Softbank's Cyber Keiretsu

It's a top global investor in Internet companies

For most of the postwar era, industrial Japan has organized its way of operating 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, it may be providing inspiration in an unlikely and borderless place: cyberspace.

Just take the recent moves of Japanese software and Internet service powerhouse Softbank Corp. In a slew of acquisitions, Chief Executive Masayoshi Son has spent $2 billion buying 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 creates Web sites. In the most recent deal, on Mar. 24, Softbank, Yahoo! Japan, and Microsoft launched CarPoint Japan K.K.--a Japanese version of the Microsoft site that allows consumers to read auto reviews and shop around for models and prices on the Internet.

DIGITAL HUB. Son increasingly sees Softbank as the hub of a huge digital marketplace. Softbank-linked companies already swap capital, ideas, and expertise to exploit such fast-growth areas as electronic commerce and online trading, and they collaborate on joint ventures. For consumers, that means 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. And Son wants to extend his reach to brand-name Web sites in Asia and eventually Europe. Says Son: "We have a strategy for always being No. 1 [in key Internet markets]. And we have to do it on a global scale."

Son, 41, started out as an obscure software distributor, but he has long had an eye on Internet growth. An ethnic Korean who broke into the ranks of Japan's wealthiest businesspeople, Son has spent the last four years on a debt-fueled acquisition spree. The result is a $4.5 billion sprawl that includes software distribution, the Ziff-Davis computer publishing empire, and the venerable Comdex trade shows held in the U.S. Such buys have made Softbank one of the leading global investors 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 and guts."

Son's chutzpah is admired in Corporate Japan, too, particularly by the big, money-losing consumer-electronics giants. Behind Sony Corp.'s recent dramatic restructuring program is President Nobuyuki Idei's belief that the company desperately needs better networking technologies and expansion into the Internet to ensure its survival. Idei says he admires Son's aggressive mergers and embrace of the Net.

Investors also 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 now 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 secured lucrative pre-offering rights to such promising players as Inc., which sells discount computer and consumer goods and plans to go public soon.

Given all this, Merrill Lynch Japan Inc. Vice-President Mahendra Singh Negi thinks the stock is actually worth $122 a share, or 30% more than its current price. He gets there by factoring in a conservative 50% of Softbank's unrealized gains on listed and private Internet players. Increasingly, Softbank will look like a savvy investment holding company, whose "value will be far bigger than its holdings," Negi figures.

ASIAN CONNECTIONS. That begs the question: Can Son make Softbank somehow bigger than the sum of its parts? So far, the answer is yes. Softbank's network and connections in Japan and East Asia are proving attractive. Yahoo! Japan, 51% owned by Softbank, has been a smash hit with the estimated 14 million Japanese Netizens, who are forecast to double in number by 2005. Its profits are expected to jump 100%, to $2.3 million this year, thanks to heavy online advertising from local auto companies and retailers.

Son also hopes to cash in on Japan's growing interest in online trading. Later this year, in a joint venture with E*Trade, Softbank will jump into discount brokerage to profit from Japan's liberalization of stock commissions. Yahoo! Japan and mutual-fund tracker Morningstar Inc., another company in which Softbank has a stake, will provide financial news and analysis. Son and his in-house team of ex-Nomura financiers also want to list the Japanese affiliates of Softbank's U.S. holdings in Tokyo.

Elsewhere in Asia, Son has taken Yahoo! and E*Trade to South Korea. And last month, Softbank purchased Asia Online, an Internet access provider with 30,000 subscribers in Hong Kong. But Son is likely to keep targeting the U.S. In mid-February, he redeployed some $400 million in gains from reducing his stake in Yahoo! to 28%, from 30%. That cash is slated for even more Internet plays in online trading, E-commerce, and transactions services.

Critics level some of the same charges at Softbank that they have at the traditional keiretsu for decades. They contend that the companies support and play off 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." Rival publisher International Data Group Inc. President Patrick J. McGovern also has publicly grumbled that Softbank always gives the best booths at Comdex to its biggest high-tech advertisers. Son has always denied that.

Softbank's huge paper gains, though, could also take a serious hit should the Internet stock bubble burst. In addition, Softbank still has a sizable $2 billion debt load. But Son insists that even without the paper gains, the company is generating more than enough cash flow to cover its nearly $300 million in annual interest and debt-servicing costs. "Why should this even be an issue?" he asks. Harder to dismiss are the dismal earnings at 71%-owned Ziff, thanks to steep advertising declines at its top titles, such as Computer Shopper and PC Magazine. Son insists an ongoing restructuring at Ziff will restore the unit to profitability. But Softbank would have recorded a group loss of $120 million last fiscal year if it hadn't sold that 2% stake in Yahoo!

Still, group operating profits are forecast to jump 90% this year and 50% in 2001. And 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. Soaring Internet stock valuations are giving Son the financial ammunition to hunt for more deals. And Japan's high-tech elite, as well as old-fashioned keiretsu, can only look on with awe and envy.

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