A year ago SoftBank founder Masayoshi Son hijacked his own results presentation to unleash a one-hour tirade on why shares of the sprawling technology conglomerate were “too cheap”.
The complaint of the Japanese billionaire, whose reputation as a peerless investor has recently been sullied by a disastrous bet on WeWork, has now been taken up and weaponised by Elliott Management, the aggressive US hedge fund.
The revelation that the $38bn US activist fund has built a $2.5bn stake in SoftBank sent shares in the Japanese group up 7 per cent on Friday.
At the heart of Elliott’s bet is a simple conviction: the market cap of SoftBank fails to reflect the value of its portfolio of holdings, which includes majority stakes in US telecoms group Sprint and Arm, the UK chip designer, as well as a significant holding in Chinese e-commerce platform Alibaba. Elliott puts the gap at $150bn.
SoftBank’s stake in Alibaba alone dwarfs the Japanese group’s market valuation.
Although both sides have proclaimed a desire to keep relations friendly, investors say Elliott’s demand that SoftBank buy back $20bn of shares, provide more transparency on the more than 80 companies it has invested in through its Vision Fund and make governance changes, sets up a clash between Mr Son, a man who has built his career on taking huge risks, and a fund that has defined modern activist investing.
“Elliott may have put out a fairly benign statement but if they don’t get what they want, they will go for the jugular,” said one SoftBank investor.
The audacious move by Elliott may also prove a defining moment for activism in Japan, which last year trailed only the US as a hunting ground for such funds. Elliott’s intervention in SoftBank may also help attract funds that have steered clear of a country historically hostile to shareholders flexing their muscles, bankers say.
Analysts say the $20bn in buybacks sought by Elliott is an aggressive opening gambit, but on the right track as far as an amount.
Although Mr Son and Elliott are united in their frustration at what has been dubbed SoftBank’s “conglomerate discount”, Mr Son’s 25 per cent stake in the group has until now shielded him the pressure hundreds of Japanese companies now face from activist investors.
The recent souring of some of the higher-profile bets in the Vision Fund — an investment arm of SoftBank that was backed by the governments of Saudi Arabia and Abu Dhabi — has been blamed for the discount in SoftBank’s shares even though the fund accounts for less than 15 per cent of the total value of the group’s assets.
While some other Japanese companies have grudgingly made changes to their corporate governance, Mr Son has resisted. Yet that may no longer prove tenable.
If Elliott is shouting louder about the discount than others, it is far from the only concerned investor. New York-based Tiger Global Management, another SoftBank shareholder, said last July that the company’s shares were “meaningfully undervalued”.
Mr Son plans to address the group’s governance when it announces results next week, according to people familiar with the matter.
In a statement Elliott said it was working on solutions to help SoftBank “materially and sustainably reduce its discount to intrinsic value”. SoftBank said it “always maintains constructive discussions with shareholders”.
But if that does not appease Elliott, the question is whether the US fund will deploy its full arsenal of tactics. Analysts point out that Elliott’s 3 per cent stake in SoftBank theoretically gives it the ability to call an extraordinary shareholders’ meeting, opening the company to potential embarrassment.
The second pressing question is, after a year in which the Vision Fund’s chaotic management and Mr Son’s taste for risk came under intense scrutiny, how strongly positioned for a fight is one of Japanese most revered business leaders?
It is questionable whether SoftBank can easily afford to repurchase $20bn in stock, analysts say. The group has struggled to raise outside money for its second $100bn Vision Fund, while it is also shouldering much of the cost of a $9.5bn rescue package for WeWork, the provider of shared office space.
A bigger, but less immediate worry, is the potential collapse of the long-delayed merger plan between Sprint and T-Mobile, which would create new demands for capital for the debt-laden group.
“SoftBank is in a hard place at the moment and needs to get the share price moving. Elliott is right that the answer is [for SoftBank] to sell some of the Alibaba stake and do a buyback but it is hard to know which way Masa [Son] will go,” said Kirk Boodry, an analyst at Redex Holdings. “He may say he is going to reward shareholders but, given the uncertainties over how much capital he may need to deal with Sprint, he may well not.”
Other SoftBank investors say that introducing more regular buybacks would be better than a single one-off purchase because it would help nurture long-term confidence.
“One buyback route which could work is a systematic buyback to reflect Vision Fund’s [latent] profit,” said Richard Kaye, a portfolio manager at French asset manager Comgest, a SoftBank shareholder, with a ¥5.5bn ($50m) stake. “Last February, SoftBank did that and it looked as though it might be the start of such a systematic approach.”
If a buyback presents challenges, so does Elliott’s demand for governance changes. Some investors believe reform will be particularly difficult, given the power struggles inside the group and a “wild west” culture at the London-based Vision fund run by former Deutsche Bank banker Rajeev Misra.
Tadashi Yanai, the chief executive of Fast Retailing, will soon end his 18-year stint as a SoftBank non-executive director. The outspoken founder of the Uniqlo clothing chain was a fierce opponent of many of Mr Son’s deals and has lamented his friend’s shift from “a business person to investor”, according to people close to Mr Yanai.
The turmoil has bled into this year, with the Financial Times revealing this week that Michael Ronen, a senior US executive at the Vision Fund, is exiting after voicing concerns about “issues” at SoftBank.
Although Elliott has not launched any significant campaigns in Japan, the group was the busiest activist in 2019, according to research from Lazard. It launched 14 campaigns and deployed $8.4bn of capital — more than twice as much as its nearest competitor, Icahn Associates.
And the group is hopeful that SoftBank will take steps, given Mr Son has already promised to tighten governance at companies he backs following the WeWork crisis, according to a person familiar with the discussions.
“There is a recognition at the highest level of SoftBank that the best way to encourage best governance practice at your portfolio companies is to have good governance at your own parent company,” the person added.
That optimism is not shared by everyone. Unlike many other activist campaigns that have taken aim at Japanese companies, Elliott is not taking on a sleepily managed, overcapitalised company with an inefficient balance sheet.
“Basically, if Masayoshi Son does anything, it’s because he thinks it’s a good idea,” said one portfolio manager with a significant exposure to SoftBank. “Not because Elliott does.”