Softbank Growth Has Some Asking for More Info
TOKYO — Masayoshi Son’s Softbank Corp. came out of nowhere a few years ago, made a series of bold U.S. acquisitions, and quickly turned the domestic Japanese software supplier into a major global player in the computer world.
Softbank leveraged itself by issuing new stock and by selling bonds backed by its rising share price. The profitable U.S. companies gave it more borrowing and buying power, which fueled the next round of expansion.
Using this formula, Softbank spent $4.7 billion, starting in 1994, to acquire the Ziff-Davis and Comdex computer trade shows; Ziff-Davis Publishing Co.’s popular computer magazines; 80% of Fountain Valley-based memory device maker Kingston Technology Co.; and interests in more than 50 U.S. technology start-ups, many of them Internet-related Silicon Valley firms.
Along the way, the Japan-born, ethnically Korean, UC Berkeley-educated Son, 40, founder and president of the firm, became a media darling, commonly portrayed as the kind of hard-driving, creative, independent-minded business leader Japan needs.
But in recent months, critics in Japan have begun loudly questioning an unusual corporate structure that has played a key role in Softbank’s rapid growth: Many of the risks of Softbank’s expansion have been assumed not by Softbank itself, but by Son’s personal asset management company, MAC Inc., which owns a controlling 43% of Softbank.
Fears that little-understood dangers may be buried in MAC have played a key role in a plunge in Softbank’s stock price, which has fallen 53% since May 15 and is down 68% from its all-time peak in April 1996.
Son acknowledges that MAC has assumed some risks on behalf of Softbank, primarily in exchange rate hedging and the purchase of unproven Ziff-Davis divisions such as its European publishing arm and its trade show business in Japan. But he insists that both Softbank and MAC are financially solid.
“MAC is a company 99%-owned by myself as an individual,” Son said in a recent interview. “So instead of thinking of MAC as a totally separate black box, unknown, a weird company, think of it as just myself, because that’s what it is. MAC, namely myself, have helped Softbank to grow. That’s true. It is the same thing as I myself helped Softbank grow. There’s nothing wrong about that.”
But as an individually owned firm, MAC is not subject to the disclosure rules of a publicly traded company. Also, Softbank does not provide separate earnings results for its U.S.-based businesses.
A key issue for investors is whether Softbank’s cash flow will remain strong enough to easily service its debts.
Softbank reported a group net profit of $73.3 million for the year ended March 31, and it predicts 5% profit growth this year. It listed $6.3 billion in long-term debts and current liabilities as of March 31. MAC issued a report in August that listed MAC debts at about $587 million.
Critics charge that the finances of both MAC and Softbank are far too murky, and that Son may be badly overextended and facing greater financial pressure than he has acknowledged.
“Investors should weigh all the risks. . . . MAC and Softbank cannot be separated, so more facts about MAC should be disclosed,” said Satoshi Nagura, an analyst at New Japan Securities Co.
“When acquisition of U.S. firms takes place, MAC provides money for currency exchange hedging,” said Shigeo Watanabe, a prominent independent commentator who is among those who have raised questions about Softbank. “It also takes over those parts of the new company that are not doing so well. This is done to paint Softbank in a better light. MAC has supported Softbank from many different directions and has helped boost Softbank’s stock price. MAC also has been hiding debts” for Softbank.
The drop in Softbank’s share values has been exacerbated by a general downturn in stocks on Japan’s over-the-counter exchange, where Softbank is listed, and by other factors such as weakness in Japan’s personal computer market.
But new questions about MAC in the Japanese business media have been largely responsible for Softbank’s continuing fall.
An article published this month in the Japanese-language weekly Nikkei Business wrapped together a variety of concerns and declared that questions about MAC are “the biggest factor” hurting Softbank. Softbank’s stock fell 29% in just three days after the article appeared.
The pace of Softbank’s spending on U.S. technology firms has slowed sharply this year. Howard Rheingold, author of the 1993 book “The Virtual Community,” said Softbank’s new-found unwillingness to fund risky start-ups played a key role in the collapse this spring of his year-old Web community company, Electric Minds Inc.
Softbank invested $1.75 million in Electric Minds, despite the unproven nature of the business, and had planned to provide an additional $500,000 loan to tide it over until a second backer could be brought in, Rheingold said. But the search for another major investor dragged on and Softbank decided not to provide the loan.
“I can’t be too bitter toward someone who gave me nearly $2 million to chase my dreams,” Rheingold said. “I think for a brief period [when Softbank made its investment] they weren’t thinking the way normal venture capitalists do and were taking chances they normally wouldn’t. I think they had a really broad commitment to building a suite of Internet-related companies.”
Rheingold said he believes Softbank backed out for “a standard venture capitalist” reason: It didn’t appear there would be a good return on the investment.
Gary Rieschel, executive managing director of Softbank Technology Ventures, which handles Softbank’s Internet-related investments in the U.S., said the drop-off in Softbank’s U.S. spending this year has not been caused by the decline in Softbank’s share price or other financial pressures. Rather, it reflects a “natural digestion process,” with the focus now on improving the operations it has already acquired, he said.
Son said Softbank’s stock tumble was aggravated by widespread feeling in Japan that he has been too aggressive in challenging the Japanese establishment.
“Everybody is saying, ‘Well, Softbank may be moving ‘too fast,’ or [it is] ‘too wild,’ or ‘too young’ or whatever, ‘too childish,’ ” he said with a laugh. “Or [a] ‘non-Japanese company.’ That total image may have scared some people.”
The fluctuations in Softbank’s stock price and dollar-yen exchange rates have meant huge variations in Son’s personal wealth over the last few years. When Softbank’s price peaked in April 1996, Son’s stake was worth at least $3.8 billion, making him one of the richest men in Japan. As of Friday, his stake’s value had fallen to $1.1 billion.
Son released a financial statement on MAC on Aug. 6 in an attempt to quiet concerns about its finances and its relationship to Softbank, but most analysts say they haven’t been able to decipher it.
“They send us lots of favorable material, but as for unfavorable information, they keep quiet,” complained Nagura, the New Japan Securities analyst.
Son himself gave an example of how difficult it is to understand Softbank’s books.
Softbank paid $100 million to buy a 36% equity stake in Yahoo Inc., and that stock is now worth about $850 million, he said. But in Japan’s accounting system, the $100 million investment needs to be shown as a loss spread over seven years, at the rate of about $14 million per year. In addition to that, there is interest expense of about $3 million per year on the $100 million of borrowing used for the purchase.
“So $17 million is the [annual] expense, a loss that shows in our books,” Son said. “But in the true sense, it has increased in asset value from $100 million to [more than] $800 million. It’s an unrealized gain, but in the accounting system we just have to expense it.”
Eric Hippeau, chief executive at Ziff-Davis, said that “there is nothing in Ziff-Davis’ operations or other U.S. operations that would justify a lowering of expectations for Softbank.”
“We’re puzzled” by the drop in Softbank’s stock price, Hippeau said. “Our business in the U.S. is doing very well. Since U.S. operations are such a big part of the business, it seems Japanese investors may be overreacting to local news.”
Ziff-Davis has expanded by more than 300 employees since Softbank bought it, and “there have been no particular measures taken to cut costs,” Hippeau said. “We’re doing everything we set out to do. We’re having a banner year altogether.”
Son is preparing to put all companies owned by MAC, plus the Comdex trade shows, under the Ziff-Davis umbrella, Hippeau added.
Son said he and Softbank can easily carry heavy debt loads partly because interest rates are so low in Japan. He noted that many Japanese firms overextended themselves during the late-1980s “bubble economy,” got badly burned, and are now afraid to make aggressive investments that leverage debt. But the timing of Softbank’s moves has been good, and cash flow from its acquisitions is meeting expectations, he said.
“So we are just doing the opposite of very many other Japanese companies, that’s all,” Son said. “We have calculated many, many times--how many years will it take to return all the debt? It is only five or six years at the rate of the cash flow that we are generating now. If you buy any assets--say for example, your own house or a building--if you can return all the principal, or debt, in five or six years, and you’re going to get debt-free, are you afraid?”
Softbank’s financial situation “is very, very healthy,” Son stressed. “I’m not very much concerned about it, because I’m still young. I just turned 40. So five years, 10 years--I can just prove it over time. I don’t have to prove it just in six months or 12 months. . . . Our industry is young. That’s the key.”
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Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.
