Softbank’s Son Seeks to Skirt Cross-Border Failure History
Softbank Corp. (9984) President Masayoshi Son is betting $20 billion he can add value by buying control of Sprint Nextel Corp. (S) in the biggest Japanese purchase of a foreign company. There’s 26 trillion yen ($330 billion) that says he can’t.
That’s the net amount of market value lost within 12 months after deal announcements in the 10 biggest overseas purchases by Japanese companies from 2000 to a year ago. Eight of the companies saw market value erode while two posted gains.
“The track record is terrible,” said Stephen Givens, a Tokyo-based lawyer specializing in M&A and corporate governance.
The Sprint deal brings announced overseas acquisitions this year to $96 billion, exceeding the total for all of 2011, as the yen near a postwar high and a stagnating domestic economy make markets outside Japan more attractive. Acquisitions abroad have failed as buyers paid too much and lack management resources, both of which apply to the Sprint deal, Givens said.
“It’s not an easy path to go,” Son told reporters in Tokyo on Oct. 15 after the agreement to buy the Sprint stake. “But without taking on a challenge, we may end up facing bigger risks.”
Outside Japan, the biggest cross-border deals by individual companies have fared better. Globally, the 10 biggest overseas acquisitions announced from 2000 to a year ago added about $56 billion in market value in the 12 months after their announcement dates, with only two leading to declines, according to data compiled by Bloomberg. The number was calculated using today’s exchange rates.
Son initiated the deal about two months ago when he traveled to Kansas City to meet with Dan Hesse, chief executive officer of Sprint, which was code-named “Swan,” one person with direct knowledge of the situation said. He was accompanied by Softbank Managing Partner Ronald Fisher and his lead M&A adviser, Jeff Sine of Raine Group LLC. Hesse was joined by Sprint’s M&A head, Keith Cowan, said the person who declined to be identified because the details are private.
Son had bet on Hesse before. In 2000, the Japanese billionaire invested $100 million in Terabeam Networks Inc., a laser communications company Hesse was running. Terabeam aimed to create a network of light beams over U.S. cities to connect local and national networks at 1 gigabit per second.
Terabeam in December 2002 sent a letter to shareholders offering to buy back stock for 95 cents a share, about what the company estimated its liquidation value would be. Lucent Technologies Inc. had paid about $20 a share for its stake in 2000.
Hesse was open to Son’s idea to invest in Sprint, said another person with direct knowledge of the situation.
To strengthen Sprint’s market position, Hesse had been close to buying MetroPCS Communications Inc. (PCS) in February and held talks with Deutsche Telekom AG about a tie-up with T-Mobile USA. Softbank had also considered entering the U.S. market by doing a deal with T-Mobile USA, one person said.
The two executives met again in Japan and company advisers continued talks by phone.
By the time Deutsche Telekom announced on Oct. 3 its merger with MetroPCS, the Softbank-Sprint talks had already accelerated.
Sprint held a board meeting on Oct. 5 to discuss the terms of its deal with Softbank and other options, including the possibility of counterbidding for MetroPCS, said the people. The board held off on any MetroPCS bid and met again the next day to discuss the Softbank deal, which it approved last Sunday night.
Representatives for Sprint and Softbank declined to comment.
“The U.S. is a large and growing mobile market, with the highest smartphone penetration in the world and high revenue per user, yet it is hampered by relatively slow network speeds,” said John Christiansen, a spokesman for Softbank.
The deal brings Son along a path once trod by bigger Japanese rival NTT DoCoMo Inc. (9437) The cellular provider bought AT&T Wireless Services Inc. as part of $10 billion in purchases of overseas carriers, only to take 1.5 trillion yen in writedowns on the investments between 2000 and 2004.
More recently, Nomura Holdings Inc. (8604)’s 2008 takeover of Lehman Brothers Holdings Inc.’s European and Asian units swelled costs that led to nine straight quarters of losses abroad.
The corporate culture of some Japanese companies has also contributed to challenges in running companies based overseas, said Parissa Haghirian, associate professor at Sophia University in Tokyo and author of “Understanding Japanese Management Practices.”
“Most Japanese companies are basically like a village where managers grow up and never leave, so when they go overseas, there are cross-cultural issues,” she said in a phone interview.
Softbank plunged by a record 17 percent in Tokyo trading on Oct. 12, the day after talks to buy Sprint were reported. The company is worth less now than before news broke of its talks for a 2006 purchase of Vodafone Group Plc’s Japanese unit, its biggest deal before Sprint.
“Every overseas acquisition by a Japanese company has a negative impact on its stock price,” Givens, also a lecturer at Keio Law School, said in a phone interview. “I’ve never seen a cross-border acquisition that resulted in a bump for the stock price.”
The Lehman shock that froze global credit markets also pushed the yen higher and boosted Japanese companies’ appetite for assets abroad that had declined in price.
Nomura’s Lehman deal put Japan’s biggest brokerage in place to compete head on with Wall Street banks weakened by the financial crisis. Instead, the head of Nomura’s wholesale business, which includes investment banking and trading, Jesse Bhattal and his lieutenant Tarun Jotwani, left the company amid a clash with Nomura’s old guard over competing visions for the future of Japan’s largest brokerage.
Daiichi Sankyo Co. (4568), a Japanese drugmaker, has lost more than half of its market value since agreeing to buy a majority stake in India’s largest drugmaker Ranbaxy Laboratories Ltd. (RBXY) in June 2008. Most of the drop occurred after the U.S. Food and Drug Administration banned imports from two of the Indian unit’s plants because of manufacturing violations.
Companies in the world’s third-largest economy have announced $96 billion of acquisitions abroad so far this year, data compiled by Bloomberg show. The biggest this year before Softbank’s Sprint deal was Marubeni Corp.’s takeover of Gavilon Group LLC, valued at $5.6 billion including assumed debt.
Japanese companies announced more than 790 cross-border purchases last year valued at $88 billion, the most since at least 2000, data compiled by Bloomberg show. Goldman Sachs, Credit Suisse Group AG, Deutsche Bank and Citigroup Inc. were among the top five advisers on the deals.
Son, a U.S.-educated entrepreneur who built a software distributor into Japan’s fastest-growing mobile carrier, may be just the person to beat the odds against overseas deals, said Haghirian of Sophia University. Son still owns 20.9 percent of the company, according to data compiled by Bloomberg.
Softbank is better prepared for the challenges of managing a U.S. company because its management structure and culture isn’t traditionally Japanese, she said.
“Son is very charismatic and has a vision,” Haghirian said. “Maybe he’s Western already and setting a very aggressive agenda.”
Japanese companies have also seen some success buying companies in faster-growing emerging markets.
Kirin Holdings Co. (2503)’s 48 percent holding in San Miguel Brewery Inc. (SMB) has more than tripled in value to about $6 billion since the stake was purchased in 2009, according to data compiled by Bloomberg.
Japanese retailers and beverage companies will continue to make acquisitions overseas, said Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo. Kirin, Japan’s largest brewer by market value, agreed to buy out shareholders in Brazil’s Schincariol Participacoes e Representacoes in November 2011, valuing the brewer at about $3.6 billion excluding debt.
“For a lot of them that ruled the roost at home, there are huge scale merits for moving overseas and selling the same stuff,” Smith said.
Softbank climbed 5.6 percent to 2,625 yen at the close of trading in Tokyo, bringing its two-day gain to 16 percent, the biggest since May 2009.
The extra yield investors demand to own the company’s 1.67 percent notes due June 2015 rather than government debt widened 107 basis points since the announcement on Oct. 12 to a record 143.3 yesterday, according to Japan Securities Dealers Association prices. The spread was more than triple the 43 basis points for the nation’s corporate bonds, and compared with 157 globally, according to Bank of America Merrill Lynch indexes.
Investors pushed Softbank bond prices lower as Japan Credit Rating Agency Ltd. and Moody’s Investors Service followed Standard & Poor’s in saying they may cut the rating.
Declines in market capitalization can’t all be attributed to bad overseas deals as values of companies that have sought organic growth have also slipped. The benchmark Nikkei 225 Stock Average (NKY) represented a market value of 167 trillion yen as of yesterday, down 10 percent from 185 trillion yen four years earlier.
The Sprint stake would give Son a shot to compete with the two biggest U.S. wireless providers and to shake the legacy of failed Japanese overseas deals.
“Son is a guy that brings strong emotions,” said Smith of CLSA. “Many people who have written him off have ended up smarting as a result.”
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