SoftBank’s Fire Sale Doesn’t Redeem Masayoshi Son’s Strategy

(Bloomberg Opinion) -- The latest round of the SoftBank Group Corp. fire sale looks set to be a much-needed success for Chairman Masayoshi Son. But it’s not a validation of his strategy..Britain’s Aveva Group Plc. is in advanced talks to acquire OSIsoft LLC, an industrial software-maker backed by SoftBank, Bloomberg News reported on Friday. The deal would be a win for Son, whose strategy of writing big checks to invest in technology companies through his Vision Fund venture capital arm has faced mounting criticism, not least from activist investor Elliott Management Corp. The fund lost SoftBank almost $18 billion last year, whereas Elliott’s efforts to refocus attention on SoftBank’s other investments have prompted a recovery in the share price..OSIsoft is a bright spot. Son paid a little under $1 billion for a 45% stake in 2017. He’ll secure a 150% return on that investment if Aveva pays the reported $5 billion — pretty decent going..But that success also highlights the failings of so many other bets. When the Vision Fund poured billions of dollars into the likes of WeWork and Uber Technologies Inc., the aim was to give the start-ups a war chest they could use to undercut the competition on price. That would then squeeze out competitors, allowing them to raise prices and finally make a profit. So far, the vision has failed to pay off: Uber and WeWork alone accounted for write-downs of $9.8 billion for the fund last year..The OSIsoft investment was different. SoftBank did not inject any new capital into the business, but instead bought the stake from existing investors. While that gave J. Patrick Kennedy, OSIsoft’s founder and chief executive officer, cover to reinvest profits in growth, it didn’t make the California-based company a bully boy with the funds to push others out of business. Such a strategy would have been unwise: Competitors include the likes of General Electric Co., Siemens AG and Robert Bosch GmbH — industrial giants with pockets deep enough to compete in a price war..It was a classic late-stage venture bet on a company with good technology in a fast-growing niche — in this case, the collection and analysis of data from industrial machinery..For Aveva, acquiring OSIsoft is likely to require some inventive financing. The Cambridge-based company, which has an enterprise value of 7.4 billion pounds ($9.6 billion), can’t fund a deal from its current balance sheet, with just 114 million pounds of cash..Based on optimistic assumptions about the firms’ combined earnings, Aveva is also unlikely to raise more than 1 billion pounds in debt, since enterprise software companies can typically sustain debt representing only about double their Ebitda, an earnings measure. To fund the rest of the proposed $5 billion deal, Aveva can either offer stock, sell new equity or both..Schneider Electric SE, the French industrial company that owns 60% of Aveva, probably won’t want to dilute its stake, since software is a key leg of its growth strategy. That makes offering OSIsoft’s owners stock in the new company, which would entail such a dilution, less likely than a capital increase in which Schneider could buy some of the new shares..Were Aveva to seek 3.5 billion pounds by offering new equity, Schneider could readily participate: It has both 5 billion euros ($5.9 billion) of cash and headroom to raise more debt of its own. And Aveva could still offer a small slice of equity to OSIsoft’s Kennedy to keep him personally invested in the combined firm..There’s a risk that Son will point to investments such as OSIsoft as evidence of the Vision Fund’s merits, particularly if he resurrects efforts to raise a follow-up to the $100 billion fund. Investors would do well to remember that savvy technology bets can be more lucrative than trying to price out the competition..This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco..©2020 Bloomberg L.P.

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SoftBank’s Fire Sale Doesn’t Redeem Masayoshi Son’s Strategy

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