I highlighted nearly six months back Softbank at 62 $.. a news report..Analyst: Softbank is Net's hidden gem Sees shares doubling, U.S. listing in 12 to 18 months
By Bill Clifford, CBS MarketWatch
Last Update: 1:53 PM ET Jun 18, 1999 Also: NewsWatch
TOKYO (CBS.MW) -- In about 18 months, Japan could well have a Nasdaq of its very own.
That is the aim of the influential Japanese company that unveiled a joint venture on June 15 with the Nasdaq Stock Market's parent, the National Association of Securities Dealers. The company, Softbank Corp., is not exactly a household name -- not like Sony, say, or, for that matter, the myriad Internet companies Softbank has financed or invested in: Yahoo, E-Trade, Broadcast.com among them.
But these days Softbank's star -- and share price -- are rising with almost every cyber step it takes. All the more so, perhaps, if investors and Japanese venture capitalists embrace the electronic Nasdaq-Japan late next year.
Lehman Brothers analyst Ravi Sarathy follows Internet and communications stocks across Asia. After five months of dissecting Softbank's business, he and his team launched coverage on June 4 with their top "buy-1" recommendation of "the hidden gem" of the global Internet sector in an exhaustive195-page report.
On a visit to Tokyo, Sarathy talked with Bill Clifford of CBS.MarketWatch.com about the Nasdaq-Japan venture and Softbank's strategy.
What will Nasdaq-Japan mean for investors? How will it differ from the existing Jasdaq market?
"Softbank is not just any Internet stock; it is the jewel of the Internet sector. It is the strategic investor globally in the sector."
Ravi Sarathy
Lehman Brothers
Sarathy: Nasdaq-Japan will create a forum for all U.S. investors, including the new breed of online investors who've been so important in driving the market and driving the Internet sector. It'll be a platform for them to buy into Japanese technology stocks, creating global liquidity that you won't see in the local market. The second thing is that the market will have a much higher level of transparency and disclosure according to U.S. Nasdaq-type regulations. The next bull run in Japan will need to be driven by shareholder orientation. The existing market in Japan is cumbersome, with anachronistic listing requirements and outmoded structures. It doesn't allow for a lot of transparency; the new market will.
What will it mean for Japanese investors, and what does Softbank get out of it?
Sarathy: What Softbank is doing is creating a medium to stimulate the retail stock-buying culture in Japan. And it ties in very neatly with all the things we're seeing here -- 401(k) legislation, the fact that we expect to see a flood of retail money into mutual funds, stocks and bond funds. The goal is to stimulate that with the Internet platform for the new Nasdaq-Japan market. That will, of course, feed directly into Softbank's investments in E-Trade (EGRP: news, msgs), E-Loan, CyberCash (CYCH: news, msgs), ForexBank. I think Softbank's deal with Nasdaq creates the glue to cement the Internet zaibatsu model (that Softbank head) Masayoshi Son is trying to establish in the Japanese market. It makes inherent sense.
Could you explain what you mean by Internet zaibatsu?
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Sarathy: Japan's zaibatsu were the prewar conglomerates, as you know, that were really responsible for driving the industrialization of the economy. Broadly, in phases, you first had groups develop transportation and infrastructure for industry. Next came the financial foundations, the banking sector. These two set the stage for the third phase, commercial reach across all business sectors. Well, Masayoshi Son's vision for the Internet zaibatsu is, first, to aggregate, maximize and channel traffic on the Web -- hence key portal investments, like in Yahoo (YHOO: news, msgs). Then comes building the online financial infrastructure -- the e-trading, e-lending, e-insuring that lays the foundation for the final stage of wide-open e-commerce. And he's picking the No. 1 investments in each area.
Isn't there a danger he's building Softbank into a schizophrenic company or a Frankenstein -- on one hand, this holding-company monolith and, on the other, a scattershot set of venture-capital enterprises?
Sarathy: Son makes the point that the traditional holding-company structure of central management control is blatantly not valid for the Internet sector. It requires micromanagement at operating level that's highly entrepreneurial, innovative, very hands-on, that maximizes shareholder and gives employees a stake in companies. Son fully accepts that, and that's the structure of the Softbank zaibatsu. The role that Son plays is one of broad strategic guidance, nudging his portfolio of companies in certain directions. Every quarter, Son gets together the managements of all the companies on the West Coast for series of business and social functions. And the result of that is clear synergy value.
Can you give an example of that?
Sarathy: You notice that the content partners of all the Softbank companies are other Softbank companies. Across the front pages of all the English-language press was Yahoo-GeoCities. Now how many people knew that Softbank was a strategic investor in each of those, and introduced the two companies (to one another)? To say that he brokered the deal is too strong, but to say that he was a critical facilitator I think is right on the money.
Softbank was 14,560 yen ($120) a share on June 1. You put a "buy" on the stock three days later, with a target of 41,600 yen a share. Today, June 18, it broke 20,000 yen, up about 50 percent. From here it doubles?
Sarathy: If you look at the published research on Softbank to date, it begins and ends with one level of analysis -- which is taking the stakes that SB has in its most famous, publicly listed Internet companies, add them together, net out the debt and, voila, you have a value per share of about where the stock price was before breaking 20,000 yen today. But what that approach fails to capture, in our view, is about 65 percent of the value of the company coming from two things: the 150 investments the company has in Internet companies in addition to Yahoo, E-Trade and MessageMedia (MESG: news, msgs), and equally important is how Softbank binds these investments together cohesively. Again it creates synergies and additional value through further effective allocation of capital.
"Whether with a U.S entity on Nasdaq or an ADR listing, there will be some type of tradable Softbank vehicle in the U.S., and I think that's inevitable in the next 12 to 18 months."
Ravi Sarathy
Lehman Brothers
What about Softbank's non-U.S. Internet portfolio? How do you value that?
Sarathy: Looking at the overseas Yahoos, for example, we value Softbank's stakes benchmarked to the U.S. Yahoo, discounting back by the number of years we believe the particular overseas market lags behind the U.S. level of development. Which I think is a cautious approach, given the fact that the typical overseas Yahoos (have) three times the margin of Yahoo U.S., because they leverage all the R&D of Yahoo U.S. and the brand of Yahoo U.S. Yahoo Japan went earnings positive from year one.
How big a risk is Softbank's debt?
Sarathy: The Internet sector in the U.S. could conceivably halve. Any investment bank, Lehman Brothers or anyone else, would securitize the company's position in all its U.S. investments, and within 48 hours Softbank could pay down the entirety of its of its total debt three times over roughly -- so you have a huge margin of safety there. Now, I'd say Softbank is not just any Internet stock, it is the jewel of the Internet sector. It is the strategic investor globally in the sector. That's the company's strength. Today you have a margin of safety because the sector can more than halve and Softbank is still undervalued.
If Softbank is the jewel in the Internet crown, why hasn't it listed on Nasdaq with the other gems? Is there something the company that stands for a transparent Nasdaq-Japan doesn't want to disclose?
Sarathy: You raise a good point. If Softbank management knew of a structure today to list on Nasdaq and do a dual listing, they'd do it like that (snaps fingers). As you know, CMGI (CMGI: news, msgs) had a huge number of issues around being a holding company. There has to be some operating business. Softbank would be characterized by same structural issues. Part of the reason there's been a little less transparency is that the company's been going through a significant restructuring. I think some of the steps the company takes going forward will be to increase transparency, through global investor relations in the U.S., going on investor marketing trips. And I'd say the company will find a structure enabling them to list -- whether with a U.S. entity on Nasdaq or an ADR listing. There'll be some type of tradable Softbank financial vehicle in the U.S., and I would say that's inevitable over the next 12 to 18 months.
And Softbank's share price, then?
Sarathy: Well, look, if Softbank were listed today, it would trade in excess of 100,000 yen a share. This is a company that dwarfs CMGI. It was involved in the creation of Yahoo, the creation of GeoCities. I mean, this stock will be a household name just like American Online (AOL: news, msgs), Amazon.com (AMZN: news, msgs) and all the rest of them.
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