Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Since SoftBank's billionaire founder Masayoshi Son announced the $100 billion SoftBank Vision fund to make technology investments, there has been confusion over its purpose and methods. An FT report on Wednesday about SoftBank selling the fund a 25 percent stake in U.K. chipmaker ARM Holdings won't help.

Of many questions surrounding the Vision Fund, which still has not officially closed, there's a crucial one: where does SoftBank Group Corp. end and Vision begin?

It's an important point that Son hasn't answered yet. SoftBank has said only that it expects to invest at least $25 billion in the entity over the next five years, and that it will be joined by a $45 billion contribution from the Public Investment Fund of the Kingdom of Saudi Arabia, and others. But the acquisitions made (or proposed) to date for U.S. asset manager Fortress and satellite companies OneWeb and Intelsat SA have been done by SoftBank, not the fund -- since the latter hasn't officially closed. Some of the assets may later be offered to the fund, as is happening with the ARM stake.

Big Bucks
SoftBank Vision Fund is courting an Abu Dhabi government fund to invest
Source: Bloomberg News
Note: Figures aren't final and are subject to change

If you're confused, that's okay. It's confusing. It's also questionable governance, signalling potential risks not just for other investors in Vision but for SoftBank shareholders too.

The ARM stake sale is a case in point. SoftBank is selling it to the fund for $8 billion, which corresponds roughly to the same valuation it bought it for back in July, according to the FT. Supposedly this is happening to help Vision secure a $15 billion commitment from Abu Dhabi's Mubadala. If true, it implies one investor may be able to dictate investment decisions for the whole fund, opening up a Pandora's box of complications.

From the point of view of SoftBank shareholders, they're handing over a chunk of a strong company that the Japanese group paid a 43 percent premium to buy, potentially giving away some upside.

Debt Load
SoftBank's net debt-to-Ebitda ratio far exceeds peers as it makes more acquisitions outside its core telecoms business
Source: Bloomberg

From the fund's side, it gets an ARM stake without much influence. Yet the holding could account for as much as 10 percent of the Vision assets. The bullish argument is that the fund gets to enjoy the benefits of ARM's synergies with SoftBank. And, in fairness, ARM is a prize asset. Vision Fund investors would probably worry more about how it's going to spend the rest of the $100 billion.

That said, Son's ARM bet is no sure thing. It depends on the British chip designer becoming a force in the so-called Internet of Things. Should ARM's earnings turn south, or SoftBank be forced into a sale to cover debts or losses elsewhere, the Vision Fund will take the hit.

This all shows that checks and balances are needed between the company and the fund. Perhaps these will become more apparent once the Vision Fund closes.

SoftBank shareholders should demand clarity. They may end up gaining from Son's canny idea to use the fund as a way to turbocharge his investment firepower. He certainly wouldn't be able to do what he wants to do out of SoftBank's money since it carries $128 billion in debt. But they could also be hurt if the fund's investments fail to generate returns or distract Son from his other operations. 

Wrong Way
SoftBank rarely posts positive annual free cash flow
Source: Bloomberg
Note: Figures are for financial year ending March 31

It's not enough for Son to rest upon his reputation as a tech visionary to be given a massive pot of money to invest, with no strings attached and a blurry relationship with his company. Son believes in a few decades we'll all be living in a world powered by AI and robots. He's probably right, but he still may burn a lot of other people's money along the way.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net