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2016-07-26 09:38:22
Masayoshi Son sets the tone for SoftBank after the exit of his successor
Jul 23rd 2016
AS A student, the 58-year-old founder of SoftBank, a Japanese telecoms firm, resolved to dream up one computer-related business idea a day. When Masayoshi Son saw, at that time, a picture of a new Intel chip in a science magazine, he cut it out and kept it with him for years. So it fits that his biggest acquisition should be in semiconductors. On July 18th he said SoftBank would buy ARM Holdings, a British company that designs processing chips, for 24 billion ($32 billion).
After Nikesh Arora, a former Google executive whom Mr Son named as his successor only a year ago, abruptly left SoftBank in June, investors had anticipated a shift in strategy. Mr Arora invested over $3 billion in a smattering of global startups. Mr Son had seemed to refocus on paying down his firm s massive net debt, which reached over $80 billion at the end of March, a ratio of four times gross operating profits. Sprint, its struggling American telecoms subsidiary, which it bought for $39 billion in 2013, accounts for about $30 billion of that debt. SoftBank agreed to sell some assets, including a stake in Alibaba, a Chinese e-commerce giant.
But investors who know Mr Son s audacious ways had been totting up the sums to hazard a guess on his next big deal, says an analyst in Tokyo. Mr Son has topped up 2.3 trillion ($21.7 billion) of cash with a bridge loan of 1 trillion to buy ARM.
Set up in 1990 in Cambridge, ARM is obscure yet fantastically important: the chips in over 95% of all smartphones sold last year are based on its designs, which it licenses to hardware makers including Apple and Samsung of South Korea, earning a royalty for each chip its customers sell. Last year they sold 15 billion ARM-based chips, an increase of 25% from 2014, and more than double the 6 billion sold in 2010.
ARM is now trying to get into designing chips for giant servers, as Intel does. Its model means that, as more of its designs are sold and as a single chip contains ever more of its processors royalties should grow. But slowing smartphone sales means it needs to move into other areas, such as cars and machinery. In 2013 it bought Sensinode, a software provider for the internet of things , which adds sensors and web connections to everyday objects from toasters to tractors. In South Korea, ARM-based sensors in fish tanks signal nutrient levels to farmers by text message.
The British firm s high market share and steady cashflow appeals to SoftBank, as tightening regulation in Japan could squeeze profits from its smartphone customers. The big question is how long-term a view it will take with ARM. If it is tempted to jack up its royalties currently just 1-2% of the chip s selling price that might upset chipmaker clients. For now, though, Mr Son says he wants to support ARM in aggressive investments in technology and engineers; he will start by doubling its headcount in Britain within five years. That suggests he will support it to become a big player in the internet of things. Mr Son is showing his seriousness on this, argues Oliver Matthew of CLSA, a stockbroker. One of Mr Son s more restrained forecasts about the future of technology is that by 2040, everyone will own 1,000 devices each connected to the internet.
Big, visionary bets are his stock-in-trade. But the premium he is paying for ARM over 40 times its forecast earnings for 2017 has once again alarmed investors. So far, SoftBank s domestic acquisitions have worked well but the record overseas is patchy. Its shares plunged by a tenth on July 19th. Sprint s shares plummeted too: many worry that ARM will distract Mr Son from reviving it. And how will they fund ARM s future development if Sprint fails? asks one longtime SoftBank watcher.
Mr Son says he can invest in ARM because he is confident he can turn Sprint around. He has taken on more vertiginous levels of debt in the past when he bought Vodafone s Japanese subsidiary in 2006, and paid off the debt early. Mana Nakazora of BNP Paribas doubts SoftBank will make any more big buys for two or three years, and expects it to focus now on improving its balance-sheet. That was the theory after his last huge investment, in Sprint, too.