Of paper gains and gossamer dreams


No one can accuse SoftBank’s mercurial founder Masayoshi Son, or Masa as he is popularly known, of not dreaming big.

Even at the time of its founding in 1981 as a distributor of PC software, SoftBank (shorthand for “Bank of Software”) had a stated ambition to be the “world’s biggest company”. In the years that followed, Masa took SoftBank through a series of pivots, acquisitions, and expansions, even briefly becoming the “richest man in the world” during the dot-com boom.

Reshaping the industry

In 2010, Masa unveiled his 300-year vision for the future—the “Singularity”. A technology revolution that will ultimately culminate in artificial intelligence superseding human intelligence, reshaping every industry in the global economy.

But big dreams require big money.

To fund these dreams, SoftBank resorted to debt. Not just a “normal” level of debt, but an extraordinarily high level.

By the end of 1998, SoftBank had more than $5 billion in debt and was using three times as much debt to finance its operations compared to equity. The company leveraged this debt to finance an ambitious M&A (mergers and acquisitions) strategy. This included the $21.6 billion acquisition of American telecom company Sprint in 2012-13 and the ~$32 billion acquisition of UK chip designer ARM Holdings in 2016.

By the end of 2016, SoftBank’s outstanding debt stood at $143 billion. The group’s total liabilities had ballooned to $250 billion, far greater than its $100 billion market capitalization.

Not only did this massive level of debt hurt operational stability, but it was also perceived as being overly risky by rating agencies. This resulted in SoftBank’s borrowings being marked down to junk-level status. With the imminent advent of 5G, SoftBank’s telecom entities had to provision huge capital deployments to build out next-gen infrastructure. This further impacted the company’s financial metrics.

When it was announced in 2017, the Vision Fund was not only a vehicle for SoftBank’s grandiose ambitions, it was also a way to bypass these financial challenges.

How so?

For starters, it gives SoftBank a large dose of fresh capital to fund startups that will emerge as key players in the envisioned “singularity”. Money that wouldn’t have been available to the SoftBank corporation otherwise.

And the money that SoftBank has itself committed to investing in the Vision Fund? Well, that can be easily remedied by transferring its holdings in companies like DiDi, Nvidia, and OYO from the corporate entity to the fund in lieu of actual cash investments. This would also give SoftBank the opportunity to book a nice chunk of profit through the transaction.

Most importantly, the Vision Fund accords SoftBank the opportunity to morph from a telecom conglomerate to a technology holding/investing company. This has two critical facets. Firstly, if investors see SoftBank as an investment business, its creditworthiness will be re-evaluated and the company will be allowed to operate with more flexibility around leverage levels. This means debt will become cheaper and less onerous. Secondly, it allows the company to resort to more complex financial instruments and avail margin loans to fund further ambitions.

The signs of this metamorphosis are already evident in SoftBank’s financial results.

What was the consolidated income?

Last month, SoftBank declared its financials for the fiscal year ending March 2019. Out of a consolidated income of $21.8 billion, a whopping sum of $11.45 billion was attributed to the Vision Fund segment. Essentially, in less than two years, the income attributed to the Vision Fund has crossed 50% of the overall income, and signs indicate that this number is only going to get even higher from here.

Both in terms of revenue share as well as mind share. Masa has been quoted as saying, “My heart and mind are full of energy for the Vision Fund, taking up 97% of my brain”.

Which brings us back to OYO.

If one were to examine the Vision Fund’s income of $11.45 billion for the year, it would show up in three categories.

First, I realized gains from acquisitions. These range from straightforward cash exits such as the Flipkart acquisition to complex transactions such as Nvidia involving derivative gains after applying a hedging technique called a collar transaction.