It is time for shareholders to take a stand at SoftBank
By Charles Heighton – Markets Editor & VP of Trading at King’s Global Markets
I believe that all good investors should be activists. Activism has been part of the investor’s toolbox for nearly a century since Ben Graham pressured the Northern Pipeline Company to distribute excess capital to shareholders in 1827. The strategies used have changed immeasurably, but the idea is still the same: how can management be forced to act in the best interests of the shareholders?
Large shareholders have the right but also the obligation to intercede when management is misbehaving. It is time that SoftBank’s major shareholder stepped up to end the string of poor decisions made by the current CEO Masayoshi Son.
Failure has ruined SoftBank’s reputation in the past year. The debacle that was the failed WeWork IPO showed the shortcomings of Masa’s growth before all else strategy. SoftBank in total has invested $18.5 billion into WeWork, a massive sum. This investment was championed by Masa, who had forgotten a basic rule of venture investing: never put that many eggs in one basket. For those unaware, WeWork is now valued at $2.9 billion and had to be bailed out by SoftBank to prevent complete failure. You do not have to be Warren Buffett to know that that is a disastrous return and that was before the full effects of COVID-19 were known. Did any major investor stop and ask Masa if WeWork was worth saving?
Then there was a string of failures in other Vision Fund companies. In December, the fund's 50% stake in Wag, a dog walking company with a similar model to Uber (which is another less than impressive Vision Fund investment), was sold back to Wag. Masa invested $300 million into Wag and lost a significant amount of this within only two years. I wonder if any big SoftBank investors sat Masa down and asked why on earth a dog walking app needed $300 million!
There is also Zume, a company that received $375 million from SoftBank. If you had no knowledge of the company and I asked you what it did, I would bet my net worth on you guessing wrong. Zume used robots to make pizzas during delivery. A good idea in theory, but not in practice. At one point the company was burning $10 million a day. Turns out pizza-making robots are not yet viable or even a necessity. Perhaps this part of Zume’s business is a case of wrong place and time. In a Wall-E like future, Zume could excel, unfortunately for Masa, we are not yet there. Once again did not one of SoftBank’s highly intelligent institutional shareholders bat an eyelid at this investment.
Many other disasters have plagued SoftBank recently. This year saw a whole new level of reputational damage. In June, Wirecard, the German payment processor was revealed as the perpetrator of massive corporate fraud, after years of FT journalists sounding the alarm. Who was connected to Wirecard, you guessed it — SoftBank. The team that runs the Vision Fund structured a deal last year to make it appear like SoftBank was investing $900 million into Wirecard just as the FT uncovered evidence of fraud. This made Wirecard look reputable, while in reality SoftBank immediately offloaded the debt it bought and held no positions in Wirecard. I am no financial expert but that looks dodgy to me and it gets worse. A select few executives at SoftBank were given a stock deal which led to very handsome paper profits. These executives, including the head of the Vision Fund, used their own money to finance the deal. So, they engineered a deal to use SoftBank’s name to endorse Wirecard while receiving the profits themselves rather than them going to SoftBank. Somehow no SoftBank executives were fired for this. Did any investors stop and ask why?
Rajeev Misra, the CEO of the Vision Fund, also had his compensation doubled this year to $15 million. Despite overseeing the loss of $18 billion of the Vision Fund’s capital. Did any investors question why SoftBank is rewarding failure?
Then we come to the most recent story that emerged within the past two weeks. It turns out that Masa has been buying huge volumes of individual US tech stock calls as the market rallied. Allegedly up to $30 billion worth of calls. SoftBank has earned $4 billion on these trades. However, the market has not rewarded them. When the news was absorbed this week, the stock lost $9 billion in market cap. Did Masa not get the memo saying that crazy risks were a bad idea? Did he not learn his lesson in the dot com crash when he lost $70 billion? Some executives at SoftBank wanted to release more detailed information about these trades, as they have claimed that they carried little risk. Major investors have now been briefed on this strategy, but Masa refuses to release more details to the wider shareholder base. Considering that the general public owns more of SoftBank than Masa, this is unacceptable. He does not feel any obligations to his shareholders and he needs to.
A major shareholder at SoftBank needs to step up to bat and strike Masayoshi Son out of SoftBank for good. No other CEO or founder would have been allowed to oversee so many failures in quick succession.
SoftBank is a publicly-traded company; if Masa cannot act like a CEO, then Masa should no longer be CEO. He did not hesitate to remove Adam Neuman when it became necessary. His shareholders should mimic his actions and end this string of failures.
Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, Jeff Gramm (2016).
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