SoftBank – Viral pin.

SoftBank will emerge better and stronger.

• It is the realisation it overpaid for many of its portfolio investments that is causing SoftBank so much difficulty at the moment which I think will lead to a complete re-writing of its investment process for the better.
• SoftBank has revealed that it expects to write down some assets in its Vision Fund by a thumping $16.7bn blaming a “deteriorating market environment”.
• I do not think that this is a full reflection reality as SoftBank is putting the spotlight on the catalyst that caused this problem rather than the root cause itself.
• This cause, which everyone has secretly known for some years, is that SoftBank overpaid for a large number of its investments and did not have a robust and prudent investment process in place when it came to selecting those investments.
• Valuations have been supported by optimism and sentiment which was punctured by the WeWork debacle and fully ruptured by the COVID-19 pandemic.
• The result is that some degree of reality has asserted its grip over SoftBank’s investment portfolio triggering the write down we will see at its next set of earnings.
• The fact that SoftBank felt the need to abandon its agreed deal to purchase a further $3bn of WeWork from its original investors at a $10bn valuation and that these investors are now suing to force SoftBank to complete the deal is further evidence that WeWork is still substantially overvalued.
• In fact, with the sharing economy in a full meltdown given that no one wants to share anything at the moment, there is a possibility that WeWork does not make it without a further bail-out by SoftBank.
• SoftBank is now scrambling to raise money to bolster confidence, keep investors happy and pay down debt.
• Fortunately, its investment in Alibaba is more than enough to cover all of its debt meaning that SoftBank is almost certainly going to survive this crisis.
• The net result is that there is going to a be a lot of scrutiny of its investment process as well as its approach to investing in companies in terms of the amount of money that gets put in.
• The days of high valuation and of SoftBank pumping far more money than the company needs are clearly over.
• This will lead to SoftBank migrating its practices to be more in line with the tried and tested methods used by almost everyone else.
• This will have a normalising effect on VC investing with much greater emphasis being placed on fundamental valuation rather than sentiment.
• In the short-term, SoftBank is also likely to have to support its portfolio and so I see the possibility that it will be forced to sell more assets and give more value away.
• I think that at some point, there will be a great opportunity in SoftBank, but as more news of the difficulties that many of its portfolio companies are suffering filters out, I think that sentiment may sour further.
• I would like to see better visibility on this before thinking of making a value-based investment in SoftBank.