Tag: ARM

SoftBank: An overstretched telco or a unique innovator?

SoftBank’s history: How it got to where it is

The story of SoftBank’s history – first as a software distribution company, followed by its contribution to the dotcom bubble, and then a gradually expanding telecoms footprint throughout the 2000s – is important because it gives context to its current investment strategy, dubbed the Vision Fund. SoftBank has never been a traditional telco and its outside perspective helped it to shake up the Japanese telecoms market. The Vision Fund’s ambition stretches far beyond telecoms, with an aim to transform all industries through the adoption and advancement of artificial intelligence (AI). Will this unique approach enable SoftBank to weather the softwarisation of telecoms, which will likely be accelerated by the newest Japanese entrant Rakuten, better than others?

Figure 1: SoftBank’s evolution

SoftBank's evolution 1981 - 2019

Source: SoftBank Group annual report 2019

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The early days: Software distribution

Founded by Masayoshi Son in 1981, SoftBank began not as a telecoms operator but as a software distributor. Son had recognized an important niche in the Japanese market: while computer hardware manufacturers were having issues sourcing quality software to run on their machines, software makers lacked the cash to properly advertise their products. As a distributor, Son acted as a matchmaker between computer software and hardware companies. Though exclusivity agreements with Japan’s major hardware vendors, SoftBank’s monthly sales reached US$2.4 million by the end of its first year of operation.

Not satisfied with a sole focus on software distribution, just six months after starting the software business, Son branched out into the computer magazine publishing segment, eventually producing over 20 periodicals. Son used his magazines to advertise the software products SoftBank was distributing. Right from the start, he aimed to create value through exploiting synergies across different business units.

In 1990, SoftBank also branched out into trade shows, acquiring Ziff Communication’s trade show division for $200 million and then, in 1995, the COMDEX trade show from the Interface group for an eyebrow-raising $800 million, taking on $500 million in debt. Later that year, SoftBank cemented its status as a leader in computer-magazine publishing, investing $2.1 billion in Ziff-Davis Publishing, making SoftBank the largest PC magazine distributor in the world. To finance this, SoftBank Group added $1 billion in debt and issued $649 million in new shares (SoftBank having gone public on the Tokyo Stock exchange in 1995, at a $3 billion valuation). It is clear from the beginning that SoftBank was not averse to accruing sizeable debt liabilities to finance strategic acquisitions.

SoftBank’s Internet pivot

SoftBank’s defining play in the 1990s was a pivot towards Internet services. Believing that the Internet would be the next technological revolution – eclipsing the invention of the personal computer – SoftBank made a dizzying number of investments in Internet companies. Many of these investments were made indirectly through a network of SoftBank venture capital funds, mainly overseen by SoftBank Investment Corp, which managed $5.25 billion worth of funds by 2000; SoftBank itself contributed over $2 billion. The investments included big name sites in e-commerce and e-finance, notably GeoCities, Yahoo!, ZD Net, e-buy-com, E-loan and E* TRADE Group.

The dotcom bust

SoftBank was heavily invested in – and therefore heavily exposed to – Internet stocks. Moreover, with a reputation as the largest investor in the world, owning as much as 25% of cyberspace by value at its peak, SoftBank became regarded by the market as fundamentally an Internet company. At the height of the dotcom bubble in February 2000, SoftBank’s market cap soared to $180 billion, far exceeding the equity value of the stakes in its subsidiaries and affiliates.

The dotcom bubble began to burst by early March 2000. Between SoftBank’s peak market cap in late February 2000, and its low point two years later, SoftBank lost over 95% of its market value. Masayoshi Son lost $70 billion of personal wealth during the crash. Many of SoftBank’s Internet investments had to be written-off entirely, including dotcom big names such as Webvan, Kozmo.com and Global Crossing – the latter filing one of the largest bankruptcies in corporate history.

However, across the graveyard of dotcom duds, SoftBank made several investments which delivered extraordinarily high returns. One resulted from a $20 million pledge Son made to Alibaba founder, Jack Ma, in January 2000. According to Ma, Son made the investment without first inspecting Alibaba’s business model or revenue stream, but rather based on Son’s impression of Ma. The Alibaba investment would turn out to be one of the most successful in history. Moreover, SoftBank’s investment in Yahoo! was still fruitful relative to Son’s initial pledge, despite falling foul of the dotcom bust. This is testimony to the efficacy of Son’s ability to adapt US companies to meet the needs of the Japanese market, delivering growth long past the NASDAQ stock crash. It is also one of the key reasons why SoftBank was able to attract nearly $100bn of investment for its Vision Fund in 2017.

Does SoftBank’s approach work for telecoms?

SoftBank Group is deeply tied to its charismatic CEO Masayoshi Son’s grand visions about how new technologies such as the Internet, the Internet of things (IoT) and artificial intelligence (AI) will transform the world. Son’s ambition to play a key role in driving the development of these technologies has led SoftBank to achieve some remarkable successes – notably an early investment in Alibaba and building a successful Japanese telecoms business – and survive some major setbacks, such as the dotcom crash and, more recently, the WeWork scandal.

The key question for telecoms operators is whether SoftBank’s telecoms assets gain any competitive advantage from being a part of SoftBank Group. Since SoftBank took ownership of Vodafone KK in Japan in 2006 and Sprint in 2013, both telecoms operators have become more profitable. While SoftBank’s stake in Yahoo Japan and willingness to take risks have contributed to success, neither operator is really exceptional in the way they manage their core business.

Table of contents

  • Executive summary
  • SoftBank’s history: How it got to where it is
    • The early days: SoftBank the software distributor
    • SoftBank’s move into telecoms
  • Masayoshi Son’s 300-year plan: Sprint, Arm and the Vision Fund
    • Sprint: SoftBank’s move into US telecoms
    • Arm: Hardware and IoT are the foundations of AI
    • The Vision Fund
  • Can SoftBank pull off its grand plans?
    • Internal risks: Cracks beneath the surface
    • External risks: Rakuten goes after SoftBank’s core
  • Conclusions

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The STL Partners Digital Investment Database: August 2016 Update

The STL Partners Digital Investment Database

We published our Digital Investment Database in early July, together with a report titled Digital M&A and Investment Strategies. Given recent high profile activities, we’ve now issued an updated version.

While there have been a number of smaller investments and acquisitions, two major acquisitions have hit the headlines since we published our report. On 18 July, it was announced that SoftBank was buying the UK chip manufacturer ARM Holdings for £24.3bn. Then, on 24 July, Verizon bought Yahoo! for $4.8bn. Here, we take a quick look at these two acquisitions.

SoftBank and ARM: (big) business as usual?

Why ARM? For its £24.3bn, SoftBank has gained one of the world’s leading processor manufacturers, with a strong existing business designing processors for smartphones and tablets, and an excellent opportunity to develop new revenues from the IoT. The attraction is clear, but the sums involved are huge.

Yet in some ways, this acquisition is the progression of business as usual. Our analysis based on v1.0 of our database suggests that SoftBank has long been one of the most active telcos in digital M&A. Among the 31 investments and acquisitions we tracked from 2012-1H2016, SoftBank was outstripped only by Deutsche Telekom, Singtel, and Telstra.

However, while the ARM deal fits with this prior interest in digital businesses, the bulk of SoftBank’s recent purchases have had a software focus: ARM marks a shift towards hardware. Moreover, the size of the transaction dwarfs SoftBank’s previous efforts.

Much media coverage has suggested that the ARM deal might be closely associated with the recent return of CEO Masayoshi Son, an adventurous, ambitious leader with a history of bold purchases. Looking at our database, the ARM deal certainly breaks the mould of telco acquisitions, as SoftBank’s £24.3bn deal for ARM is by far the biggest non-core-business acquisition tracked by our database.[1] But £24.3bn rarely changes hands on a whim, and we intend to publish further in-depth analysis on this in future.

Verizon and Yahoo!: Can a telco challenge Google and Facebook on advertising?

Verizon’s purchase of Yahoo! for $4.8bn was, in financial terms, far smaller than the SoftBank/ARM deal. Yet it received a great deal of media attention, partly, of course, because Yahoo! remains a significant household name in the US in particular, and a salient reminder of how the corporate landscape of the internet has changed.

At its peak in 2000, Yahoo! was worth $125bn. So there are clear questions: have Verizon snapped up an undervalued business, or has it splashed cash on a dinosaur?

Verizon has been very clear that its intention with Yahoo! is to join the advertising business with its 2015 purchase of AOL for $4.4bn, and become the third player in digital advertising behind Google and Facebook. CEO Lowell McAdam made no bones about the business’s ambitions in oft-repeated comments shortly after the deal was announced: ‘Are we going to challenge Google and Facebook? I just say, look, we’re planning on being a significant player here. The market is going to grow exponentially.’[2]

Currently, Google and Facebook together have over 50% of the US digital advertising market. AOL and Yahoo! combined have 6%. 1bn users view Yahoo! content each month, and Verizon only therefore needs to persuade a few advertisers to switch to them in order to grow market share.

From a telco point of view, one key facet of this argument is that potential synergies between Yahoo! and Verizon’s network do not appear to be essential. While telcos have classically searched for M&A opportunities that directly complemented their core business, Verizon might be understood as using its market value to finance deals that have independent value – not unlike Softbank and ARM. However, there are questions around the true value of Yahoo!’s share of digital advertising.

At the moment of Facebook’s IPO in 2012, Yahoo! had greater revenue. But since then. Google and Facebook have transformed digital advertising by making it targetable. Google knows what you want, when you want it (a search for ‘buy blue jeans’, for instance), and Facebook knows what you like (as users are encouraged to document their preferences). It can use this data to give advertisers access to the most relevant sections of a vast potential online audience.

This is a strong business model that has proved more valuable as these companies have refined it. Yahoo!’s digital advertising is not quite as sophisticated, and it remains to be seen if Verizon will be able to develop the revenue it envisages.

Verizon and Fleetmatics: Under the radar

Yahoo! garnered the majority of media attention, but Verizon also spent $2.4bn on Fleetmatics, a digital business that provides SaaS for fleet management. M2M fleet tracking is nothing new, but as well as its core software business, the company has the potential to play an important role in the industrial IoT as connected vehicles become more common.

Together, the two acquisitions might suggest a drive to develop profitable plays in markets beyond core telco revenue: from Fleetmatics, the IoT, and from AOL-Yahoo, digital advertising. Moreover, for strategists and practitioners placing the two together may have greater significance than viewing them separately.

Highlighting such deals and longer term trends behind them are two of the key goals of our M&A database.

Accessing the database

Our Digital Investment Database documents key digital investments and acquisitions for twenty-two operators during the period 2012 – August 2016.

An illustrative snapshot of part of the database

[1] To be precise, ‘non-core-business’ excludes telcos buying businesses involved in delivering the quadruple play of fixed, mobile, internet, and TV – for example, BT’s purchase of EE, or AT&T’s purchase of DirecTV.

[2] Financial Times, 26 July 2016.