In fairy tales, a crystal ball can be many things: it can reveal the future, but it can also be a malevolent charm that drives peaceful villagers insane with greed. The former rather than the latter is what Masayoshi Son had in mind in 2016 when, after paying $32bn to buy Arm — the most aggressive gamble of his life at the time — he described the UK chip designer as “my crystal ball”.
As an investor obsessed for decades with the evolution of communications and software, the SoftBank founder had just bought a company through which he believed he could see the future of every trend in computing, artificial intelligence and the internet of things.
The idea that he possessed magical insight became a formidable tool for one of Asia’s greatest salesmen. It was a pitch that allowed Mr Son to entice billions of dollars from Middle Eastern investors with the promise of betting on the start-ups that would dominate centuries into the future.
Project Crystal Ball, after a quick rebranding, was introduced to the world later that year as the groundbreaking $100bn SoftBank Vision Fund — and its new Gulf backers demanded that a portion of Arm be put in the portfolio.
Today, the vision unlocked by the crystal ball is gone. Mr Son is disposing of Arm for up to $40bn to Nvidia, a US chip company that was worth less than the UK group at the time of SoftBank’s acquisition and is now valued at $330bn. The Vision Fund is fighting to recoup losses in its portfolio and struggling to raise fresh outside money for a sequel fund following a series of disastrous investments in WeWork, the shared workspace company, and other start-ups.
The group is also distracted by infighting between different factions inside the organisation. Following a six-month flurry this year in which SoftBank sold $90bn of holdings including in T-Mobile, Alibaba and its domestic mobile business SoftBank Corp, the company went off at an unexpected tangent with its diversification into trading of listed US tech stocks.
SoftBank may have cash, it may have an inspirational and mercurial leader, but the group lacks, say investors, a clear statement of where these two things will take the company a month, a year or a decade from now.
“A year ago, it was all about the Vision Fund,” says one of SoftBank’s larger UK-based shareholders, “now I hardly hear about that. Before, it was about Arm and the internet of things. Now it isn’t. Then it became about investing like a hedge fund.
“The decision on what SoftBank is as a company seems to be the whim of Son,” he adds, noting that he will continue to hold SoftBank stock as long as it represents what he sees as the most adventurous tech play in Japan, one of the world’s biggest stock markets.
Still, without Arm to provide the company with the easy-to-grasp narrative of a crystal ball, Mr Son — along with even some of his closest allies in the company — seem unable to clearly answer the much asked question: what is SoftBank?
In the absence of a clear response from Mr Son, people both inside and outside SoftBank have begun crafting their own definitions of the company.
“SoftBank is headed in the direction of being a giant hedge fund,” says one person who has worked closely with Mr Son. The idea, at least superficially, is seductive.
“The idea that SoftBank’s jettisoning of businesses that it directly operates means it is more like a Bridgewater [hedge fund] or a Blackstone [private equity group] makes some sense for now. At least until Son changes the DNA again,” says one long-term investor. He adds that descriptions of SoftBank’s internal management as confrontational and factionalised add to the image of it as a swashbuckling risk-taking machine rather than a sober tech giant.
Several SoftBank executives argue that the hedge fund description underplays the group’s investment style led by Mr Son, which allows it to bridge geopolitical tensions to strike sophisticated technology deals.
Others say that SoftBank can now be best characterised as primarily an investment firm. A member of the founder’s inner circle describes it as “a visionary’s gigantic family office”. Another says that the company is “a projection of Mr Son’s mind” but adds that its strategy is prone to sudden huge shifts “when Mr Son gets bored”.
To some investors, these tortured efforts to nail down a description of SoftBank and explain a corporation in constant evolution are a central part of the appeal.
When you are buying SoftBank shares, says one of its long-term UK-based investors, you are not just buying Mr Son’s vision and his past investment record. Instead, you are betting on someone who has a long history of challenging the business establishment — especially in Japan — and who believes he can adapt more quickly than anyone else out there.
“SoftBank’s asset mix may change but its investment approach and belief in outsize returns by picking winners in technology has been remarkably consistent,” says CLSA analyst Oliver Matthew.
Other investors argue that SoftBank’s breakneck pace of reinvention, combined with its vulnerability to Mr Son’s regular shifts of attention, is the reason shares in the company trade at a massive discount to the value of its holdings. Even as SoftBank shares climbed to a 20-year high in early August, boosted by a sharp rally from its holding in Alibaba, its market capitalisation of $137bn represented a 45 per cent discount to the value of its portfolio.
The rebound was driven by a restructuring spree that began in March, when shares in SoftBank plummeted due to the market rout triggered by the pandemic. It exposed Mr Son’s own fortune, which is tied to his 26 per cent stake in the company and his heavy personal borrowings against that stake.
Since spring, Mr Son has placed a bigger focus on securing investment returns, but people close to the SoftBank founder say his underlying vision remains unshaken and he has displayed no sign of wishing to compromise even at the height of the market turmoil. “Most people would have panicked, but he’s supremely confident and there was never a moment of doubt,” says one of those close to him.
Yet, without the 52 per cent drop in share price in the month up to March 19, the sale of Arm to Nvidia may never have happened. Nor would Nvidia, which Mr Son had once considered acquiring, have approached SoftBank about selling one of Britain’s most important homegrown technology companies.
The sale of Arm has cemented Mr Son’s transition from an operator focused on the telecoms and tech industries to one who is a global manager of assets. And while Mr Son has not publicly discussed the sale of the chip designer, the chief executives of both Nvidia and the UK group have defended the deal as a continuation of his technology bet in the era of AI. SoftBank is expected to become one of the largest shareholders in Nvidia with a stake of up to 8.1 per cent.
“Masa will tell you in a heartbeat that Nvidia and Arm are his two favourite technology companies for the era of AI,” says Jensen Huang, co-founder and chief executive of Nvidia. “If you look at the result of our combination, this is a continuation of that vision. It just happens that Arm and Nvidia will be together and Masa will be a large shareholder [in the combined group].”
Some long-term SoftBank investors share that view, saying there is a consistency even in the string of strategic decisions Mr Son has made in the midst of the coronavirus crisis.
“I still believe in Mr Son and I still believe in the SoftBank vision of finding innovative platforms early, investing in them and putting them together. That’s been the premise of our investment in SoftBank since 2006 when it took over Vodafone in Japan,” says Richard Kaye, a portfolio manager at Comgest, a SoftBank shareholder with a $95m stake.
“I can’t pretend that everything at SoftBank is entirely transparent,” Mr Kaye adds. “It’s a very large complex company but I think we have often seen with the benefit of hindsight that SoftBank has a pretty consistent policy and it executes generally very well on that.”
Landing the ‘Nasdaq whale’
Even people who have worked closely with Mr Son, however, have begun to seriously question what visions remain after the Financial Times revealed in early September that SoftBank was the “Nasdaq whale” behind billions of dollars’ worth of US equity derivatives that stoked a rally in big tech stocks.
Using some of the money from asset disposals that was initially planned for share buybacks and debt reduction, its aggressive foray into publicly listed tech stocks has only reinforced the idea of a company completely beset by the whims of one man.
“The reason the share price trades at a discount is because there is an element of ‘what crazy thing is this guy going to do next and where is the governance in this company’,” says a person who has worked closely with Mr Son.
Longtime admirers admit the risks surrounding the billionaire founder have amplified as his empire has grown. Advisers and investors have questioned his choice of lieutenants to execute his investment ideas, while others including Elliott Management, the US hedge fund, have sought higher governance standards at SoftBank and the Vision Fund.
A string of executives and board members have left the group over the past year amid Mr Son’s pivot towards asset management, including Fast Retailing chief executive Tadashi Yanai and Alibaba founder Jack Ma. More recently, Chad Fentress also resigned as the group’s chief compliance officer after just two years in the role where he led the establishment of SoftBank’s global code of conduct. Mr Fentress, who also sat on the WeWork board, left the group due to concerns that the company was not addressing its governance issues, according to people close to SoftBank.
Mr Fentress did not respond to a request for comment. But SoftBank said its “management is constantly considering appropriate ways to enhance its group-wide corporate governance” and thanked Mr Fentress for strengthening “its compliance functions”.
Inside SoftBank, the persistent discount to its share price has prompted discussions among senior management over whether the company would be better off taken private in a management buyout. SoftBank watchers suspect the answer will again be “no”, but speculate that the company’s deepest ever cash war chest will be used for transformational AI deals that could extend into sectors as diverse as the car industry and video games.
A web of minority investments in leading tech companies picked up through the Vision Fund in recent years has allowed SoftBank to influence multiple industries without having to manage individual companies. But people close to the Japanese group say Mr Son may now pursue full takeovers with the money he has at hand.
While the scale is unprecedented, the disposal of assets since March echoes the preparations Mr Son has made previously before big deals.
“If I really need to have a real fight, I would have no hesitation to sell to have a paradigm shift and make a big investment,” Mr Son told the Financial Times following the Arm deal in 2016. “I make a calculated risk. It’s just that the scale is somewhat bigger than other people.”
Ultimately, assessing scale rather than the type of business it has become may be more useful in defining SoftBank. Mr Son, says one SoftBank executive, will continue to run a company that defies easy description until it is of a size where it can straightforwardly be numbered among the 10 most valuable on the planet. Mr Son himself has been explicit about the link between market value and the company’s “significance to humanity”.
When he was unveiling the company’s 30-year plan in 2011 and asking for the market to accept yet another reinvention of SoftBank, he stressed how critical market capitalisation was to that process.
“In every age, the top 10 list includes companies that were the most needed by people at that time. In other words, these companies provided functions that were indispensable to everyone. This means that market capitalisation can be considered to be a standard global yardstick for gauging how much people need a company,” Mr Son said at the time, making his desire to enter the global top 10 an explicit target.
Today SoftBank barely scrapes into the top 100. That is partly due to being listed on the Japanese market and also the discount at which its shares trade compared with the massive value of SoftBank’s assets. Yet, if Mr Son wants to know when and how the group can achieve his top 10 ambition, he may need to find a new crystal ball.
CLOs draw in new support after showing resilience
One of Wall Street’s hottest hedge funds has pulled in a quarter of a billion dollars from a small group of investors seeking out returns from an obscure corner of capital markets: collateralised loan obligations.
Diameter Capital, which posted a 24 per cent gain in its main hedge fund last year, intends to use the seed money to structure and sell its first six CLOs, which bundle together risky company loans and use them to back interest payments on slices of new debt, each with different levels of risk and return.
The asset class nestles just on the fringe of markets, dominated by specialists, but demand is now rising more broadly. The combined $250m investment in Diameter from alternative asset managers Apollo Global Management and Corbin Capital, and the pension fund of renewable energy company Babcock & Wilcox, also hints at a shift towards the mainstream.
“CLOs have survived the market swoon intact,” said Bret Leas, who runs Apollo’s structured credit business. “Therefore the asset class continues to gain more widespread acceptance. It’s no longer niche.”
Part of the allure for investors is that the CLO market offers a way to improve returns now that low interest rates have made higher-yielding assets scarce.
Total issuance of CLOs in the US this year is running at a record pace around $70bn, according to data from S&P Global Market Intelligence, with the total market now sitting at $770bn outstanding, according to Citi. The bank predicts it will grow to $850bn by the end of the year.
“It is a source of return in a world where there are not many obvious returns,” said Craig Bergstrom, chief investment officer at Corbin, who noted Diameter’s record as part of the $8.5bn investment manager’s decision to invest. Once interest has been paid to debt investors in the CLO, whatever is left flows through to the equity holders that have provided seed capital.
CLOs have been viewed sceptically in the past. Before the pandemic struck, regulators had expressed concerns that they had facilitated risky lending with weaker standards, and that they could lay the groundwork for a future credit crisis.
But CLO participants now feel vindicated, arguing that a strong rebound from the depths of the coronavirus-induced fall in markets has proved the resilience of the structure and offered comfort to cautious investors, even if critics still point to the large amount of assistance provided by the Federal Reserve that helped all credit markets — from bonds to loans — recover.
Even CLO equity investors, most exposed to the default of underlying issuers, largely ended 2020 with positive, single-digit returns, according to multiple industry sources.
“CLOs have come out pretty unblemished,” said Scott Snell at credit fund Tetragon, which invests in both the debt and equity of CLOs. “If liquidity had not been provided by the Fed, CLOs would have been more adversely impacted but it also would have been more challenging for all markets, not just CLOs.”
Eager to capitalise on the demand, a host of fund managers has sought to enter the market or expand their business.
As a result, some market participants expect consolidation among CLO managers. There are 135 CLO managers in the US, according to Citi, with 50 of them managing less than $2bn. Industry veterans say that depending on the fees charged and the size of the team, it typically takes $2bn to $3bn in assets to break even.
However, few M&A deals have emerged with both new and existing managers seemingly preferring tie-ups akin to Diameter’s.
Diameter’s launch follows York Capital ceding control of its CLO business to a new entity called Generate Advisors earlier this year, partnering with Kennedy Lewis Investment Management who will provide a $200m equity contribution to future deals. Kayne Anderson in January raised $600m in a fund to invest in the equity of both its own and other managers’ CLO deals.
This is Apollo’s fifth partnership, starting with an equity financing for CLO manager Gulf Stream in 2011, with three others in between.
“We preferred to build something ourselves that we can infuse with our DNA as opposed to buying a business that’s struggling on another platform,” said Scott Goodwin, who co-founded Diameter with Jon Lewinsohn. The pair met while working at credit fund Anchorage roughly a decade ago, starting Diameter in 2017. Investing across credit markets, it has become known as one of the most prolific hedge funds in recent years.
Goodwin’s first boss working at Citi was Jim Zelter, now co-president of Apollo. Both Goodwin and Lewinsohn also had a long-held relationship with John Zito, Apollo’s deputy chief investment officer, cemented after Apollo supported Diameter’s entry into issuing collateralised debt obligations.
“A lot of people talk about it but there has been very little CLO M&A,” said Leas at Apollo. “The price sellers expect to be paid is not typically attractive to firms like ours when we can just either issue our own deals or seed other managers. A tie-up is a far more likely way to launch a CLO manager these days.”
Huawei’s fall hits growth of Sony’s chip business
Growth of Sony Group’s semiconductor business has slowed, reflecting a plunge in shipments of image sensors for smartphones to Huawei Technologies as a result of the US-China trade war.
Although Sony has avoided a fall in the volume of shipments thanks to orders from other Chinese smartphone makers, the recovery of earnings appears likely to be delayed until the fiscal year of April 2022 to March 2023 because of weakened demand for sensors for high-end smartphones.
As Samsung Electronics of South Korea, which is strong in processing sensors for midrange smartphones, catches up, Sony is halfway towards recapturing the smartphone market.
“We cannot achieve an earnings recovery in the year through March 2022,” said Terushi Shimizu, president and CEO of Sony Semiconductor Solutions, at a press briefing on June 3.
This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.
For fiscal 2021, the semiconductor arm of Sony Group expects its operating profit to decline for the second consecutive year to ¥140bn ($1.26bn). The projection reflects changes in the smartphone market structure resulting from the trade friction between the US and China.
Huawei had a global market share at the 4 per cent level in terms of shipments in the January-March period, according to US research firm IDC. With the US government banning the export of American technology to Huawei, the Chinese company saw its market share plunge some 14 percentage points from the same quarter of 2020, when it ranked second.
At the expense of Huawei, Samsung, Apple of the US and three Chinese smartphone manufacturers — Xiaomi, Oppo and Vivo — expanded their shares.
Sony commands half of the global market for image sensors in value. Growing demand for high-definition smartphone cameras, and the trend of using two or more cameras in a smartphone in recent years, have enabled Sony to expand shipments to Apple and Huawei on the back of its advanced technology of producing high-end sensors.
With Huawei losing its momentum, demand for cutting-edge sensors for high-end smartphones has weakened. Sony thus increased shipments to the three Chinese smartphone makers which primarily manufacture middle- and lower-end phones. While sensors for such phones are each priced low, the makers demand improvements in image quality to attract consumers.
Samsung has set an eye towards capitalising on the “new normal” created by the trade friction between the world’s two largest economies, in a bid to recover its lost ground.
Samsung ships nearly 300m smartphones per year, most of which contain image sensors it produces on its own. While having stable demand, the company is strong at producing high pixel sensors used in midrange smartphones and is enjoying growing demand.
In the global image sensor market, Samsung, with a share of 20 per cent, is trailing Sony, with its 50 per cent share. With Samsung boasting microfabricating technology needed for high pixel sensors, Shimizu said, “We are actually falling behind as far as high pixels are concerned.”
But, he added, “we will add new value using technology cultivated in the field of high image quality.”
Samsung has a large number of manufacturing facilities, including those for memory chips and central processing units. Sony will spend ¥700bn on production facilities in its semiconductor business under a three-year plan through fiscal 2023, up 20 per cent from the preceding plan. But if the importance of microfabrication technology increases, Samsung may gain an advantage because of its greater leeway for investment, according to a research company.
Sony is also expected to take time before reducing its reliance on the volatile smartphone market. Although the company positions image sensors for automobiles as a growth market and keeps boosting annual sales by 50 per cent, the business is still small in scale. Collaborating with its “Vision S” prototype electric vehicle project, Sony plans to develop a high-performance sensor capable of detecting objects even in the dark and sell it to American and European automakers.
Sony will also challenge for a new business model. While Sony has engaged in the sale of image sensors, it is attempting to establish a recurring model of collecting fees on a continuous basis. Specifically, it will use a sensor equipped with data-processing functions of artificial intelligence it has developed. Data, therefore, can be processed both in the cloud and in the sensor so that the volume of communication can be reduced.
For example, the sensor can be used in a camera at a cashless payment retailer with no cash register and improve the performance of street monitoring cameras.
Sony’s AI image sensor has found its way into smart monitoring cameras the city of Rome will put into use in June to optimise the operation of buses by sensing congestion at bus stops or emit light to pedestrians walking through a red light.
The semiconductor business centred on image sensors was positioned as an engine of growth when Sony was rehabilitating itself. In fiscal 2019, it contributed to Sony’s earnings, logging more than ¥1tn in sales and an operating profit ratio of 22 per cent to sales.
Sony Semiconductor has propped up the revival drive despite such difficulties such as damage inflicted on its local plant by a series of earthquakes in Kumamoto Prefecture in 2016.
While striving to address radical changes in the smartphone market, Sony Semiconductor is being tested for whether it can develop new growth sectors such as image sensors for automobiles and AI image sensors.
Cutting-edge semiconductors are also drawing attention from the viewpoint of national security as the government has drafted a policy of courting overseas manufacturers.
The procurement of logic chips has become difficult as even Sony farms out most of production to overseas manufacturers. Asked whether Sony Semiconductor will launch production, including a joint venture project, for stable procurement, Shimizu admitted to the difficulty of producing them on its own in terms of both technology and cost.
“Generally speaking, it is extremely meaningful to receive state support,” Shimizu said, suggesting the need for government financial assistance for production.
A version of this article was first published by Nikkei Asia on June 7, 2021. ©2021 Nikkei Inc. All rights reserved
Kamala Harris takes heat handling knotty vice-presidential portfolio
US vice-president Kamala Harris gave a widely panned television interview while visiting Guatemala this week.
Asked why she hadn’t been to the US-Mexico border, where an influx of migrants is putting a huge strain on local communities, Harris first dismissed the question and said, “We’ve been to the border.” Pressed, she laughed and said: “And I haven’t been to Europe.”
Her comments drew criticism and underscored the political dangers that the number two official in the White House faces as she juggles a cumbersome, and expanding, policy portfolio.
Harris was in Central America as leader of the Biden administration’s response to the border problem, including the thorny question of how to address migrants fleeing north from the troubled countries of Guatemala, El Salvador and Honduras.
She has also been handed the nearly intractable task of shepherding contentious voting rights and police reform legislation through a sharply divided Congress. She has hit the road to sell President Joe Biden’s sweeping infrastructure plans. In addition, she has also taken an interest in black maternal mortality and other racial equity issues, including tackling vaccine hesitancy among African-Americans.
Harris’s first foreign trip as vice-president exposed what detractors and allies alike say are her shortcomings as a politician and vulnerabilities should she run again for president. Harris, a former senator from California, abandoned a floundering primary bid for the White House in late 2019.
Her comments earlier in the week to NBC News sparked outrage, particularly from Republicans who are hammering the administration over migrants. Meanwhile, she took flak from fellow Democrats for urging migrants not to come to the border in the first place.
Mary Anne Marsh, a Democratic strategist, pointed to the vice-president’s failure to effectively convey her message on the trip.
“If this is your debut as vice-president on the international stage, you want to give your best performance, and she certainly can do better,” Marsh said.
Harris made history at her January swearing in, becoming the first woman, the first black person and first Asian-American to serve as vice-president. She holds outsized power as the tiebreaking vote in a Senate evenly divided between Democrats and Republicans. But the other duties of a vice-president are less clearly defined.
People close to the administration say that Harris has proven a deft counsellor to the president and a near constant presence at the White House, attending regular briefings, offering Biden advice and appearing at his side for big speeches.
Biden himself served as vice-president under President Barack Obama from 2009 to 2017. When he announced Harris as his running mate last summer, he said he hoped that she would provide advice as he did to Obama.
“When I agreed to serve as President Obama’s running mate . . . he asked me what I wanted most . . . I told him I wanted to be the last person in the room before he made important decisions,” Biden said.
He added: “That’s what I asked Kamala. I asked Kamala to be the last voice in the room.”
Harris is hardly the first vice-president with difficult assignments. Most recently, Mike Pence, Donald Trump’s vice-president, headed the White House coronavirus task force.
“The vice-presidential tasks are such that usually, if you are successful, they become the president’s and the administration’s accomplishments. If you are unsuccessful, they become yours,” said Kenneth Baer, the founder of consultancy Crosscut Strategies. He was a speech writer for vice-president Al Gore in the Clinton administration and Gore’s ill-fated 2000 presidential bid.
Harris supporters contend that her challenging portfolio only underscores the faith Biden has placed in her.
“Any one of those issues would be a full-time job for most people,” Marsh said.
Many Democrats argue Harris faces undue criticism, from Republicans in particular, given her identity as a woman of colour. But others admit she made missteps in Latin America and say that her refusal to correct course — Harris later had a frosty exchange with a Univision TV anchor about the border crisis — only remind people of her shortcomings as a presidential candidate in 2019.
“What I think you have seen in the past few weeks . . . are some of the issues you saw during the campaign,” Marsh said. “At different points during the campaign, she did not perform particularly well. Other days, she was spectacular.”
Looming over Harris’s term is the political future of Biden, who is 78. Her allies say that she is focused on supporting the president as he seeks to push through his legislative agenda ahead of the 2022 midterm elections, when control of both chambers of Congress will be up for grabs. Next week, as part of her voting-rights remit, she will meet state legislators from Texas, where Democrats recently blocked a state bill that would have restricted access to the ballot box.
“There is a sense . . . that she is focused on her future as opposed to the job, and I just don’t think that is true,” said Dylan Loewe, a former speech writer for then-vice-president Biden who also ghostwrote Harris’s memoir.
“The last thing that she wants for her future presidential campaign, whenever it is, is for the storyline to be that she was focused on the future and not the president, and that she was not the same kind of vice-president to Joe Biden as Joe Biden was to Barack Obama.”
Rana Foroohar and Edward Luce discuss the biggest themes at the intersection of money and power in US politics every Monday and Friday. Sign up for the newsletter here
Korean shippers to raise billions of dollars as global trade rebounds
EU and US set to end Airbus-Boeing trade dispute after 17 years
The hat and the pencil: who is Peru’s president in waiting?
Italy’s government in crisis as Renzi ministers resign
Macron’s war on ‘Islamic separatism’ only divides France further
US allows sales of chips to Huawei’s non-5G businesses
Europe5 months ago
Italy’s government in crisis as Renzi ministers resign
Europe7 months ago
Macron’s war on ‘Islamic separatism’ only divides France further
Emerging Markets8 months ago
US allows sales of chips to Huawei’s non-5G businesses
Europe6 months ago
European truckmakers to phase out diesel sales decade earlier than planned
Emerging Markets9 months ago
Mexico’s Supreme Court approves referendum on presidential trials
Company8 months ago
Most investors now expect the U.S. stock market to crash like it did in October 1987 — why that’s good news
Markets8 months ago
Two top Morgan Stanley commodities traders lose jobs over use of WhatsApp
Emerging Markets8 months ago
Arrest of Mexican general in US shakes López Obrador at home and abroad