Crouching Tiger, Hidden Problems - Cracks in Softbank Emerge

Posted by Ed 2 yrs ago
“A value is valuable when the value of value is valuable to oneself.” – Dayananda Saraswati

What is something worth? For many, this is a simple question with an easy answer: whatever somebody is willing to pay for it. In practice, valuation is critically important to the core functioning of finance over the long run. How value is determined – and who gets to do the determining – can make the difference between fortunes won and lost. As with all such circumstances, if there is big money on the line, there will be people with the means, opportunity, and motive to stretch the boundaries and grab more than their fair share of it.

In the public stock markets, valuation seems straightforward. Stocks trade hands between willing buyers and sellers during market hours, and when the markets close there’s a final trading price for the day. But things aren’t always so transparent. Imagine you are a money manager with a large position in XYZ stock. It is somewhat illiquid in that it doesn’t trade in big volumes. Since your compensation depends in part on the closing value of XYZ on December 31st, you decide to make a series of small buys in the last few minutes into the close, artificially pushing the value of XYZ up by 5%. Your entire stake now gets marked there, but it isn’t real - you have merely “painted the tape.” 

If a founder sells 15% of her startup to an accredited investor in exchange for an injection of $150,000, then it might be fair to say her company is worth $1 million. What if it is the founder’s parents making the investment? A best friend? A business partner in a different but related venture? Throw into the mix critical deal terms like distribution preferences, board seats, voting rights, anti-dilution protections, and other negotiated concessions, and it quickly becomes apparent how difficult the concept of private value can become – and how easily it can be manipulated.

Things get really interesting when the public and private company worlds collide, and no person has pushed the envelope harder at this interface than Masayoshi (Masa) Son, Chief Executive Officer of SoftBank. SoftBank is a large Japanese conglomerate consisting of run-of-the-mill operating companies and a staggering array of aggressive private investments deployed through all manner of complex structures, often with significant leverage.
Known as a swashbuckling gambler with an incredible tolerance for volatility, Masa Son is famous for his bizarre investor presentations during which he rails against the value the public markets assign to the whole of SoftBank, especially compared to what he believes is its proper sum-of-the-parts valuation. Below is a famous moment from his 2020 presentation, delivered at the height of the Covid-19 pandemic, during which Masa Son claimed SoftBank’s equity was worth 25 trillion Yen, yet the market was assigning it only 9 trillion Yen (on the slide, he’s backing out the 4 trillion Yen in SoftBank debt). 

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Ed 2 yrs ago
"They're In Desperate Need Of Capital" - SoftBank Halts Investments As It Scrambles To Raise Cash

2021 was a difficult year for Softbank, and so far, 2022 is shaping up to be even more punishing. The Japanese telecoms giant/VC firm/conductor of the "AI Revolution" booked massive losses on its investment portfolio as massive bets on Didi and Grab soured (among other holdings), saddling the firm with tens of billions of dollars in losses for 2021 (this according to the firm's most recent earnings report). And as shares of Alibaba and other prominent SoftBank holdings continued to tumble during Q1, dragging SoftBank shares lower in tandem, the situation has only continued to deteriorate.


As SoftBank shares have tumbled, founder Masayoshi Son has seen roughly $25 billion of his net worth evaporate.


The firm's investment losses - spurred by a crackdown in Beijing (which has sheered $9 billion off the firm's Didi holdings, and that's just one stock), the war in Ukraine, and other factors outside SoftBank's control - could represent an existential threat, since SoftBank borrows heavily against its own shares to finance investments in early-stage companies. Because of this heavily leveraged structure, if the company's financial position deteriorates too aggressively, it could trigger a brutal margin call "doom loop" that could force it to sell even more of its holdings. Masa Son lost his first fortune during the dot-com blowup. The last thing he wants is to be financially ruined a second time.


To try and guard against this eventuality, Masa Son has reportedly ordered his lieutenants to halt investments in new firms as the company seeks to conserve cash as the value of its portfolio continues to deteriorate.


Here's more from the FT:


SoftBank founder Masayoshi Son has told his top executives to slow down investments, as the world’s largest tech investor seeks to raise cash amid falling tech stocks and a regulatory crackdown in China.


The Japanese billionaire made the remarks to his leadership team at a recent meeting, according to people briefed on the discussions, as the group responds to the massive hit to the value of its holdings in recent months. The previously unreported discussions offer a rare glimpse into the growing tension within SoftBank, which has disrupted the tech investing landscape since launching its first Vision Fund in 2017.


Instead of looking for new innovative tech companies to pump money into (or soliciting backers for a third iteration of its 'Vision Fund'), SoftBank is evaluating its portfolio to decide which holdings might be best suited for liquidation. One insider said the firm doesn't expect valuations of its Chinese holdings to rebound any time soon. 

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Ed 2 yrs ago
SoftBank Shutters Hedge Fund Unit Behind Infamous 'Nasdaq Whale' Trades
So much has changed since the summer of 2020, when a mysterious entity nicknamed "the Nasdaq Whale" (later revealed to be SoftBank acting via its internal hedge fund unit, SB Northstar) triggered an epic meltup in tech shares by gobbling up billions of dollars in call options on NASDAQ megacap companies (along with, to a lesser extent, the index and underlying stocks), forcing dealers to delta-hedge, triggering the gamma squeeze of a lifetime. 

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Ed 2 yrs ago
SoftBank's Vision Funds Report Historic $27 Billion Loss
While the unraveling of ARK (and its flagship fund ARKK in particular) have come to epitomize the unraveling of the pandemic-era tech boom, Cathie Wood and company are rank amatures compared with Masa Son and SoftBank, who have seen their portfolio of rising tech firms hammered by the trifecta of global economic contagion: Rising rates in the US, China's COVID-inspired lockdowns (and before that, Beijing's crackdown on Chinese tech) and the fighting in Ukraine (and the inflationary hellscape that rising oil and food prices have unleashed).

We noted back in March that SoftBank's portfolio had seen $25 billion evaporate. Since then, the bleeding has only worsened.

To wit, SoftBank's two Vision Funds have posted historic investment losses of ¥3.5 trillion ($27.5 billion) over the 12 months to March 31 as the funds' biggest holdings were pummeled by rising interest rates and Beijing’s crackdown on the tech sector. 

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Ed 23 mths ago
SoftBank posts record $23 bln net loss on Vision Fund pain

TOKYO, Aug 8 (Reuters) - SoftBank Group Corp (9984.T) unveiled a $23 billion quarterly net loss on Monday, its biggest ever, as a market sell-off upended tech stocks and shredded valuations at its sprawling Vision Fund unit.

The pain in the April-June quarter comes fresh after the closely watched Vision Fund posted a record $26 billion loss in May, when rising interest rates and political instability disrupted global markets, and could test investor willingness to stomach further big losses.

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Ed 23 mths ago
SoftBank Lost $39 Billion in 6 Months, Wiping Out the Bubble Gains of the Vision Funds Since 2017: Easy Come, Easy Go

Now trying to avoid “a blow that would be irreversible.”
SoftBank reported its biggest loss in history, as it said in its presentation today, of ¥3.16 trillion, or about $23.5 billion, for the quarter through June (its fiscal Q1), mostly due to mega-losses in its Vision Fund segment, and some due to exchange-rate losses of the yen, after having already lost ¥2.1 trillion, or about $15.6 billion in the prior quarter, for a combined six-month loss of $39 billion (chart via SoftBank’s presentation):

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