If SoftBank’s Masayoshi Son bails on Jack Ma’s Alibaba it would underscore the Japanese giant’s own investor-flight troubles
https://asiatimes.com-by William Pesek
Softbank Group founder Masayoshi Son and Alibaba founder Jack Ma in a file photo. Image: Getty via AFP
TOKYO – If Masayoshi Son is about to sell his massive stake in Alibaba Group, does it say more about the fortunes of his SoftBank Group or the Chinese e-commerce giant Jack Ma founded?
This is the burning question as markets gyrate on reports that Son, Ma’s most important early investor, might cut his losses.
Alibaba shares plunged Monday after analysts at Citigroup connected the dots concerning its registration of big additional blocks of American depositary receipt shares.
Son owns roughly 25% of Alibaba, a company battered and bruised more than most after 15 months of tech industry crackdowns launched by Chinese President Xi Jinping.
Because Son invested in Alibaba before it listed in New York, much of his stake is probably not registered as ADRs. The step would thus exact additional damage on Alibaba’s share prices.
As of Monday, Alibaba shares were down 61% from their October 2020 just before Xi’s clampdown began.
The interesting wrinkle here, though, is what such a move says about Son’s empire. Citi reckons SoftBank could use the cash given Son’s own investor-flight troubles.
Along with Alibaba, SoftBank is taking lumps from the falling values of Didi Global, DoorDash Inc, One 97 Communications and other tech holdings.
In a sense, Son’s US$100 billion Vision Fund risks being undone by a mainland tech industry whose creation he helped facilitate 22 years ago.
Back in 2000, Son was dazzled by Ma’s plans to build a Chinese Amazon — and the nation’s most important tech startup. So much so that he took a $20 million chance on this unknown English teacher in Hangzhou. By 2014, when Ma took Alibaba public, Son’s stake was worth more than $50 billion.
Three years later, Son founded the Vision Fund to try to recreate that magic in countries around the globe. Yet over the last couple of years, even before the pandemic hit, Son was suffering more losses than wins.
Son was by far the most extravagant supporter of WeWork’s fanciful strategy of building an office-sharing eco-system in the image of Apple Inc. What’s more, Son’s penchant for overpaying for stakes in undeserving startups warped venture capital incentives everywhere and larded SoftBank’s balance sheet with excessive risk.
By late 2021, SoftBank was suffering its worst decline since 2006. As Son said in November: “We are in the middle of a blizzard” of red ink. It was quite a contrast from a year earlier when Son said the Vision Fund was the goose laying “golden eggs.”
No one saw Xi’s turn against tech tycoons coming. That regulatory shock coincided with slowing growth in Alibaba’s sales.
And yet, dumping big chunks of his Alibaba holdings would put Son at odds with the company’s other famous booster: Charlie Munger, Warren Buffett’s long-time partner.
At the end of 2021, Munger’s Daily Journal doubled its Alibaba bet, the second consecutive quarter it took bigger risks on Ma’s juggernaut.
Munger claims he’s just crunching the numbers. Alibaba boasts more than 950 million active consumers in the domestic market. And despite short-term uncertainties, Ma still boasts monopoly status in China’s online retail market. Overseas, Alibaba reaches another 285 million consumers.
The events of the last 15 months, though, reminded investors that Alibaba’s monopoly relies on the Communist Party’s goodwill. To amplify the point, Beijing scrapped a November 2020 initial public offering by Ma’s Ant Group. The $37 billion dual listing in Shanghai and Hong Kong would have been history’s biggest.
Though Beijing characterized the move as necessary to curb risks in the fintech space, it came days after Ma, in a Shanghai speech, criticized regulators for “outdated supervision” stifling innovation and banking rules that amounted to an “old people’s club.”
Ma’s complaint that Chinese banks suffer from a “pawnshop mentality” that has “severe” effects on entrepreneurs made headlines around the globe.
Part of the problem, Ma complained, is that China doesn’t have enough experts in power to devise policies to create the Silicon Valley East that Xi claims he’s building with “Made in China 2025.”
And yet, Xi’s government spent the last 15 months making Ma’s point. Ma, the poster boy for Chinese tech and finance, has seldom been heard from since his Shanghai speech.
Reports of sightings of the personality who propelled China to the forefront of e-commerce dominate the global business pages, not Ma’s plans to resurrect his giant IPO.
All this has Son at a loss to explain to shareholders what he expects from SoftBank’s massive exposure to Xi’s regulatory chaos. Yet it also raises bigger questions about where exactly the Vision Fund goes from here.
The other news cycle marring Son’s 2022 is a departure of a string of high-profile executives, including longtime chief operating officer Marcelo Claure. In recent years, Claure was instrumental in making sense of messy investments from wireless carrier Sprint to WeWork.
The tiff is over compensation. Claure reportedly thinks he’s owed billions for reining in the Vision Fund’s worst excesses; he was paid $17 million in 2020.
It underlines the bind in which Japan’s most important tech CEO finds himself. Son is the nation’s most aggressive and unapologetic seeker of foreign talent.
But listed Japanese companies must deal with an aversion among domestic investors to lavish top management with huge payouts. Attempting to find a workaround turned Nissan Motor savior Carlos Ghosn into an international fugitive.
Son’s bigger problem is transforming SoftBank from a tech conglomerate into a full-time venture capital outfit. Trouble is, the income streams are far more erratic when you rely on windfalls from exiting tech investments, not monthly payments from mobile phone subscribers.
Since 2017, Son’s venture capital team poured tens of billions of dollars into startups around the globe, hoping to ride a herd of tech “unicorns” to Alibaba-like riches. The strategy often seems like high-stakes roulette: placing chips on a wide variety of numbers hoping wins top losses.
In doing so, Son’s Vision Fund realigned the venture capital game. Scoring a meeting with Son’s executive team is the most important 30 minutes in young entrepreneurs’ lives.
Yet controlling such a sprawling business and mismatched revenue streams is quite the challenge for SoftBank. It’s made worse by shareholders concerned Son’s compass isn’t always state of the art.
Son, famously, claims to have a 300-year investment time horizon. Nor does his passion for betting on the “singularity,” or the moment when computers outthink humans, comforting to many old-school value investors.
In recent years, Son sought to reassure shareholders with a Buffett-like move to stabilize the balance sheet with a big investment in the insurance world. One secret of Buffett’s Berkshire Hathaway’s success is the steady income it earns from insurance company General Reinsurance.
Back in 2018, Son considered taking a $10 billion stake in Swiss Reinsurance. Son is under pressure to revisit such a strategy as the Vision Fund experiences increased volatility. Given the scale and diversity of SoftBank’s private holdings, returns are becoming harder and harder to estimate.
It’s debatable whether Alibaba’s share price will be bottoming out soon, as analysts like JP Morgan’s Alex Yao have argued in recent months. The idea is that with Covid-19 hitting mainland growth, Xi’s team will throttle back, figuring Big Tech has gotten the message.
Yet as the SoftBank stake sale narrative suggests, this still may be an investor-beware moment. Reuters reports, for example, that President Joe Biden’s White House is investigating Alibaba’s cloud business on US national security grounds.
If true, it suggests Ma’s giant faces fresh hurdles in an area in which investors and analysts saw vast potential growth.
Son pulling the plug on big chunks of his Alibaba stake is a reminder to Xi that Beijing’s capitalist credentials need some reinforcement. It’s also a sign, though, that Son’s big picture investments could have a rough 2022.
Follow William Pesek on Twitter at @WilliamPesek