Softbank, London Calling

It’s not on a press release, but Mr. Alok Sama has resigned, effective January 10, 2017. Mr. Sama is no longer a director of the entity managing the Softbank Vision Fund. Per Softbank’s initial press release:

The Fund will be managed in the United Kingdom by a subsidiary of SBG and will deploy capital from SBG and investment partners.

That’s indeed true. On November 25, 2016, an entity called the Softbank Vision Advisers Ltd. was incorporated in England. Listed on the corporate filings as directors were Rajeev Nisra, Alok Sama, and Jonathan Bullock or “JB”.

After Mr. Sama’s resignation, there are only two acting directors left: Mr. Nisra and Mr. Bullock. Here’s another interesting fact: Mr. Bullock doesn’t live in London, but the United States. Specifically, Mr. Bullock is based in San Franciso at the office of Softbank Group International. 

Mr. Bullock is already on the boards of Ola, Snapdeal, and, after the departure last year of Nikesh Arora. Per his Linkedin page, “JB” also  “ensure our business runs effectively outside of Japan, and externally with a number of our portfolio companies“.

So while not in London, Mr. Bullock may be the Fund’s man in Silicon Valley looking for the next deal. Who knows, “JB” may have already been responsible for the Apple, Ellison, Qualcomm investments in the Vision Fund.  



High NOON in the Kingdom

It’s noon, no, not that noon, but The Middle East’s newest e-commerce site opens its doors this month. Noon represents the ever expanding technology portfolio of the Saudi Arabia Public Investment Fund (PIF). In 2016, the PIF invested $3.5 billion in Uber, up to $45 billion in the Softbank Global Vision Fund, and now $500 million in Noon.

PIF’s activities are part of a broader strategy to diversify the Kingdom’s oil-based economy. Unlike the petro-states of Abu Dhabi, Qatar, and Kuwait, the Kingdom is a very, very, very, late player in the Sovereign Wealth Fund arena. For example, the Abu Dhabi Investment Authority was established in the 1970s and is now one of the largest sovereign wealth funds with over $800 billion in assets.

To catch up, the Saudi’s are monetizing their holdings in Saudi Aramco through a coming public offering. Over the time, the PIF is supposed to diversify from oil into other assets, such as technology, and provide revenue to the Government. The PIF will also developed non-oil based industries. The PIF’s $3.5 billion Uber investment could in theory provide employment to young Saudis and provide needed mobility to transportation poor cities such as Riyadh.

While the PIF may have lots of money, that won’t necessarily make the Kingdom richer. Ever since they discovered oil, the Saudis have been trying to diversify from oil. In the past decade, lots of money was spent developing cities and projects, such as King Abdullah Financial District or King Abdullah Economic City, to expand the economy, without much success.

So what the Kingdom really needs is better intellectual capital, rather than more financial capital. And while it’s currently staffing the PIF to handle the coming funds, the Kingdom really needs deal-makers. Thus the PIF investment in the Softbank Global Vision is the first right step. For its $45 billion, the Kingdom gets access to Masayoshi Son’s brain and his M&A team. And this another reason for the Noon investment.

By investing in Noon, the Kingdom is also investing in the always youthful, very smart, and master builder, Mohammed Alabbar. Mr. Alabbar is the other part of Noon. To achieve his goals, Mr. Alabbar has purchased stakes in the logistics company, Aramex, and the fashion company, Yoox Net-a-Porter. His goal is to create an e-commerce site that will compete with Souq.


Rolling Bones – Indian Style

You lose some and then you win some.

More news came out this week of Snap’s impending initial public offering. In an highly anticipated sale, one early investor is hoping to striking it big, Fidelity Investments. At the same time, in another under-reported story in the U.S., Fidelity wrote down its stake in the Indian e-commerce site, Flipkart. Fidelity now values Flipkart at $5.6 billion or thirty six percent less than before.  

Mutual fund money from investors such as Fidelity and T. Rowe Price flowed into private equity over the past ten years. Often the mutual funds piggybacked on the earlier trades made by venture capital firms. Mutual fund involvement with the “Unicorns” became a window on an otherwise opaque, private market. Markups and markdowns by mutual funds of their Unicorn holdings, became a proxy for a public market.

Now in India, the Unicorn market could be slowing imploding. Besides Flipkart, one of the other India e-commerce sites is receiving a reduction in valuation. Snapdeal, it was also reported this week, was seeking additional funding, but at a lower valuation. And one must remember that the same issue occurred to Ola back in the fall of 2016.

India has received considerable money from global funds and Silicon Valley venture capital firms, such as Sequoia. The money followed an investment thesis described as the “this-of-that”. Translated, the strategy meant taking business models from development markets and then investing in their emerging market equivalents. So for India, this meant Flipkart got head start on Amazon and Ola rode along with Uber.

As stated here before, money from big players – Tiger, Softbank, Alibaba, etc. – has flowed into India in the past ten years. As in other places, money and not technology was the prime determiner of the success as startups subsidized prices to attract and hold customers. But only companies with sufficient capital can continue to play the game. That is why the recent funding problems in India are so troubling.


Alphabet’s 4Q16 Earnings

A one-time tax benefit ruined Alphabet’s recent quarterly earnings release. Alphabet’s earnings for the fourth quarter of 2016 were lower than analysts estimates when compared with the prior year.

Contributing to the less than expected earnings was a higher tax expense of $1,524 billion as compared with $277 million from the prior year.  On the conference call, CFO Ruth Porat described the tax hike this way:

And then, the other item I noted was, with respect to our tax rate. I noted that there was a slightly elevated tax rate this quarter. It’s always affected by the geographic mix of results, but we did have a discrete item that affected the US tax rate, just to make that clear.

Some attributed the “discrete item” to a one time adjustment for stock based compensation. But this is not the case. In fact, the “discrete item” was from the prior year as stated in Alphabet’s SEC Filings:

Our effective tax rate for 2015 included a discrete tax benefit related to refunds and reductions in uncertain tax positions due to the resolution of a multi-year tax audit in the U.S.

At the end of 2015, Alphabet revised its estimated tax expense as a result of an IRS audit that covered many years. The IRS ruled in Alphabet’s favor causing the tax expense to be less than expected. The adjustment occurred in the 4th quarter of 2015 and made the 4th quarter of 2016 higher in comparison.

Income tax expense is not really the amount of taxes paid; instead it is an estimate. At the conclusion of its IRS audit, Alphabet’s revision pushed the effective tax rate to five percent for the quarter. One year later, the quarterly effective tax rate when back to “normal” at around twenty-two percent.

All of this should prove that GAAP based financial statement are somewhat meaningless or at least can’t be taken at face value. In their recent book, authors, Baruch Lev and Feng Gu, argued that GAAP based financial statement include so many estimates, that true corporate earnings are often obscured.


Verily’s Expanding Pies

Singapore’s sovereign wealth fund, Temasek, purchased a slice of the Alphabet’s other bet, Verily. This is after Alphabet reportedly put more money into Verily. For its exchange of $800 million, Temasek becames a minority partner and values, at most, Verily, at $1.6 billion. The deal was made possible by Verily’s establishment as a limited liability company, rather than corporation, in August 2015.

In the past year, Verily was the one doing the investing. In August 2016, GSK and Verily form a joint partnership, called Galvani Bioelectronics, by each business contributing intellectual properties and cash over seven years. In this exchange,Verify owns forty-five percent of the joint venture and GSK holds the remainder. Verify, for its part, would be required to contribute $10 million each year as a minority partner.  

Then in September 2016, Verily formed a joint partnership with Sanofi that was valued at $500 million. Sanofi put in a reported $250 million and Verily contributed an unspecified amount. Before all of this, Verily and J & J formed the medical robotics company, Verb Surgical Inc., back in 2015. No financial details were released on the Verb Surgical Inc.

Verily could use Temasek’s $800 million to fund its future commitments to the already formed joint ventures. What does Temasek get in the exchange? Temasek will now gain as it helps Verily expand its pie in Asia and especially, China.

As the majority partner in Verily, Alphabet gives up some of its interest in exchange for reducing risk. It was reported that earlier this month, Alphabet invested in Verily, too; this time, the amount was $1 billion.

Cisco and Dead Presidents

Dead pigeons don’t return home and sometimes, neither do dead presidents. 

Before its public offering, AppDynamics was purchased by Cisco, making it one of the largest tech acquisitions of the new year. More importantly, Cisco said it…”will acquire AppDynamics for approximately $3.7 billion in cash and assumed equity awards”. AppDynamics investors are receiving not stock, but cash, which is in short supply among most tech companies, like Cisco Systems.

A majority of Cisco’s cash is held overseas. As of the last quarter, only $10 billion of Cisco’s total $71 billion in cash was held in the United States. Bringing the remaining cash home would mean incurring additional taxes by Cisco, which it and other tech companies don’t seeming willing to do.

Thus to finance large acquisitions, some tech companies need to issue additional debt as was done by Microsoft in its LinkedIn acquisition.  Cisco recently issued debt of $6 billion causing the bump in its cash to $71 billion from $66 billion of the previous quarter.

Beyond issuing debt, a proposed tax holiday is probably the only quick method for Cisco to bring its cash back, tax-free. With its $3.7 billion acquisition, future stock buybacks, and committed cash dividends, Cisco may be limited in further blockbuster, tech acquisitions.


David Karp, Gone Fishing

Is Tumblr Founder, David Karp, sticking around? Marissa Mayer is definitely hanging out a little longer. On Monday, Yahoo said this about the Verizon Sale:

However, given work required to meet closing conditions, the transaction is now expected to close in Q2 of 2017. The company is working expeditiously to close the transaction as soon as practicable in Q2.

Included in the online assets going to Verizon is Tumblr. Marissa Mayer, some say, inherited some very bad problems at Yahoo, but the Tumblr acquisitions was all hers.  At the time of the acquisition, it was described this way by Yahoo:

Our acquisition of Tumblr in Q2 2013 is an example where we gained access to an engaged community of younger users that complemented our core audience.

Tumblr investors received about $1 billion in cash and stock. For Yahoo, its investment didn’t turn out as planned. Yahoo was not able to monetize the traffic coming from Tumblr, causing Yahoo to eventually write off the premium paid for Tumblr. Yahoo didn’t necessarily overpay, it just wasn’t able to achieve its reasons for purchasing Tumblr.

In the Tumblr acquisition, David Karp got an employment contract. Each year he received $10 million in cash and $10 million Yahoo stock as long as he remained an employee. The four year contact ends this year and presumably in June.

Yahoo expects the Verizon sale to close in the second quarter of 2017. Afterwards, Verizon owns Tumblr, but will it have David Karp, too?




No More Tech LBOs

Trump’s tax proposals may impact a favorite strategy of private equity: the LBO. The initials stand for leveraged-buyout and the purchasing of companies with debt. Under the Trump’s proposal, interest expense will no longer be tax deductible. In the tech world, this could affect private equity firms doing tech LBOs such as Silver Lake, Thomas Bravo, and Vista Equity.

In the LBO, the private equity firm forms a partnership with funding from investors, limited partners. The LBO fund then seeks to purchase a portfolio company. Instead of using all the money it raised, the LBO fund borrows the remainder to buyout the portfolio company. It is similar to purchasing a house with a down payment and borrowing the rest from the bank.

Using debt also amplifying the private equity returns. Return to the house example: assume you purchase a $500,000 house using cash that you later sale for $1.5 million. Your return on investment is 2X*. Alternatively instead of cash, you borrow $400,000 and you use your own cash of $100,000 to buy the house. In the second example, your return on investment is 10x**.

Debt is favored over equity currently in the tax laws. This means companies will get a tax deduction for interest expense, but not dividends. The portfolio company is able to deduct the interest expense on the leverage-buyout loan and thereby reduce company’s income taxes. The tax-deduction is an additional benefit to the private equity firm.

Trump’s tax proposal in the short-term may have an impact on leveraged-buyouts, but in the long-run it probably won’t matter. Interest rates, like most everything, move in cycles; in this case, it appears to be a thirty year period. Starting with high rates under Reagan to the less than zero rates of today, interest-related industry flourished such as real estate, bond managers, and leveraged-buyouts.

But may be no more.


  • *  ($1,500,000-500,000)/$500,000 = 2x
  • ** ($1,500,000-500,000)/$100,000 = 10x

TPG + CAA = Tech

Reading through the book, Powerhouse: The Untold Story of Hollywood’s Creative Artists Agency, provides one with insights into the potential public offering of AirBnb and Uber. Covering the short life of Creative Artist Agency, Powerhouse tells its story with interviews of stars, agents, producers, and private equity co-founders.

TPG is the private equity firm which invested in CAA over the past ten years and that story is told in the later chapter of the book. Author, Jim Miller, interviews TPG co-founders David Bonderman and Jim Coulter who share their views on different topics, including going public.

Jim Coulter:

“There are two misconceptions I often run into regarding private equity. The first is when we go into an investment, we have a plan for how long it will be before we exit. That’s absolutely not true. The second misconception is we have a three-to five-year holding period, which is definitely not the case.”

David Bonderman:

“The advantages of being public are that is can be easier to raise capital; it gives you a currency if you wish to make acquisitions or provide incentives for people you want to come join your firm. It also interferes with your privacy, so there are plusses and minuses.”

David Bonderman and Jim Coulter words should carry authority and importance in the world of tech. TPG is part of the new money following into tech in the form of growth capital. Unicorn and AirBnB were recipients of money from TPG’s Growth Fund II. In 2015, TPG closed Growth Fund III with $3 billion.


Alibaba is china

Time to reflect upon this: Softbank is working hard, putting together another investment fund, the Vision Fund, to replicate prior successes like Alibaba.

A small investment in Alibaba, made about fifteen years ago by Masayoshi Son, is now worth many, many billions.  Only Yahoo’s Jerry Yang had the same “luck” when he invested in Alibaba a little over ten years ago. Yang’s investment has grown to overshadow the worth of Yahoo’s other operating businesses.

Alibaba’s public stock offering provided an opportunity to cash out for Yahoo and Softbank. Last year, some of Softbank’s Alibaba shares were sold for $10 billion in order to pay down debt and strengthen the balance sheet. Softbank still owns about one third of Alibaba.

Yahoo doesn’t own a third of Alibaba, but still has a substantial ownership. Like Softbank, Yahoo sold some Alibaba shares; this time, the sale was in 2014 and by Marissa Mayers. Unlocking value in the remaining Alibaba shares, the machination of Starboard Value’s Jeffrey Smith, has lead to selling of Yahoo‘s online business to Verizon.

What would happen if Jeffery Smith and Masayoshi Son were wrong? That Alibaba isn’t worth so much. Then they wouldn’t need to worry so much. For example, Naspers small bet on Tencent is now worth many, many billions, leaving current the CEO with an “existential crisis” of his next bet.

In these euphoric times, Alibaba may not be that high. Famed short-seller, Jim Chanos did have a short position on Alibaba as of last year. His shorting thesis is that Alibaba’s true earnings are obscured by the use off-balance entities. His trade may be wrong, but what is right is understanding the importance of Alibaba’s value to Softbank and to a lesser degree, Yahoo.

It’s not china, but with Alibaba, we must be careful, because it could break.