick. Provided Son does not revert to old habits of overpaying for ad hoc investments, there could be better ways to spend the $15bn.
Read the full article here