SoftBank is ready for more acquisitions

Smartphone showing Arm Ltd logo

In this illustration taken on March 6, 2023, a smartphone with the Arm Ltd logo is placed on a computer motherboard.

TOKYO – The huge success of Arm Holdings' stock flotation has made it easier for its owner, SoftBank Group Corp, to return to its natural state – hungry for acquisitions.

Shares of the British chip designer rose nearly 25% on its debut, more than doubling the value of the $32 billion SoftBank paid for the company in 2016. 5 billion, while retaining 90.6% of the company.

read: SoftBank's Arm soared nearly 25% on its first day of listing, with a valuation of US$6.5 billion

SoftBank founder and CEO Masayoshi Son, known for his debt-fueled acquisition spree, stressed in June that the company was returning to “offensive mode” while highlighting the potential of artificial intelligence. That came after a year in “defensive mode,” when technology stock valuations plummeted due to rising interest rates and global banking turmoil.

read: Global M&A fell sharply in second quarter, but dealmakers see signs of recovery

However, his chief financial officer, Yoshimitsu Goto, struck a more cautious tone, saying last month that the company was pursuing selected new investments cautiously.

Regardless of whether Son resumes his frenetic pace of acquisitions, taking Arm stock public would allow SoftBank to more easily use the stock as collateral, potentially boosting its credit rating to obtain better borrowing terms and helping it gain Son's favor. margin loan.

SoftBank declined to comment on its acquisition strategy.

Analysts at SemiAnalysis said increasing the proportion of SoftBank's net asset value (NAV) held in listed stocks is an important prerequisite for improving its sluggish credit profile.

“They hope that Arm's stock price will be higher so that they can increase their net worth and help repair their credit rating,” they wrote in a note to subscribers.

SoftBank's reputation was damaged when S&P Global Ratings downgraded its long-term rating further to junk status in May.

The agency noted SoftBank's growing investments in unlisted companies, which are less easily valued, as it sold assets in listed companies, mainly Chinese e-commerce giant Alibaba, to stabilize its balance sheet .

SoftBank's last big investment coincided with the 2021 tech bubble, and the bubble burst caused the value of its Vision Fund 2 to drop to $33.2 billion, while the total purchase price of the assets was $51.8 billion.

Vision Fund 1 performed slightly better, with earnings exceeding acquisition costs by 14%.

read: U.S. IPO market expected to end strong in 2023 amid flurry of listing activity

good time?

Some analysts say that if Son indulges his acquisition streak now, his timing may be fortuitous given depressed valuations and the relative lack of funding for the early-stage startups he typically targets.

SoftBank also benefits from being one of the largest funds in the market.

“They have firepower behind them that a lot of venture capital funds don't have,” said PitchBook venture capital analyst Kyle Stanley.

“If they invest in the early stages, they will have a little bit of price elasticity to get involved in the deals they feel they need to get involved in,” he said.

Still, analysts question whether Son can replicate the success he saw at Alibaba.

Enthusiasm for artificial intelligence has soared to impressive peaks, and with the exception of chip company Nvidia, it's difficult to determine which companies will be the biggest beneficiaries of AI adoption. Analysts say few companies in SoftBank's portfolio have demonstrated the commercial utility of artificial intelligence.

There's no guarantee that Arm's share price will stay high, with some analysts warning that tech companies may now be adjusting given that valuations driven by enthusiasm for artificial intelligence may have come to an end.

“There are signs that tech stocks are getting tired and overvalued,” said Amir Anvarzadeh, strategist at Asymmetry Advisors.

Higher interest rates (the U.S. benchmark is 5.5%) also mean target companies need to achieve greater growth to justify the cost of acquisition, forcing investors to take a more considered approach.

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“This should apply to SoftBank as well. But they have their own playbook,” PitchBook's Stanford said.

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