SoftBank/Elliott: a suitable case

According to folklore, a giant catfish sometimes awakes and stirs under Tokyo, shaking the buildings above. The epicentre this time is the headquarters of SoftBank, the controversial technology investment group. A US activist has bought a $2.5bn stake and is agitating for change. About time.

SoftBank is a sprawling financial structure with accounting and governance every bit as hair-raising as its huge debts. This was tolerable while founder Masayoshi Son enjoyed the aura of tech visionary. That evaporated thanks to the woeful failure last year of the US initial public offering of WeWork, a flexible office space group with the trappings of a tech startup.

As confidence has ebbed, the gap between the value of SoftBank and its investments has gaped ever wider. Lex calculates that the $222bn enterprise value of the company, including the market capitalisation of its shares, is 40 per cent less than the worth of its investments and net debt. That $140bn black hole is a potent symbol of value destruction.

Elliott wants SoftBank to buy back up to $20bn of its own stock, around a quarter of the total. The Japanese company would not need to increase its steep debts — selling a portion of stakes in companies such as Alibaba would suffice.

The activist should push for an overhaul of SoftBank’s opaque ownership of tech assets. This makes it hard for investors to work out which stakes — typically in food delivery and ride hailing start-ups — are held directly by the company or via the Vision Fund. Saudi Arabia and other external investors participate in this.

SoftBank is also due a corporate governance shakeup. There are 11 people on its board. None are women and few are independent.

When US or UK activists target Japanese companies, it tends to be billed as a clash between freewheeling western capitalism and the cloistered Asian kind. However, the Japanese authorities support activism as a means to raise historically low returns. And SoftBank is a maverick business whose financial structure prompts raised eyebrows among strait-laced Tokyo bankers.

Unfortunately, Elliott’s stake in SoftBank gives it little heft when Mr Son owns 25 per cent of the shares. He has complained persistently about the company’s valuation discount. He has done little to address it, beyond a smaller buyback and a partial spin-off of a domestic mobile phone operator. Investors need no wake-up call to alert them to SoftBank’s problems. It is Mr Son that Elliott must stir from his technological daydream.

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