Two of the poster children for the unicorn set—highly valued companies that put growth well before profitability—turned SoftBank Group’s latest quarterly earnings report into a dirge.
SoftBank on Wednesday tallied up the write-downs on its investments in WeWork since that shared office space startup hastily pulled its IPO. The total: $9.2 billion, or some 90% of the $10.3 billion SoftBank had invested in the venture.
A fairly contrite Masayoshi Son, founder of SoftBank, put much of the blame on himself on Wednesday for SoftBank’s performance. “There was a problem with my own judgment, that’s something I have to reflect on,” he told investors and the press.
The WeWork hit, plus additional investment losses piling up from its Uber stake, is leading even some big-name investors to question the merits of the prevailing “unicorn” management strategy that sees accruing massive losses in search of growth as no big deal.
Goldman Sachs Group CEO David Solomon made the case for a shift in thinking earlier in the week. He told a Bloomberg TV interviewer, “it’s important for people to grow, but there’s got to be a clear and articulated path to profitability.”
The investment bank booked a big loss of its own—not SoftBank big, but still a $267 million hit—as its bets on many of these same companies—Uber Technologies, Avantor, Tradeweb Markets, and, yes, WeWork—went south. “I think there’s a little more market discipline coming into play,” Solomon said.
The SoftBank investments included money through a wholly-owned subsidiary, SB WW Holdings (Cayman) Limited, and SoftBank’s Vision Fund. So much then for the company’s soft words into an analyst’s ear that the WeWork potential impact was overstated in the press.
Analysts probably won’t be surprised by the magnitude of the write-down because they had been taking cues from the “recent re-cap of WeWork by SoftBank itself, which I think is the only value analysts could realistically assume,” Dan Baker, director of equity research at Morningstar Investment Management Asia Limited, told Fortune.
The size of disaster that is the company’s heavy investment in WeWork isn’t the only problem facing SoftBank. The value of its Uber shares have fallen since its IPO.
A Fortune analysis of the SoftBank filing shows that the loss attributed to the company’s Vision Fund and Delta Fund came to $3.5 billion. And yet, elsewhere in the filing, the reporting on the two funds showed a $4.9 billion “loss of valuation.” One explanation for that: the additional $1.4 billion would be the result of share price drop for Uber, in which the funds were heavy investors.
All in, the result was a $4.9 billion loss on investments for the first six months of the company’s fiscal year that ends in March 2020. That compares to the $6 billion positive gain for the same period last year. Given that the investment gain was $3.8 billion in the first quarter, that would mean the investment loss in the second quarter was $8.7 billion. Those results don’t directly match the write-downs of WeWork and Uber because there were gains on other investments.
And yet, the long-term implications of the losses aren’t clear. They are “unrealized,” meaning that they remain on the books and haven’t been sold. It remains to be seen whether WeWork investments in particular would find new takers.
Of course, what was written down this period could be written back up again with a change in the fortunes of the investments. That explains why SoftBank has put more money into WeWork in hopes of resuscitating it.
The funding package includes $1.5 billion at $11.60 a share. SoftBank also launched a tender offer at $19.19 a share, worth up to $3 billion, to acquire outstanding shares of the company starting next year. There is also $1.1 billion in senior secured notes, $2.2 billion in unsecured notes, and a $1.75 billion letter of credit to occur after the tender offer is complete. Finally, Vision Fund holdings in three joint ventures with WeWork that addressed the office space subleasing businesses in China, Japan, and the greater Pacific region will be swapped for shares of WeWork valued at $11.60 a share.
SoftBank hopes that by taking more control, it can direct WeWork into renewed growth and eventual profitability. That said, the company does risk what is called the sunk costs fallacy: the assumption that more investment will eventually recoup previous losses.
There are some in finance who see the WeWork-chickens-coming-home-to-their-subleased-space-to roost as a kind of poetic market justice. “The best trend I have witnessed recently in the equity markets is the dramatic fall in value of some of the so-called Silicon Valley unicorns,” says Robert Johnson, professor of finance at the Heider College of Business of Creighton University.
The hit to SoftBank’s investments, Johnson says, “illustrates that markets still value firms that can produce cold, hard cash” and that “investors have returned to valuing firms that produce positive cash flows, preferring growth at a reasonable price to growth at any price.”
Then again, as Baker says, “SoftBank is still forging ahead with Vision Fund 2,” which is expected to be just as large as the original. The losses with WeWork and Uber “[don’t] seem to be impacting on it much.”
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