Vision Fund Goes to India?

Softbank incorporated SB Investment Holdings, Ltd. in England on May 11, 2017. What’s notable is the company was first called SVF India Holdings (UK) as of May 15th when the name changed to the current one.  

Once decoded, the old name, SVP India Holdings, hints at the Vision Fund’s future plans.

First, SVF is an abbreviation for the Softbank Vision Fund. Secondly, India may be another place for investment besides the developed countries such as the United States and United Kingdom.

It may also be Softbank’s intentions to contribute some or all of its existing India investments – Ola, Snapdeal, Paytm – to the Vision Fund.

Softbank Changes Name of Vision Fund Adviser

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What’s in the name, SB Investment Advisers? That’s the new name for Softbank Vision Advisers, based upon filings on April 21, 2017. Between incorporating the original Vision Advisers in November 2016 and now, Softbank purchased another investment adviser, Fortress Investment Group.

Softbank’s Fortress acquisition reunites Rajeev Misra with his former employer; Mr. Misra worked briefly at Fortress and now works for SB Investment Advisers. So may be the new name is saying, Mr. Misra will manage more than just the Vision Fund, but all of Softbank’s investments.

GS Banker Joins Softbank Vision Fund

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Fifty year old Frenchman, and now ex-GS employee, Saleh Romeih officially joins Softbank Vision Advisers.

On March 31, 2017, Mr. Romeih became a director of Softbank Vision Advisers, the unit managing the soon to be $100 billion fund, as disclosed in filings made available on Tuesday.

With the announcement, Goldman Sachs will be losing the head of its securities unit for the Middle East and North Africa. Mr. Romeih will also need to update his LinkedIn profile:

 

 

Softbank Cashes Out of ARM

Softbank is reportedly monetizing part of its ARM holdings with a partial sale to the Softbank Vision Fund.

The transaction allows Mr. Son to monetize his ARM holdings while still maintaining control. Softbank purchased ARM last year for $32 billion and is now selling one quarter for $8 billion. Softbank will still effectively control more than three quarters of ARM since Softbank is also an investor in the Vision Fund.

Selling part of ARM, while retaining control, is similar to another transaction by Softbank. Softbank monetized its Alibaba shares in 2016 with the same outcome. Using derivatives, Softbank appears to have gotten cash from their Alibaba holdings, while still owing the Alibaba shares.

 

Masayoshi Son’s Own Singularity

Masayoshi Son may not make it to Singularity. Today in Barcelona at Mobile World Congress, Mr. Son spoke about the future and answered the question: Why do we need so much money? Based upon the announced deals so far, Softbank is committed to investing $25 billion in Vision Fund, $3.3 billion for private equity firm, Fortress, and a rumoured $2 billion for WeWork. In addition, Softbank is part of the new, $500 million funding round for SoFi.

At the end of last year, Softbank had about $22 billion in just cash, even after making the $32 billion ARM purchase in July 2016. Selling its stake in Supercell for $8 billion added to Softbank’s cash balance last year. To find more money, Softbank has done a sale-leaseback for $2 billion and raised $8 billion by monetizing its Alibaba holdings in 2016.

Besides cash, Softbank needs to worry about debt; in this case about $30 billion, some of which came from the Sprint acquisition. It appears, Softbank is trying to unload its Sprint investment through a merger with T-Mobile. If that’s true, then it would be a reversal of Mr. Son’s original vision and evidence of another problem: Mr. Son sometimes acts more as gambler than businessperson. 

Fortune portrayed Softbank’s foray into India’s tech scene this way:

Around the time Arora joined SoftBank, Masayoshi Son decided that India was the next big growth opportunity, and Son tackled investing in the region in his usual swashbuckling style. He approached Kunal Bahl, founder of fast-growing e-commerce startup Snapdeal, with an unheard-of offer to invest $1 billion for a majority stake.

Just like Singularity, Mr. Sons’ ambitions may exceed the practical limits of Softbank’s balance sheet. So a better question for Mr. Son is: How does he spend money?

 

 

SoFI Gets Softbank High

More money rushes into Social Financial or SoFi, especially from Softbank. Private equity firm, Silver Lake leads the new funding round, according to the Wall Street Journal. Softbank joins Silver Lake and others, after investing $1 billion back in 2015.

For Softbank, the new funding is good news. Former Softbank executive, Nikesh Arora left his fingerprints on Sofi and four other investment before leaving Softbank last year. Besides SoFi, Nikesh Arora invested in Snapdeal, Ola, Housing.com, and Coupang in a two year period between 2014 and 2016.

Later in 2016, Softbank wrote down Arora’s Snapdeal and Ola investments by $350 million. Housing.com faired better; it merged with PropTiger in 2017. Coupang is doing well, with encouraging results reported last year by Bloomberg. Sofi’s now stands out as Softbank’s only winner out of the five.

 

Softbank After Fortress

After the purchase of Fortress, predicting Softbank’s next move is difficult given Mr. Son’s impulsive nature. We could see as the next steps a “rationalizing” of prior transactions that have accumulated under Mr. Son’s swashbuckling tenure.

First, there could be more “monetizing” of the Alibaba investment as a pivot to others investments. A sale of some Alibaba shares did occurred back in 2016 when Softbank needed money to pay down debt. In a move reminiscent of Enron, derivatives and a special purpose vehicle were used to raise the money.  Mr. Son views Alibaba as a core holding, but selling some more shares may provide money for other investments.

Secondly, Softbank may bring Yahoo Japan together. Part of Yahoo Japan is owned by Yahoo, which becomes Altaba after its Verizon sale. Altaba’s board is also interested in rationalizing its various assets, such as the Alibaba shares and patents. In the past Yahoo didn’t sell its Yahoo Japan shares due to tax implications, but the new Altaba board may be willing to do otherwise. If so, then Softbank’s next move may be purchasing the Yahoo Japan shares from Altaba.

Lastly, after sinking $22 billion to expand outside of Japan, Mr. Son has wanted to exit Sprint for some time. His preferred strategy with Sprint is merging it with T-Mobile. The prior administration blocked that move, but Mr. Son is courting the current one to give it another try.

Mr. Son’s gut takes him into many investments; sometimes successfully as with Alibaba and at other times no so successfully, such as with Webvan. In the later case, Webvan, before its first public offering, received $125 million from Softbank only to lost it during the dot.com crash. If Softbank 2.0 is about discipline and structure, then we may see a cleaning up of prior transactions as Mr. Son’s next move. 

 

 

Softbank Repairs Past with Fortress

 

Softbank repairs its past with the purchase of Fortress. On February 14th, Softbank purchased, for cash of $3.3 billion and a large premium, the private equity firm, Fortress. Masayoshi Son, Softbank Chairman, said the acquisition will “accelerate our SoftBank 2.0 transformation…

Softbank 2.0 has already started but it recently ran into a roadblock. Mr. Son announced Softbank 2.0 in 2015 to correct the following :

Many tech companies face a decline after thirty years due to evolving technologies, changing business models and overreliance on founders. To create a sustainable growth business for centuries to come, we must transform our current operating assets and take a systematic approach to supporting our group of disruptive entrepreneurs.

Executing Softbank 2.0 meant elevating Nikesh Arora to Chief Operating Office on July 19, 2015. As head of Softbank’s Internet and Media Unit, Nikesh Arora invested billions in India startups such as Snapdeal and Ola, even without a background in venture capital.

In a Fortune article, Mr. Arora said “Every job you get into, you bring 50% of the skills you need, and you learn the other 50% if you’re lucky enough..”.  Two years after joining, Mr. Arora left Softbank last year while his bets on Snapdeal and Ola deflated. With Mr. Arora gone, there was no one to eventually takeover from Mr. Son or implement Softbank 2.0.

Mr. Son will not live forever, but he wants Softbank to live for centuries. More than anything, the Fortress purchase is an attempt to “institutionalize” Softbank’s acquisitive nature. By purchasing Fortress, Softbank won’t rely on one person for acquisitions, but instead a team of people all over the world.

 

Softbank Takes Loss on Indian Unicorns

Snapdeal and Ola give big losses to Softbank. In its recent earning release, Softbank took a loss of $345 million on the Indian startups for the nine months ended December 31, 2016. A gain, on converting the investment from Indian rupee to yen, limited Softbank’s losses; otherwise it would have been $490 million.

Softbank’s loss came from writing down the combined value of Snapdeal and Ola, as stated here:

Gain or loss arising from financial instruments at FVTPL comprises mainly of changes in fair value of preferred stock investment including embedded derivatives, such as ANI Technologies Pvt. Ltd and Jasper Infotech Private Limited in India, designated as financial assets at FVTPL.

Snapdeal and Ola now face harder times raising more funds, based on Softbank’s actions. Not only did Softbank lower its valuation, but so did mutual fund company, Vanguard. This month it was reported that Vanguard wrote down its Ola investment by forty percent. Uber faces an easier time in India with Ola’s lower valuation. Cash raised by both companies allows for discounts and incentives to expand their businesses.

Softbank may not be too happy, either. News of the losses come after Softbank managing director, Jon Bullock, resigned from the boards of both Ola and Snapdeal in January 2017. Mr. Bullock takes over as director of Softbank Vision Advisors which will managed the $100 billion tech fund being raised by Softbank.

Over the past years, Softbank invested in India by taking proven business models and investing in their Indian equivalents. With Softbank seeing red with the losses, may be this will inform the Vision Fund’s investment strategy?

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.