SoftBank's New $30B Z Holdings Lacks X Factor
If it looks even vaguely technological and comes with a multi-billion-dollar valuation, it seems bound to attract the attention of Masayoshi Son, the SoftBank owner and Japanese billionaire whose genial appearance is at odds with his control freakery and increasingly sinister plans for world domination.
His latest move is a $30 billion deal to merge Yahoo Japan, a web company part controlled by SoftBank, with Line, a Japanese messaging service whose majority owner is South Korea's Naver. The transaction, detailed in nine pages of legalistic prose, has all the hallmarks of financial complexity that go with most of Son's deals. What's important is that SoftBank's telecom subsidiary and Naver will create a joint venture valued at $30 billion that includes Yahoo Japan and Line.
The rationale, according to SoftBank's statement, is that Japan has fallen behind the US and China in the Internet race. Despite Son's bid for global domination, it is US and Chinese firms that have become "overwhelmingly dominant." Japan, in other words, has no BATs and FAANGs (the acronyms used to describe the technology giants of the modern age). This merger is the apparent answer.
It certainly has the zeitgeisty name for a new Internet overlord. Z Holdings, the part of SoftBank that operates Yahoo, will be the brand for the new-look entity, hinting at post-millennial identity and relevance. But alongside the FAANGs, Z Holdings may lack teeth.
Its valuation alone points to its diminutive stature. Alphabet, Google's parent company, is currently worth about $911 billion. Amazon is valued at $869 billion. China's Alibaba, meanwhile, carries a market capitalization of about $482 billion in New York. A $30 billion valuation would not even put Z Holdings in the same bracket as French telco Orange, worth about €39 billion ($43 billion) in Paris today.
Market valuation is not always the best measure of business value, of course. So how does Z Holdings match up in other ways? Well, Yahoo Japan made revenues of about 947.4 billion Japanese yen ($8.7 billion) in the most recent fiscal year, reporting earnings (before interest, tax, depreciation and amortization) of JPY193.6 billion ($1.8 billion). Line managed JPY207.2 billion ($1.9 billion) and recorded a net loss of JPY3.7 billion ($34 million). Combined sales, then, would equal about $10.6 billion today. Alphabet's revenues last year were more than $136 billion. Amazon made about $233 billion.
That does not make this a stupid deal. Bulking up in Japan makes sense given strong competition from Rakuten, an ecommerce rival now building an entirely new mobile network based on whizzy, albeit commercially unproven, technology. Together, Yahoo Japan and Line will have access to more data and be able to strike more favorable deals with advertisers. On the sales front, they will also overshadow Rakuten, which made about $10.1 billion in revenues last year.
This is not how the deal has been sold to the investor and analyst community, however. Son has shown himself pathologically incapable of announcing any deal without reference to artificial intelligence or the world stage. True to form, SoftBank's announcement on the Z Holdings move talks of a "driving force across Japan, Asia and worldwide." In the two paragraphs explaining why the merger is so important, artificial intelligence is mentioned four times -- yet without any coherent explanation of how it will be used. Right now, Son probably has few sensible ideas about that. He is big on the singularity, the idea beloved of science-fiction enthusiasts that robot intelligence will eventually surpass the human variety, at which stage billions of people will apparently become pointless.
Standing on its own feet, Z Holdings will not have the research-and-development muscle to challenge BATs, FAANGs or even companies like Huawei, a Chinese maker of network equipment. Last year, Alphabet pumped $21.4 billion into R&D, a sum it will take Z Holdings two years to generate in sales alone. Earnings at both Yahoo Japan and Line have also been on the slide.
This all overlooks the role of SoftBank as a muscular parent whose resources and portfolio of technology companies could prove invaluable to Z Holdings. Last year, it made $88.4 billion in sales, a considerable amount by any measure. Unfortunately, SoftBank is also drowning in debt, with about $127 billion on its books at the end of September. Investment activity is to blame: The Vision Fund, a $100 billion SoftBank-guided vehicle, is betting on all manner of technological businesses plus WeWork, a badly run property firm that recently needed a $9.5 billion bailout. Few of Son's recent gambles seem to have paid off.
Son insists otherwise. Trying to justify his profligacy, he told analysts in a rambling monologue earlier this month that revenues and profits are no longer metrics he considers relevant. "The most important measurement for us is shareholder value," he said. Defined as the equity value of holdings minus interest-bearing debt, that soared JPY1.4 trillion ($12.9 billion) in the recent third quarter, to JPY22.4 trillion ($206 billion). The expression "house of cards" springs to mind.
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— Iain Morris, International Editor, Light Reading