Softbank's Cyber Keiretsu

It's a top global investor in Internet companies

For most of the postwar era, industrial Japan has organized around the keiretsu, large groups of companies doing business with each other. These days, that outmoded industrial model is insular, glacial, and ailing. Yet while no longer yielding big payoffs for Japanese industry, the keiretsu may be providing inspiration in an unlikely place: cyberspace.

Take the recent moves of Japanese software and Internet service powerhouse Softbank Corp. In a slew of recent acquisitions, Chief Executive Masayoshi Son has spent $2 billion on equity stakes in more than 100 high-tech fliers--mostly in Silicon Valley. And he is assembling them into a sort of cyber keiretsu. Unlike Japanese in-house groups, however, Softbank's is more of a cross-border global alliance heavily reliant on big U.S. names. Members range from portals such as Yahoo! Inc. to specialists like U.S. Web, which designs Web sites.

Son sees Softbank as the hub of a huge digital marketplace. Softbank-linked companies swap capital, ideas, and expertise, and collaborate on joint ventures. A Net surfer on Yahoo! can check out mortgages from E-Loan, trade stocks on online broker E*Trade, and price software on computer vendor companies affiliated with Softbank. Son talks of more expansion: "We have to do it on a global scale."

WINDFALL. Son, 41, has spent the last four years on a debt-fueled shopping spree. The result is a $4.5 billion sprawl that includes software distribution, the Ziff-Davis computer publishing empire, and the well-attended Comdex trade shows. Such buys have made Softbank a leading global investor in cyberspace. "Their portfolio is one of the best venture investments of all time," enthuses Daniel Case III, CEO of investment bank HambrEcht & Quist. "You have to give them credit for insight andguts."

Investors are taking notice. Softbank's stock has more than doubled, to 92, since September. The U.S. investor frenzy over Internet issues has been a windfall for Softbank. It boasts $15 billion in paper profits from its stakes in Yahoo!, E*Trade Group Inc.--the No. 3 online broker--and others. Son also has lucrative pre-offering rights to such promising players as Inc., which sells discount computer and consumer goods and plans to go public soon. Given this, Merrill Lynch Japan Inc. Vice-President Mahendra Singh Negi thinks the stock is actually worth $122 a share. Increasingly, Softbank will look like a savvy holding company, whose "value will be far bigger than its holdings," Negi figures.

That begs the question: Can Son make Softbank bigger than the sum of its parts? So far, the answer is yes. Yahoo! Japan, whose profits are forecast to double this year to $2.3 million, is a hit with Japan's estimated 14 million Netizens. As well as expanding in Asia, Son is likely to keep targeting the U.S. He recently got $400 million by reducing his stake in Yahoo! to 28%, from 30%. That cash is slated for even more Internet plays.

Critics level some of the same charges at Softbank that have dogged traditional keiretsu for decades--that the companies support each other for commercial gain. One example is the charge that Yahoo! earnings have been inflated by Ziff buying up a lot of advertising space--a kind of hidden subsidy. Yahoo! CEO Timothy A. Koogle calls this "nonsense." Also, publishing rival International Data Group Inc. has grumbled that Softbank always gives the best booths at Comdex to its biggest high-tech advertisers. Son denies that.

Softbank's huge paper gains, though, could take a serious hit if the Internet stock bubble bursts. In addition, Softbank still has a sizable $2 billion debt load. There are also dismal earnings at 71%-owned Ziff, thanks to steep advertising declines. Son insists that restructuring Ziff will boost profits. But Softbank would have seen a group loss of $120 million for the fiscal year if it hadn't sold a 2% stake in Yahoo!

Still, Son is enjoying a virtuous cycle. The more successful brand-name Internet sites he can band together, the greater the pull with online advertisers and potential new partners. And Japan's high-tech elite, as well as old-fashioned keiretsu, can only look on with awe.

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