By Zaid Dudhniwala, BSc Economics @LSE
SoftBank and Masayoshi Son’s name is often tied with catastrophic disasters. Whether that be the failed WeWork IPO, Uber’s miserable IPO day, or more recently being dubbed the “Nasdaq whale” as a result of their $4bn option bets on technology stocks, a move large enough to shift markets, negative PR is something SoftBank has become accustomed to. Having said that, many of the conglomerate’s achievements go under the radar as a result. Very few know of the early bet Son made on Alibaba, back in 1999, nor do many know the platform his $100bn Vision Fund is providing for technology companies that are changing the world, a good example being Bytedance, the owners of Tiktok.
Despite SoftBank’s asset management arm hedging in the most unorthodox manner in volatile market conditions, their Vision Fund is brewing up the possibility of some industry-changing M&A activity going forward. Firstly, the Arm-Nvidia deal, which is ironic considering both companies were once both part of the Fund (Arm still is, and it’s shares are 75% owned by the fund). Not only that, but also OSIsoft, a software producing company, is now in talks to be acquired by the Aveva Group. Son’s litter of exciting technology startups have matured well, the few companies above being good examples, and they are now paving the way forward in their unique segments of the technology industry.
Nvidia’s acquisition of Arm Holdings, at an approximate valuation of $30bn, would reap Softbank great rewards on their investment, however the impact it will have on the technology world would be immense. It will allow the synchronisation of two giants in their respective domains, Nvidia’s graphic processing with their GPU platforms and Arm’s computer processing with their CPU platforms. Since these two are already tied to the industry-leading chipmaker TSMC, this acquisition makes great sense in terms of synergies and a broader aim to take down the faltering-leader Intel. A calculated acquisition as such, if executed tactically, would be able to create a new industry leader and norm, really representing the extent to which SoftBank’s involvement in this space has led to change in the technology world, through M&A following on from their Vision Fund.
OSIsoft’s sale to AVEVA, aimed at around $5bn, will not be as impactful as the potential Nvidia-Arm deal, but will still cause murmurs, especially in the world of M&A. AVEVA’s dominance in industrial software and OSIsoft’s expertise in real-time industrial data software and services is a great match, one where AVEVA’s end-to-end services can be substantially benefited by OSIsoft’s data management. There are further synergies to this transaction, especially so in sharing clients and establishing an international footprint as the leader in software provision for capital-intensive industries. Dr. Kennedy, OSIsoft’s CEO & Founder, proudly labelled the acquisition as a “culmination of a thoughtful search for a respected organization that would mesh with our own strong mission-and customer-driven culture”. This represents the nature of the companies from the Vision Fund. If the likelihood to be the next Alibaba is low, these companies do not shy away from exit opportunities, and at the hand of right buyers, can result in huge businesses that impact the global market.
Well, where does SoftBank fit in all of this? The theme here is not about SoftBank’s returns as a Venture Capitalist or Private Equity firm, the pressing matter is the impact that all of SoftBank’s holdings can have on the world. The nature of the fund is very forgiving, allowing these companies to burn through millions and billions in order to provide them the freedom to innovate the best technology they can possibly bring to the market. The goal is not necessarily to create the next Facebook or Amazon necessarily, but more so to create large enough companies to warrant very healthy exit opportunities. These companies aim to undercut the market and hoard market share, drive out competition, and then be heralded as the industry standard and norm. With regards to M&A, well when these companies are sold on, the result of having so much time and room for error in creating the best technology, allows these companies to demand extortionate premiums as targets. The potential for success of the technology is enough to convince investors to purchase these companies, even if they have poor cash flows or are loss-making. This conspires further inflation with regards to company valuations, which are already highly exaggerated in the technology world, probably borderline over-priced. Overall, causing technology M&A to become even more overpriced, with more ridiculous premiums going forward.
To summarise, the Vision Fund is inadvertently resulting in revolutionary technology startups growing to profitable sizes, and heavily encouraging M&A activity in the sector. Despite the deals netting huge returns for Son and his Fund, the impact they are having on markets is immense. It would be strongly suggested to follow the Fund, especially as more and more companies mature and are ready to enter the world outside Son’s $100bn bubble, I personally feel that there is much more high-value M&A action to come.
