Masayoshi Son knows a thing or two about big bets. The Softbank chairman and CEO famously invested $20 million for a 34% stake in a little known Chinese eCommerce startup back in 2000. When that company — Alibaba (BABA) — went public 14 years later, that stake was worth $50 billion. Today its market cap is more than $475 billion.
Son is hoping to strike gold now that Uber (UBER) has gone public in the largest IPO since Alibaba. With a 16.3% stake in the company, Son’s Softbank Group is the biggest shareholder of the ride-hailing company and stands to gain billions.
“This has been the master plan all along for Son, which is to pick a few mega-winners that will do well in an IPO that will enable [the Vision Fund] to fund the next round of more and more tech unicorns,” said Marc Einstein, chief analyst, telecommunication and digital services at ITR Corp.
This time, Son won’t have to wait 14 years. Softbank purchased Uber shares at a steep discount, during a tumultuous time. The sale in December 2017 was priced at $33 a share, valuing the company at $48 billion, months after founder Travis Kalanick resigned from the top post and amid a stream of negative headlines, including allegations of sexual harassment at the company.
On Thursday, Uber priced its IPO at $45, raising over $8.1 billion and valuing the company at $82 billion.
Uber’s IPO marks the first big public exit for Softbank’s Vision Fund, Son’s near $100 billion bet on emerging technology, driven by artificial intelligence. Fueled largely by the sovereign wealth funds of Saudi Arabia and Abu Dhabi, the world’s largest tech fund has placed bold investments in companies like WeWork, Slack, and Arm Holdings, reshaping the venture capital landscape.
In the process, it’s also helped shape the global ride sharing market. In addition to its stake in Uber, Softbank has invested billions in Chinese rival Didi Chuxing, Singapore’s Grab, Ola in India, and Brazil’s 99. The capital injections have allowed Uber’s overseas rivals to go toe-to-toe with the company, enabling those companies to offer steep discounts, often to the detriment of Uber.
In fact, the company cited the Japanese fund’s investments in competitors among the risk factors in its prospectus, saying “These investments or strategic transactions, along with other competitive advantages discussed... may allow our competitors to compete more effectively against us and continue to lower their prices.”
In a recent interview with CNBC, Son said his investments in the ride-sharing space stem from his belief in the potential of autonomous driving technology, an area Softbank has also bet on through investments in GM’s Cruise and Uber’s autonomous driving unit. That development, he explained, would make these companies more profitable.
“When autonomous driving comes, the cost of providing the service dramatically gets more efficient … lower rate of accidents, lower costs, more reliable timing,” he said. “You have to have scale and you have to have big market share. That’s why we have the number one market share company in every country around the world.”
The stiff competition has resulted in consolidation among Softbank’s portfolio companies in at least one market. Last year, Uber sold its Southeast Asia business to Grab, in exchange for a 27.5% stake in the rival company, a transaction that led to speculation that Softbank had orchestrated the deal.
In other markets, the fund’s investments in rivals have magnified Uber’s losses. While its exit in China preceded the Softbank investment, Uber’s key Chinese rival Didi has used its own Softbank funds to put up a fierce fight in key Latin American markets Brazil and Mexico. Indian rival Ola, also backed by Softbank, began operating in Australia last year, challenging Uber in a market it has dominated.
The investments have extended to food delivery, where Softbank led a $535 million funding round for Uber Eats rival Doordash last year.
“You can’t draw a line and say ‘Softbank has invested, therefore competition is going to stop,’” said Chris Lane, a senior analyst of Asia Pacific telecommunications at Sanford C Bernstein. “These companies are still playing out their strategies, they’re still trying to succeed as much as they can in a land grab. But the second phase is about profitability, and profitability will require consolidation.”
Still, Softbank is likely to play a key role in keeping impatient investors at bay in the immediate future for Uber, allowing the company to focus on scale over profitability, according to Arun Sundararajan, professor of NYU’s Stern School of Business and author of “The Sharing Economy.”
“There is a point at which it could make a lot of business sense for all of these companies to stop trying to compete for each other’s customers who are already using the services and start doubling down on growing the pie,” said Sundararajan. “If companies get trapped in this race to the bottom, Softbank could play an important role in pulling them out of that.”
Of course, Softbank also has to contend with its own investors, who have raised questions about its valuation methods and its ability to keep up with Son’s pace of investments. The $6 billion paid out to shareholders so far have come from its sale of Indian online retailer Flipkart to Walmart and its stake in chipmaker NVIDIA. Recent reports suggest the Vision Fund could be looking at its own IPO as a way to fund a second Vision Fund.
A successful Uber IPO would free up money to put towards new investments — and go a long way towards quieting skeptics.
“There are still question marks about whether you can take $100 billion of private capital invested in unproven tech companies and still make money,” said Sundararajan. “Alibaba was more reputation building. With [the Uber IPO] Son is validating his ‘Vision’ vision.”
This article was originally published on May 8, 2019.
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter at @AkikoFujita
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