(Bloomberg) -- Masayoshi Son has quietly tightened his grip on SoftBank Group Corp. during a tumultuous market downturn, edging closer to the point where he could bid to take the world’s largest technology investor private.
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The billionaire now owns more than a third of the company he founded, after aggressive buybacks in the last two months reduced SoftBank’s outstanding stock by almost 90 million. Son’s stake in the company rose to 34.2% from 32.2% as of end-September, according to Bloomberg calculations based on company filings. That’s up from 26.7% as recently as March 2019.
SoftBank’s share price reversed losses to close up 2.2% after the news on Thursday. It was the stock’s biggest rise in three weeks. The benchmark Nikkei 225 Stock Average fell 0.4%.
Under Japanese law, Son gains additional rights after breaching one-third ownership. The 65-year-old wields more control over asset sales, some buybacks, mergers and corporate bylaws by having the power to veto any special resolution put before shareholders by activist investors.
Son is also closer to the point where he could mount an effort to take SoftBank private, an idea he has repeatedly discussed internally. One option long debated is a “slow-burn” buyout to gradually buy back shares until the founder has a big enough stake to squeeze out remaining investors. Under Japanese regulations, Son could compel other shareholders to sell if he gets to 66% ownership, in some cases without paying a premium.
“There’s not a single reason why SoftBank should be listed,” SMBC Nikko Securities senior analyst Satoru Kikuchi said. The company can raise the funds it needs without being listed and without a public entity’s restrictions and costs, he said. “It’s not a good fit for the current business model.”
The idea of a buyout has been debated fiercely for years inside SoftBank. Advocates argue that going private would free SoftBank from regulatory oversight and shareholder scrutiny over investments and staffing. Venture capital peers Tiger Global and Sequoia Capital are closely held. Son would take the company private if he could afford it, one person familiar with the billionaire’s thinking said.
But many lieutenants oppose a buyout, according to another person close to the situation, who asked not to be identified because the talks are private. It would be an enormous financial undertaking that would consume management’s attention and leave it short of cash to make acquisitions and investments.
At SoftBank’s current market capitalization, the price of an MBO would be about $50 billion — roughly double the size of Michael Dell’s buyout of Dell Inc. in 2013 — assuming the need to buy two-thirds of the company.
“He’s not going to have any money left to go out and do the investing that he wants to do,” said Kirk Boodry, an analyst at Redex Research, who publishes on Smartkarma.
Privatization could jeopardize the terms of debt financing for Son personally. Roughly a third of Son’s SoftBank shares are held as collateral, while Son already owed SoftBank $4.7 billion at the end of September.
“An MBO is a monumental undertaking,” said Justin Tang, head of Asia research at United First Partners.
At an earnings call last month, Chief Financial Officer Yoshimitsu Goto dismissed market speculation that the company’s recent flurry of share repurchases was in preparation for an MBO. He cited technical issues that led to a concentration of orders in October.
Apart from any buyout, Son’s rising influence has fueled governance concerns. While the founder has always wielded substantial control, he has proven responsive to outside critiques, including when activist Elliott Management built up its stake in SoftBank in 2020.
Now Son may be less inclined to listen to outside points of view. More importantly, activists will be even less inclined to try.
“This goes against the value of being a shareholding company,” said Masaru Kaneko, professor emeritus at Keio University.
Son’s personal finances are also tied up with SoftBank’s stock price in complex ways because of his margin loans. If SoftBank’s shares tumble again, for example, Son may be inclined to prop up the price through a company-financed buyback — something that would prevent banks from asking for more collateral on his loans.
“The buybacks open the company to criticism that Son’s personal interests and the company’s interests have gotten jumbled up,” said Koji Hirai, president of merger-and-acquisitions advisory firm Kachitas Corp.
“That Son is a major shareholder in the company he founded, demonstrates his confidence SoftBank’s growth,” a spokesperson for the company said, adding that SoftBank “strictly adheres” to legal and regulatory requirements and has administrative checks in place regarding governance and conflicts of interest.
Much hinges on the initial public offering of SoftBank’s chip designer unit Arm Ltd. next year. SoftBank was seeking a valuation of as much as $60 billion for Arm in an initial public offering — almost double the amount it paid when it bought the business in 2016. If realized, that kind of return would not only provide capital to help turbocharge SoftBank’s investment machine, it would also open a path to privatization.
SoftBank’s cash flow will determine whether Son gets favorable terms on loans to finance any MBO. Other asset sales that could quickly bolster SoftBank’s cash position include its shares in Alibaba Group Holding Ltd., SenseTime Group Inc. and DoorDash Inc.
Going private “is not something that’ll happen tomorrow,” Kikuchi said. “But if you’re talking about next year or the year after, it’s plausible.”
--With assistance from Peter Elstrom, Haruka Kuroo and Vlad Savov.
(Updates share price reaction in third paragraph)
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