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17 February 2017

Big Deal analysis: Softbank ventures deeper on its tech vision

Softbank could be seen as building a capability to understand and see full public and private dealflow and have the financial tools to utilise insights gathered from trends identified in its operational businesses, such as the customers of its Sprint or Arm businesses.

Author: James Mawson, Editor-in-chief

Japan-based Softbank Group has operations in broadband, fixed-line telecom, e-commerce, internet, technology services, finance, media and marketing, semiconductor design and other businesses, including robotics and a baseball team.

The firm has also just agreed to buy one of the world’s largest alternative investment managers, Fortress Investment Group, for $3.3bn on top of shortly expecting to close on $100bn for a technology-focused corporate venturing fund, Softbank Vision.

This is just months after SoftBank closed its purchase of UK-listed chip designer Arm for $31.4bn, which was just a bit more than it paid buying 80% of US phone operator Sprint in mid-2013.

Finding a unifying strategy is hard to read for those outside the core executives at Softbank or even just the founder, Masayoshi Son, who is also SoftBank's CEO.

Softbank, however, could be seen as building a capability to understand and see full public and private deal flow and secure the financial tools to utilise insights gathered from trends identified in its operational businesses, such as the customers of Sprint or Arm.

The vision is effectively corporate venturing on steroids, involving the application of corporate strengths in operational performance and technology roadmaps together with financial execution and an ability to make money as the cycle shifts up and down.

It could be seen more like a Google, Tencent, Alibaba or Baidu in that regard than even a private equity-style conglomerate in Blackstone Group or Berkshire Hathaway.

To take one example, as my colleague, Rob Lavine, noted in the daily Global Corporate Venturing newsletter after the deal was announced, SoftBank through buying Fortress will gain a stake in Lyft, the ride hailing platform valued at $5.5bn as of late 2015, a few months after Fortress contributed to its series E round.

SoftBank already holds a portion of peers Ola, Grab and Didi Chuxing, and the Lyft stake means it is backing all of Uber’s main competitors worldwide.

That is a classic venture-based approach to a large new market being developed.

SoftBank has explored the changing transportation market through its existing businesses. It announced in July 2016 it would partner carmaker Honda to bring artificial intelligence to connected cars. SoftBank’s robot technology, dubbed Pepper, can converse with people and recognise their moods, while Honda has its own mobile robot, Asimo.

Add in that Arm's next chips, announced after Softbank’s acquisition, were to drive autonomous cars – a market most ride sharing services want to understand or utilise – and users from last year could use Sprint service Ride-Fi to “turn their car into a mobile hotspot connecting up to eight devices to 4G LTE Wi-Fi while also offering pass through charging for other devices via a USB port”.

In short, Softbank is in a unique place to comprehensively see all of one of the major technology disruption areas, and has the funds to merge or pull assets into different places to capitalise.

Add in the payments, blockchain and media content being developed by Softbank-affiliated portfolio assets to that hypothetical car-centred computing platform and the scope of Softbank's potential becomes almost beyond comprehension, even looking in just one area.

However, time and patient capital are required to execute on this potential, which is why the $100bn Vision fund will probably add crucial ballast and stability to Softbank’s strategy as potentially now being marked out by Son and his senior executives, including Ron Fisher, Alok Sama, Rajeev Misra and Jonathan Bullock.

Go back three or more years to when Softbank last ramped up its investing and, coincidentally, at about just this time in summer 2013, Fortress was advising people to sell rather than buy assets.

A few months later, in February 2014, Japan-based bank Nomura perhaps heeded the signal and sold back a stake in Fortress Investment Group for about $6 a share, or $363m in total, which was $500m less than it had paid eight years earlier.

Japan’s biggest investment bank had spent $888m to buy a 15% stake in New York-headquartered Fortress in December 2006. But the value of Nomura’s holding plummeted in the years after Fortress’ initial public offering in February 2007 at $18.50 a share, reaching a nadir of 95 cents less than two years later.

Softbank has agreed Fortress shareholders will receive $8.08 per share, a premium of 38.6% to the closing price on February 13.

All these share price values – let alone the $35 per share price point achieved in the first day after Fortress’ flotation, which one banker at the time called the “coming of the age of the alternative investment management company” – reflect market sentiment on the company’s likely future earnings.

The swings in share price for Fortress has in hindsight done little to reflect the company’s continued ability to grow assets under management across a wide range of products and pools of capital over the past decade or the near 20 years since its formation in 1998.

Fortress has also been an incredible vehicle for personal wealth generation. Ten years ago the share price rise after its first day of trading valued the stock of then five main principals (including Robert Kauffman and Michael Novogratz) at $9.7bn, on top of the $1.7bn they received in distribution and share sales in the prior year, as the share price climbed nearly 90% from the top-of-range $18.50 per share to $35 each.

Rather than these heights, newswire Bloomberg said its analysis of the three remaining leaders of Fortress found they would reap a combined $1.39bn from the sale of the alternative-asset manager to SoftBank.

Co-chairmen Pete Briger and Wes Edens own stakes worth $510m and $511m, respectively, at the $8.08 per-share offer price, based on ownership disclosed in the company’s most recent proxy statement. CEO Randy Nardone’s class A shares were valued at $371m, Bloomberg added.

The trio have agreed to remain in charge of the business and invest half of their after-tax proceeds from the sale in the company’s funds, according to a statement.

Some money off the table and a recommitment to their prowess in making further returns seems sensible for Fortress but Softbank’s expectation is in the synergies delivering far more.

As Son said: “For SoftBank, this opportunity [buying Fortress] will immediately help expand our group capabilities, and, alongside our soon-to-be-established SoftBank Vision Fund platform, will accelerate our SoftBank 2.0 transformation strategy of bold, disciplined investment and world class execution to drive sustainable long-term growth.”

It would be some legacy to leave not just for Softbank but for the broader innovation capital ecosystem about what is now feasible.

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