Masayoshi Son Again Pulled Softbank From the Brink. This Time He Had Help.

 Masayoshi Son Again Pulled Softbank From the Brink. This Time He Had Help.

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Illustration: Ula Sveikauskaite

Japanese tech billionaire Masayoshi Son late this spring said he had “peered over the cliff edge” of financial ruin. Now, the
SoftBank Group Corp.
founder is sitting on one of the largest cash piles in the investing world.

Mr. Son pulled his conglomerate back from the void with a sharp and surprising strategy shift, selling off holdings that have been central to his investment and operating blueprint, and buying back shares. The world’s biggest tech investor relinquished majority control over its last major operating businesses, sealing SoftBank’s transformation into an investment firm—and Mr. Son’s reputation for not doing anything by halves.

Mr. Son had survived previous corporate near-death episodes. This time, there was a new force urging on the metamorphosis.

When SoftBank’s shares lost nearly half their value—almost $50 billion—in two weeks this spring, Mr. Son and his senior team held daily calls with executives at hedge-fund firm Elliott Management Corp., said people familiar with the discussions. Elliott since last fall has built a SoftBank stake that likely makes it the company’s No. 2 shareholder after Mr. Son, they said.

Among Elliott executives counseling the Japanese firm was Gordon Singer, the founder’s 46-year-old son and head of Elliott’s London office. Mr. Singer and his team pressed Mr. Son to improve corporate governance and buy back shares.

In the end, SoftBank bought back more stock than Elliott had pressed for—surprising executives at the hedge fund—and sold enough assets to leave the company as much as $60 billion in available cash, said a person with knowledge of SoftBank’s finances.

SoftBank shares closed at 6,581 yen on Wednesday, up 144% from their March 19 nadir.

Now there is a nagging question within Elliott: Might Mr. Son go back to his old ways?

Some inside the hedge-fund firm are wary Mr. Son could spend the cash on risky investments, as he has done before, said people familiar with Elliott. He has often paid a major premium that has baffled the investment and tech worlds, including a large investment in office-share firm WeWork that he later called “really bad” judgment and another on a dog-walking startup.

Those worries have been fanned recently by Mr. Son’s surprise move to become essentially a day-trader, personally directing a team of traders using some of the cash pile to bet on daily moves in tech stocks.

Elliott executives are concerned enough about Mr. Son’s new activity that they have hedged against some of his trades by buying put options on an index of tech stocks, said the people familiar with Elliott. SoftBank is keeping all options open for spending the cash, Mr. Son said at an earnings press conference on Monday.

SoftBank CEO Masayoshi Son said he had ‘peered over the cliff edge’ of financial ruin; Mr. Son in February.

SoftBank CEO Masayoshi Son said he had ‘peered over the cliff edge’ of financial ruin; Mr. Son in February.

Photo: Kiyoshi Ota/Bloomberg News

The year 2020 has further cemented Mr. Son’s reputation as one of the world’s most unpredictable entrepreneurs, one whose every move is scrutinized, given how his cash sways industries and markets.

That Elliott, one of the world’s most tenacious activist investors, is wary SoftBank could head in an unanticipated direction is testament to Mr. Son’s record. He is known for strokes of investing genius, for huge flops and for running his own show, sometimes arguing against his own board and advisers.

In a written statement, SoftBank said that while its “vision hasn’t changed, our business model is always evolving,” adding that it is focused on pursuing an artificial-intelligence revolution and “creating value for shareholders—and no one is more determined to deliver than Mr. Son.”

SoftBank’s strategy shift and its asset sales were based solely on its own judgment, the company said. Investment decisions at SoftBank or the Vision Fund are made by their boards or investment committees, not by Mr. Son on his own, it said, declining to make Mr. Son available for an interview. Elliott declined to make Mr. Singer available for an interview.

Odd match

Elliott’s deepening foray into SoftBank harks back to last summer, according to people with firsthand knowledge of the companies, investors in the firms, and traders and bankers who work with them.

SoftBank is Elliott’s largest-ever bet on a single stock, said people familiar with the investment. Since it began building its stake last fall, Elliott’s SoftBank position has grown in recent months to at least $5 billion, much of it via so-called swaps that let Elliott avoid disclosing the full extent of its SoftBank position, they said. At today’s prices, that would be the equivalent of a 3.8% stake. It has since sold some shares, the people said.

Elliott is an odd match for Mr. Son. Founded by billionaire Paul Singer in 1977, the $41 billion fund is famous for taking stakes in companies and engaging in pitched battles with management. Chief executives who go head-to-head with Elliott frequently lose. It is known for its disciplined focus on not losing money—the founder has described that as the firm’s No. 1 rule.

Among Elliott Management executives counseling SoftBank was Gordon Singer, here at a 2018 soccer match.

Among Elliott Management executives counseling SoftBank was Gordon Singer, here at a 2018 soccer match.

Photo: Spada/Lapresse/ZUMA Press

In 2008, when hedge funds on average lost 19%, Elliott lost 3%. It was up 8.7% this year through September.

Mr. Son has become the world’s biggest technology investor by relying on his gut. He has directed SoftBank into dozens of companies often based, he has said, on instinct and a vision of how technology will change the future. He expects to lose money on some investments. Like most venture capitalists, his hope is that a handful will eventually be hits. He has said he invests with the aim to make SoftBank last 300 years.

SoftBank is known for its chaotic culture, reflecting its founder’s personality. Mr. Son often calls hourslong discussion sessions over strategy or investments, company veterans say, and sometimes pushes through investments despite skepticism from banks, his executives or his own board. He has said he can quickly sense whether he wants to invest in an entrepreneur, famously saying he decided to offer funding to Alibaba Group Holding Ltd. co-founder Jack Ma because of the twinkle in his eyes.

Over the nearly 40 years since founding SoftBank, Mr. Son has steered it through a bewildering number of businesses, from software distribution to mobile phones to satellites and solar arrays. During the dot-com boom and bust, he gained and lost the status of world’s richest man and made one of the world’s great venture-capital bets, a $100 million Alibaba investment that is still valued at more than $170 billion even after selling portions of it.

He hasn’t replicated that success with his most recent venture, the $100 billion Vision Fund. It logged an investment loss of $17 billion in the year ended March 31, and efforts to find investors for a sequel fund flopped. Those two funds posted a $13 billion investment gain for the six months through September, SoftBank said Monday.

SoftBank said its “culture is one where importance is placed on maintaining momentum to always stay ahead of the times. It is not ‘chaotic.’ ”

Elliott’s stake

Elliott had traded modestly in SoftBank stock for more than a decade, but never felt comfortable making a big activist bet, said people familiar with its strategy. They were worried Mr. Son, who holds nearly 30% of the company, wouldn’t agree to take steps Elliott could normally demand of its targets, such as selling assets or making substantial share buybacks.

Last year, the idea of taking a larger SoftBank stake attracted Elliott’s Mr. Singer, the founder’s son, who saw it was trading far below the value of assets it was holding. He thought aggressive share buybacks could help close that gap, and figured the WeWork debacle—it scrapped its initial public offering plan, pushed out its founder and was bailed out by SoftBank—might have humbled Mr. Son enough to be willing to hear them out.

SoftBank’s stock has long traded for less than the sum of its parts because investors are wary about Mr. Son’s unorthodox investment style. In addition to its stake in Alibaba and the Vision Fund, last year SoftBank owned controlling interests in U.S. telecom operator Sprint, a Japanese mobile operator and Arm Holdings, a microchip design company. At year’s end, SoftBank shares were trading at less than 50% of the value of its assets.

Elliott took a small position in SoftBank in the fall and began adding to it. By February 2020, Elliott had amassed a more than $2.5 billion stake in SoftBank, equivalent at the time to about 3% of SoftBank’s market value.

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Instead of launching a public campaign and surprising SoftBank with its demands, as Elliott has done with past large targets, the firm decided on a softer approach. They worried about angering Mr. Son, over whom they had little leverage, given his No. 1 stake. The best bet, they decided, was to make an appeal based on logic and the math behind the stock’s poor performance.

To their surprise, Mr. Son was receptive. When he met Mr. Singer and his team in January in Tokyo, he agreed SoftBank’s stock was undervalued and openly wondered why he wasn’t as revered as legendary value investor Warren Buffett, said one person in attendance.

Mr. Singer told him one way to help boost the stock price was to improve corporate governance, including adding women to its all-male board and implementing more checks and balances for Mr. Son, measures SoftBank has since implemented. Elliott also suggested SoftBank commit to buying back $10 billion to $20 billion of stock—up to a quarter of shares outstanding at the time.

Mr. Son didn’t commit to Elliott’s suggestions, appearing to signal he favored a more gradualist approach, including buying back less stock. Elliott decided to take a wait-and-see approach.

Then in March, the market panic over Covid-19 and tightening social restrictions pummeled his empire. While some of the Vision Fund’s companies benefited—including e-commerce and medical firms—many of its biggest investments were in businesses getting hammered, including WeWork,
Uber Technologies Inc.,
Didi Chuxing Technology Co. and Oyo Hotels & Homes. SoftBank’s share price fell 25% during the first two weeks of March.

From the Archives

SoftBank’s longtime strategy of dumping mountains of cash on promising young companies to create big winners failed dramatically at WeWork and is inviting scrutiny into the fund’s other investments. Here’s a look at Vision Fund’s structure, and how its fast paced investment strategy could make it risky. (Originally published Dec. 11, 2019)

On March 13, SoftBank announced it would buy back as much as 7% of its shares, roughly $4.8 billion at the time, an amount similar to previous buybacks.

The team inside Elliott was surprised and frustrated by the buyback’s size, which they deemed lacking the urgency needed. The frequency of phone conversations between the firms increased—sometimes involving Mr. Son and Mr. Singer—until they were speaking daily.

On the calls, SoftBank executives at first said the larger buyback Elliott had requested wasn’t necessary. Elliott executives kept pressing as SoftBank’s stock price fell more than the broader market in the days following the announcement.

Mr. Son called SoftBank’s investment in WeWork ‘really bad’ judgment; signage in Beijing.

Mr. Son called SoftBank’s investment in WeWork ‘really bad’ judgment; signage in Beijing.

Photo: wang zhao/Agence France-Presse/Getty Images

The price brokers were charging to insure against a SoftBank default—known as a credit-default swap—was spiking, and credit-rater Standard & Poor’s had downgraded the company’s outlook on March 17.

By Thursday, March 19, SoftBank’s shares had fallen 40% in just over a week, and its market capitalization had tumbled to around a quarter of the value of its assets. Mr. Son was personally affected when SoftBank’s falling share price depressed the value of shares he had pledged as collateral for loans, forcing him to pledge nearly three-quarters of his holdings at one point. Mr. Son has since said the situation has improved quite a bit. SoftBank said the board, not Mr. Son, made its decision to sell assets and buy back shares and that “Mr. Son’s personal circumstances had nothing to do with such decision.”

On Saturday, March 21, SoftBank called a multi-hour meeting with large shareholders, including Elliott’s Mr. Singer to pitch the idea of taking SoftBank private. Mr. Son had floated the idea off and on through the years, and some portfolio managers and analysts at Elliott were interested. But the other shareholders were ultimately not on board with the proposal.

On Monday, March 23, SoftBank announced a plan to sell $41 billion in assets and use the money to buy back an additional $18 billion in shares—more than Elliott had asked for when including the previously announced buyback. The move surprised even the biggest supporters of the SoftBank bet within Elliott.

Transformation

Within months, SoftBank had signed deals to sell most of what it had pledged to in March, agreeing to part with chunks of prized holdings such as Alibaba, U.S. carrier
T-Mobile
US Inc., and the company’s Japanese mobile-phone unit. SoftBank’s share price soared.

Mr. Son kept selling, surprising Elliott and other investors. SoftBank agreed to sell Arm to
Nvidia Corp.
for as much as $40 billion. SoftBank sold an additional 22% piece of its Japanese mobile-phone unit for $11.6 billion and a U.S. wireless-services provider it had bought several years back.

Top brass from SoftBank and Elliott now connect multiple times a month to discuss SoftBank’s next steps. SoftBank executives have told Elliott and other shareholders that taking the company private is possible but not currently on the table, said people familiar with the matter.

SoftBank is also working on developing a “blank-check” company to raise money in a public offering, then find an acquisition target.

One recent development at SoftBank that worries some in Elliott is a new asset-management arm Mr. Son announced in mid-August as cash piled up, to which he will contribute himself. He now personally directs a team of traders using $20 billion of the cash pile to bet on daily moves in tech names including
Alphabet Inc.,
Amazon.
com Inc. and
Netflix Inc.,
said people familiar with his trading.

SoftBank shares lost nearly half their value in two weeks this spring; Tokyo headquarters.

SoftBank shares lost nearly half their value in two weeks this spring; Tokyo headquarters.

Photo: Kiyoshi Ota/Bloomberg News

On an investor call, Mr. Son explained he was putting his own money in the new venture because he wasn’t a “bonus and salary guy” and felt the need to take risk and make money if his bets worked out. A person familiar with the investing arm said Mr. Son has for now set aside his 300-year focus to concentrate on directing his daily trades.

Some of SoftBank’s other institutional shareholders said they were confused by the flurry of trading and wondered if Mr. Son was readying another multibillion-dollar investment.

Mr. Son’s traders bought options that at one point were tied to around $50 billion of individual tech stocks, a massive bet on Silicon Valley that caused SoftBank’s stock price to drop 7% after the trade became public in early September. SoftBank lost nearly $3 billion on some of those options trades as well as other derivatives transactions, it said Monday.

Elliott bought offsetting options to hedge against SoftBank’s options trade when it found out about them, protecting them from the trade’s fallout.

Some within Elliott worry Mr. Son might make a surprise, large investment. Recent calls between the companies, a person familiar with the calls said, have included Elliott’s stressing the need for SoftBank to employ discipline.

Write to Phred Dvorak at phred.dvorak@wsj.com, Corrie Driebusch at corrie.driebusch@wsj.com and Juliet Chung at juliet.chung@wsj.com