😲 SoftBank's Record-Breaking Loss Decoded
The saviour for Indian startups, SoftBank, has just recorded a record-breaking loss. Here's why.
WeWork, Snapdeal, Paytm.
Do you know what all of these companies have in common apart from the fact that they have been disappointing?
SoftBank's Vision Fund has invested in all of them.
Yes, one of the world's biggest venture capitalist funds has made many such investing mistakes.
And now they're coming back to bite it.
📉 SoftBank's Record-Breaking Loss
Thanks to such unwise investments and the current global economic scenario, SoftBank has seen a record-breaking loss of $23.4 billion.Â
Not only is this the biggest quarterly loss the company has ever seen, it is also the biggest quarterly loss that any Japanese company has ever seen.
It is only a little less than the $27 billion annual loss SoftBank reported last year.
But wait, what does the current global economic scenario have to do with this?
You see, with central banks raising interest rates and warnings about inflation coming soon, investors are in full panic mode.
Most do not want to invest in risky tech stocks, causing their valuation to plummet, which means losses for SoftBank.
And it is not just an investor problem: a financial crisis means a lot of people aren't really using SoftBank's portfolio companies' products as well.
For instance, the valuation of Swedish buy-now-pay-later firm Klarna has declined by 85% because most people are cautious about what they are buying in the middle of a global crisis and nobody wants to pay at all.
And the worst part?
The startup bubble burst.
SoftBank invests in a lot of up and coming startups, looking for the next hit company.
Now, the startup frenzy of the last two years meant that a lot of these startups raised money at inflated valuations.
And as money was flowing due to low interest rates, VCs obliged.
They were hoping to take at least some of these startups public and make good money through their IPO.
But the markets are in no mood to invest in new companies when their existing portfolio has been performing so badly.
This has also caused massive losses for SoftBank.
So, what steps is it taking?
😇 Acceptance Comes From Within
The first and the foremost step that SoftBank has taken is to accept its mistakes.
And that's huge coming from Masayoshi Son, the CEO of SoftBank, who once compared himself to Jesus Christ!
Son accepted that the company had made mistakes and should have made more strategic investments.Â
And that's what the company is going to do now. It had already announced that it would be cutting startup funding by half, but now it seems it will be tightening its purse strings even more.
Only startups with sensible valuation have a chance at getting money from the VC now.
Now, that's a preventive step for the next time, but what about damage control now?
Well, SoftBank historically has two ways of damage control:
Buying: The company buys back its own shares from the market to boost its stock price. Huh? You see, buying its own stock increases trade volume and decreases supply. Both of these factors help boost stock prices. SoftBank is set to buyback shares worth 400 billion yen ($3 bn) this year.
Selling: The company sells its assets, for instance, shares of Alibaba, to boost its finances. Right now, the company is expected to see a gain of $34 billion from Alibaba stock sale.
In essence, SoftBank is like the antithesis of Warren Buffet right now. Buffett's Berkshire Hathaway was buying back shares earlier last year when markets were doing great and SoftBank was buying stake in startups. And now Buffett is buying the dip, when SoftBank is tightening its purse.
But comparisons aside, there is yet another option that the company is exploring. In fact, this is an option Masayoshi Son is very fond of exploring indeed: A Buyout.
What's that? It is basically a way for this publicly listed company to go private.
Just as Elon Musk was set to buy Twitter, some investors could come in and buy SoftBank, taking the company off the market.
But why?
You see, this would help the company out in lots of ways.
First, it wouldn't have to worry about stock prices plummeting with losses. Plus, Son anyway feels that SoftBank is undervalued and a buyout could increase the company's value (that's because most existing investors sell their stock at a higher price than the market).
Second, it would be spared a lot of regulation and compliance and could focus on recouping without worrying about stakeholders' approval.
Third, the company could come back with a bang by listing itself on the US stock exchange (it is currently listed on the Tokyo stock exchange), a move that would once again boost its valuation.
However, so far this strategy hasn't worked out for SoftBank. The company has talked to a few potential buyers but the deal has fizzled out.
But, Son is so dedicated to this move that he is planning to go for a gradual buyout.
What this means is that he will continue buying back SoftBank shares (he already owns a 28% stake) until he becomes a majority shareholder (with 66% stake). He can then force other shareholders to sell their stake and take the company private.Â
To some, this strategy makes sense as there is no particular reason for SoftBank to be a public company.
But many insiders don't support this idea, claiming that it would remove the checks and balances on Son, leaving him to make possibly more risky investments.
One rumour claims that anytime Son is thinking of a buyout, employees leak the news, pushing the company's shares higher (because investors think they will get higher returns when the company is bought).
This satisfies Son to some extent, benching the idea for the time being.
🔮 SoftBank's Future Prospects
SoftBank honestly believes it has some golden eggs in its portfolio, the most important being Arm Ltd. It is a British semiconductor chip making company, which given the demand for semiconductors, will be a real catch for investors when it goes public.
SoftBank is currently planning Arm's IPO, a move that could bring billions to the company.
Moreover, once inflation rates come under control, tech stocks and startups will probably gain traction again, giving SoftBank more money to lose next time we have a crisis (just kidding).Â
However, things could continue to look grim for the company (and for startups across the world by association) if we enter a recession.
What do you think the future holds for SoftBank?
âš¡In a line: SoftBank is seeing record breaking losses due to some bad investments and because people's faith in startups and tech stocks is going down.
💡Quick question: How do you think SoftBank's spending cuts will impact Indian startups?
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SoftBank more money to lose next time we have a crisis, apt enough