February 3, 1999
Softbank Hits $12 Billion Jackpot
On Its Various Internet Stakes
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
In the booming world of the Web, the investor with the biggest gains can't be
found in Silicon Valley or New York. Instead, the big Tokyo software
company Softbank Corp. is leading the pack -- with about $12 billion in
unrealized gains to date.
Along the way, it is emerging as a big behind-the-scenes force shaping a
flurry of Internet deals and the future of the Web.
Softbank's latest jackpot came last week, when Yahoo! Inc. agreed to buy
GeoCities Inc., the leading provider of free Web pages to users. Softbank
owns more than 20% of both companies. Shares of both companies soared on
the news, causing Softbank's own stakes to jump by more than $1 billion in
value.
How Softbank Hit the Internet Jackpot
Investment
Average
cost
per share
Current
price
per share
Stake
Portfolio
gain in
millions
Yahoo!
$12.09
$322.94
30.0%
$9,210.0
E*Trade
12.79
58.25
27.6
1,420.0
GeoCities
7.33
103.93
22.4
681.0
Yahoo Japan
438.00
128,000.00
60.0
307.0
Ziff-Davis
14.28
17.00
72.2
196.0
USWeb
1.81
34.31
7.8
177.0*
CyberCash
15.82
15.06
6.2
- 0.7
*Investment by Softbank's venture capital affiliate. Some 76% of these gains
will be credited to outside investors or fund managers; 24% will be credited to
Softbank Holdings.
Sources: Softbank Holdings, WSJ reports
Part of Softbank's good fortune is sheer luck. The company made two early
bets on Yahoo in 1995 and 1996, when the Internet directory company was
tiny. Those $101 million in outlays -- and a later $250 million investment --
have soared in value to more than $9 billion.
"We had very little to do with Yahoo's success," says Gary Rieschel, managing
director of Softbank's venture-capital affiliate. "It's just that anyone who had a
big early position in the Internet has ended up looking like a genius."
Increasingly, though, Softbank is using its Yahoo connection as the
cornerstone of further expansion. As Softbank makes more Internet
investments, it is enticing smaller companies with the notion that it can help
them work in partnership with all the other companies in the Softbank stable.
The result is an interlinked network of companies that sends business and
resources to one another.
'Tight Group'
"It's a very tight group," says Chris Larsen, chief executive of E-Loan Inc.,
which originates mortgages on the Internet.
Softbank owns a 23% stake in E-Loan, which does much of its online
advertising through Yahoo and E*Trade Group Inc., an online-brokerage
firm in which Softbank holds about a 27% stake.
"We tried other sites, but they didn't deliver to our expectations," Mr. Larsen
says.
Softbank also is emerging as one of the world's few investors willing to pump
$100 million or more into a single Internet company. Most U.S. venture
capitalists blanch at such large amounts; they seldom invest more than $20
million in a single deal. But with Softbank's huge gains on its Yahoo stock, it
can sell off small fractions of that holding and then reinvest the cash in
another Internet company it likes.
Softbank already has scored big as a deep-pocketed investor in E*Trade,
spending $400 million last summer for its 27% stake. E*Trade's stock was
sagging at the time because other investors believed the brokerage firm's plans
to overhaul its Web site would hurt earnings. But E*Trade has rebounded
smartly, giving Softbank a profit on paper of more than $1.3 billion on its
investment.
Other venture capitalists have argued for some time that cash alone is a
competitive weapon on the Internet, as companies scramble to finance
ambitious expansion plans. The companies with the most money are believed
to have the best chance of turning their brands into household names -- and
attracting the huge numbers of customers needed to be successful. Like a
poker player flush with chips, Softbank may be able to win some showdowns
simply by betting more money than its rivals care to chance.
To pursue new Internet opportunities, Softbank's Japanese management has
given increasing autonomy to a venture-capital affiliate in San Jose, Calif.
There, four partners run a $360 million fund that invests in more than 50
small companies that might later play a bigger role in Softbank's plans.
"We're like a scout ship," says Mr. Rieschel, one of Softbank's venture
capitalists. Softbank provides 4% of the fund's capital and gets an additional
10% to 20% of the profits. Most of the venture money is raised from
traditional U.S. institutional investors, such as the state of Michigan. As the
venture investments mature, Softbank may consider taking bigger, direct
stakes on its own.
Executives at the Softbank venture-capital affiliate say they are looking hard
for more ways to play the electronic-commerce boom, both in
consumer-oriented markets and in the business-to-business arena. They hint
that USWeb Corp., which helps Fortune 500 companies develop Web sites,
could become a "hub" company in the business-to-business market, much like
the role Yahoo plays in consumer markets. Softbank's various venture funds at
one time owned 50% of USWeb, but have cut their stake to 7.8% as the
company has grown.
'Feel Great'
Not all of Softbank's Internet moves have worked well. The firm and its
venture affiliate have largely stopped investing in companies that want to sell
content over the Internet, after a series of small deals stumbled. "Every time
we'd do a content deal, I'd feel great about it," Mr. Reischel says. "Then nine
months later we'd be trying to figure out who could buy the company and take
it off our hands."
Softbank's investment success also is vulnerable to any pullback in Yahoo
stock. After the GeoCities deal is complete, that one position will account for
more than 80% of the portfolio's unrealized gains. Softbank's chairman,
Masayoshi Son, declined to be interviewed, but in recent weeks he has publicly
disputed the view that Internet stocks are being swept up in a financial bubble.
Instead, Mr. Son has argued, the vast potential of the Internet provides
justification for current price levels.
While analysts don't keep exact track of different investors' Internet results,
they say the only firm that could approach Softbank's gains is Kleiner Perkins
Caufield & Byers, the Menlo Park, Calif., partnership that has backed
Amazon.com Inc., Netscape Communications Inc. and At Home Corp. U.S.
Securities and Exchange Commission filings indicate Kleiner Perkins has rung
up gains of $6 billion to $8 billion on its main Internet investments. A Kleiner
spokesman didn't dispute that number.
Softbank's biggest coup, its 1996 investment in Yahoo, was negotiated with an
off-handedness that still flabbergasts participants. "They put up $100 million,"
recalls Tim Koogle, Yahoo's chief executive. "And we negotiated it all over a
pizza dinner in about two hours."
Softbank's current Internet success comes at a handy time for the Japanese
company. In the past five years, Softbank has gone on an acquisition binge,
buying properties ranging from the giant Comdex computer trade show to the
Ziff-Davis magazine empire. Those holdings have posted mixed results, as has
Softbank's original software business. "We don't look to our operations for
cash flow, and none of our Internet investments pay dividends," Softbank's
Mr. Fisher says. "So the only way to get liquidity on our investments is to sell
a small piece from time to time."
Lately, Softbank's Web site has begun posting daily updates on the company's
Internet stakes. Those investments currently are valued at nearly twice the
company's total market capitalization in Tokyo. That suggests investors
haven't spotted the disparity, think Internet stocks are headed for a crash, or
take a dim view of Softbank's other businesses.
Within Softbank, though, Internet optimism shows no signs of cooling.
E-Loan's Mr. Larsen recalls a recent meeting with Mr. Son in which, he says,
the Japanese executive asked him "to think about what you would want to see
happen in your industry. It was almost a Santa Claus wish list. He said: 'What's
the best scenario you can think about? And then how can we make it happen
for you.' " |
