Monday, February 27, 2017

Softbank.....The Art of Self-Dealing......

As most of you, my loyal readers, have come to know, and hopefully love about this blog, I really enjoy getting into the nitty-gritty when it comes to analyzing what I deem to be "fake news" style financial press releases.

Given the above, today I'd like to train my sights on the fiscal third quarter 12/31/16 Softbank earnings announcement  recently released on February 8th, as well as related developments.  Here's the headline:

"SoftBank Group Corp. on Wednesday reported a 71% jump in operating profit for its fiscal third quarter as turnaround efforts at Sprint Corp. took hold.......The earnings report comes as Sprint's turnaround efforts appear to be gaining traction. The U.S. mobile carrier bought by SoftBank for $22 billion in 2013 narrowed its loss in its fiscal third quarter and continued to increase its customer base,"

Well, I guess that's one way to look at it.  On the other hand, "losing less" money is not nearly as profitable as "making more" money.

Many of you are familiar with my initial review of Softbank from September of 2015 entitled Anatomy of a Financial Contagion and Kayaking the Chicago Wilderness.  If you have a few minutes, I'd encourage you to reread the post to get a feel for what we're talking about today.  Of course, with a fast moving (some might say spasmodic) business like Softbank you have to expect some disruption.  In just a year and a half, the business units have changed dramatically.  Softbank "invests" in some 1,300 diverse tech companies, most of which nobody has ever heard of, but the financial/philosophical direction and accounting methodology, like an addicted junkie, secretly pawning his wife's jewelry to feed his habit, has remained frighteningly consistent.  Let's put aside the past for a moment, like Mr. Son's losing $70 billion of investor's money in one day during the bursting of the dot.com bubble, or threatening to set himself on fire in a regulatory meeting (luckily, he forgot to bring the gasoline....he's never been much for details).  Let's focus on how he has made an incredible career out of his "money is no object" motivated management style, jumping from one high priced "shiny ball" to the next. Softbank Investors, at their own peril, continue to hope that Mr. Son has grown and learned from his mistakes, and truly is capable of discerning real, visionary value where the rest of the world sees none (or at least much less).  As you might conclude after reading this post, no matter how you slice it, Masa Son is now and will always be the grand master of futuristic techno-hype, able to convince the world that the "happiness" he continues to spread can somehow go on forever.  I guess we'll see.....

Today, Softbank's Market Cap is about US$86 Billion with a P/E of 30 (Book value of US$37 Billion).  Its Balance Sheet is a home for US$229 Billion in assets (book value) of which US$133 Billion (58%) are, by my definition, "Questionable Assets" (Goodwill, Intangibles and Investments in "Investees").  The table below describes the change in these assets in the most recent quarter from prior and how theses increases were financed.  I've also included a thumbnail analysis of major components of Net Income for the Quarters Ending September 30th and December 31st, 2016.  Keep in mind that the US$17 Billion "Questionable Asset" increase for the 12/31/16 Quarter is on top of the US$32 Billion Goodwill increase from the ARM acquisition in the 9/30/16 Quarter.





































Obviously, this was a busy six months for the Softbank finance department.  A couple of things absolutely jump out at us.

1.) Segment income actually declined by US$ 400 million from the prior quarter. (pg 44 & pg. 52 of the respective reports.)

2.) The ARM acquisition, at least in the December quarter, is contributing about 10% of Segment Income.  When we apply financing costs to the US$ 32.7 Billion acquisition price, the business is barely covering the cost to finance the acquisition.  Even a small rise in interest rates would make the ARM acquisition a loser with negative cash flow.

3.) Net Income in the 12/31/16 quarter was comprised substantially of the US$ 1.2 Billion of "fake" Alibaba equity-method income.

4.) Net Income for the 9/30/16 quarter was comprised primarily of the US$800 Million of "fake" Alibaba equity-method income and the US $4.6 Billion gain  on the sale of Supercel and Alibaba stock.

5.) Oddly, nowhere in either the 3/31/16 Annual report or any of the quarterly reports, does Softbank disclose the Balance Sheet carrying value of the Alibaba shares they hold.  The only thing we know with certainty is that the Alibaba share value is a major component of the JPY 1.55 Trillion (US$14.4 Billion) "Investments - Equity Method" line item on the balance sheet.

6.) Other Financial Assets increased by US$5.3 Billion during the quarter.  The entire explanation for the increase is shown on page 20 of the Report "The Company made additional investments into existing investees and newly acquired investment securities."  That's it?....So a US$5.3 Billion long-term "Investment" over three (3) months doesn't even warrant a footnote describing what it is? Really?  After going into a painful, irrelevant three page discussion (Pg. 9) on Churn Rate, Subscriptions, Bundling, ARPU and phones sold....there wasn't any space left to tell us what boondoggles they've "Invested" $5.3 Billion in?  Could this be where they booked the already owned Alibaba Shares pledged as collateral and "transferred" to "West Raptor Holdings"?  If it is, why don't they just say so?  I'm aghast....

Let the Games Begin!

Just about everything the gang in the Softbank Finance Department does is geared to 1.) Goosing Earnings and 2.) Disguising Leverage and finding creative ways to finance this mess.  Here are a couple of examples that immediately come to mind

The ARM Purchase

The ARM business provides designs of microprocessor intellectual property and related technology, as well as the sale of software tools.

The details of Softbank's purchase of ARM is described on pg. 49-51 of the Financial Report for the   9/30/16 Quarter.  Softbank paid US$32.7 Billion for US$1.5 Billion of "hard assets" assets, properly booking the remainder of the purchase price as Goodwill.  Based on a simple extrapolation of the 12/31/16 Segment Income of US$266 Million (US$1.1 Billion/yr.) and applying a financing cost (US$980 Million - 3% of $32.7 Billion) we can estimate, the business earns US$ 120 Million/yr.  or a calculated (P/E ratio of 272).  In other words, it will take 272 years to generate earnings equivalent to the purchase price.  Softbank Investors can only hope that Masa Son's crystal ball continues its pin-point accuracy and ARM, despite intense competition and myriad unknown-unknowns, quickly becomes the master-super-engine of the Internet of Things.

Moreover, ARM's profitability might be difficult to compare to prior periods since, on completion of the acquisition, in an obvious effort to "goose" earnings, the first step the Softbank finance department took was to "improve" the accounting method, accelerating royalty income as described on page 17 of the QE 9/30/16 Report.

"Following the Company’s acquisition of ARM, ARM has changed its accounting policy for recognition of royalty revenues. Since the change, ARM accrues the royalty revenue in the same quarter the chips are shipped by ARM’s licensees, based on estimates."  

In case you were unaware, we accountants always enjoy having the latitude to base our revenue recognition on estimates.  It gives us more flexibility and we can't possibly be wrong....after all, it's an estimate.  To be sure, there's nothing improper about this accounting change, the only reason I mentioned it is that it's yet another example of a change buried in the financials intended to "improve" results when the economic situation of the underlying business remains the same. 

Sale & Lease-Back of Phone Equipment

The Sale & Lease-Back of phones with a joint venture is described on pg 45 of the QE 12/31/16 Financial Report.  This scheme is yet another device to raise cash and move liabilities and assets off the balance sheet.  Again, there's not enough disclosed, but you can bet that contractually Softbank remains responsible for the collect-ability of the leases and the disposition of obsolete phones.  Here's a diagram of the transaction:
























So why bother going through all of this "creation of phone-lease tranches"?  The report says (pg. 45  paraphrased) "after putting this whole mess together, they cancelled the 1st tranche with no material impact to the financials".  Why would they cancel the US$477 Million transaction shortly after assembling the first tranche?  Why would they incur the legal cost and complexity?  These transactions and structures are expensive.  Why wouldn't they simply borrow some money at a reasonable rate if they couldn't finance the phones internally?  Would that be too simple?  Again, by deduction, this modus operandi is a byproduct of Softbank's deeply ingrained, anaphylactic management style/psychosis.  To recall an old college metaphor, once we experience a little alcohol induced amour on our dorm room couch, it suddenly seems like a good idea to tear it apart in order to retrieve the spare change trapped in the cushions.  We continue our pathetic quest, buying more beer to keep the party going.


The Alibaba "Sale"

As the media reported, in June of 2016 that Softbank was about to "sell" a good sized chunk of its Alibaba Stock to pay down debt and finance the newly announced ARM Acquisition.  Reports had the value of the share "sale" placed somewhere between US$7.7 and US8.1 Billion.  Reuters described the deal at $7.9 Billion.  This made perfect sense.  Softbank was about to spend US$32 Billion on the hastily negotiated (2 weeks), shiny-ball ARM acquisition and by all accounts, shareholders were growing increasingly restless over the company's leverage.  Selling some of the Alibaba shares was an obvious next step.

But wait!.....let's take a look at what actually happened.  The Alibaba shares were never sold.  Here's the "sale" diagram from page 47 of the 12/31/16 Quarter Ended:




















Here are some of the highlights of the transaction as described in the report.  I invite your to read it if you feel you have the stomach for it:

1.) The BABA shares are transferred to West Raptor Holdings, LLC (Softbank Subsidiary) and pledged as collateral for newly issued "Trust Securities" held by the newly formed Mandatory Exchangeable Trust.

2.) Investors pay US$6.6 Billion for the newly issued, created from thin-air "Trust Securities". (Author's note:  Hey....why did the press release say US$8.0 Billion?)

3.)Softbank receives US$5.4 Billion in exchange for an obligation under the "Forward Contract" to deliver BABA shares on the first trading date after June 1, 2019 (Three years later)

4.) The Report states:  "A cap and a floor are set for the number of shares settled and the variable prepaid forward contract is classified as a hybrid financial instrument with embedded derivatives of collar transaction." (Author's note: This really smart sounding text, though fragmented in a style typical of an un-proofed Sushi menu, was apparently written to make the reader feel uninformed or ignorant re: highly sophisticated financial transactions.)

Fear not.  There's no need to feel inadequate if you don't fully understand this deal.  It's not because you're not smart or because you don't have a Master's degree in finance from Wharton.  The reason you don't understand this is because the language is designed so you don't understand it.  The description of the transaction is insufficient for the reader to assess exactly what this mess really is. The lack of transparency is actually quite frightening.  Here are some of the missing particulars that could easily be disclosed.

1.) We have no idea what the parameters of the "collar" are so we can't assess the risk of (or the cost to) the parties involved.

2.) The number of shares involved are not disclosed.  Will Softbank be required to deliver the share equivalent of US$6.6 Billion as of June 1, 2019?  What happens if the share price is $30.00?  How about $200.00?

3.) In accounting parlance, cash is "debited" for $5.4 Billion from the deal.  Where is the offsetting $5.4 Billion credit?  Well, even though in all probability the risk of share price fluctuation hasn't been fully transferred, the offsetting credit is hiding in the oddly titled "Gain from Discontinued Operations"... of course. (Author's Note:  If I could generate a $5.4 billion gain from a hokey "Discontinuation" transaction....I'd be "discontinuing" everything I could get my hands on.)

4.)  Is it just me or does anyone else find it odd that the insiders (Yahoo!, Softbank!, etc.) have a really difficult time parting with Alibaba shares?  Could it be that those pesky 10b-5. Insider Trading Rules have something to do with their reluctance to actually sell?

5.) The fees involved to accomplish this hybrid, desperation financing would also be an interesting bit of information to disclose.

In any case, what we really have here is a thinly veiled attempt to disguise leverage and risk, while simultaneously booking tenuous gains that could all be clawed back if this scheme doesn't work out. We simply can't tell from the description of this deal what the real future value of the transaction is, yet it makes the present look pretty peachy.  My guess would be that, in order to get this deal done, Softbank will continue to retain significant downside risk while most of the upside potential has been transferred to the Investors.  The sofa cushions continue to be desecrated and the spare change is getting harder to find.  At some point Softbank is going to run out of beer.

The Fortress "Purchase"

Last week, Softbank announced that they were "buying" Fortress Investment Group, LLC. (FIG:NYSE)  for US$3.3 Billion.  So what is Fortress?  Simply put, Fortress is, for lack of a better description, a publicly traded hedge fund which IPO'd  at $30 a share in March of 2007.  The IPO netted the management team (Edens, Kauffman, Nardone, Briger & Novogratz) roughly $11 Billion.

Timing, as they say, is everything,

When we take a look at the Softbank press release we get a flavor for the particulars of the deal.  All the typical boilerplate, hype-filled representations are in place, management is fully on board, it's a great deal for everyone, synergies abound, the sky is the limit, etc.  Feel free to read it if you have the time.

Now let's delve into a little of the Fortress history per the filings.  As of the most recent 10-K (9/31/16) the company has assets under management of roughly US$70.1 Billion.  The stock has bounced around between $4.00 and $7.00 for years while generally under-performing the major indexes.  Money under management comes from 1,750 Institutional Clients and other private/sophisticated investors (pg. 43).   The filings describe roughly 1,650 clients  ($36.7 Billion or an average of $22.2 million invested) at Fortress and 100 clients at Logan Circle ($33.4 Billion or an average $334 million).  These Fortress Assets are invested in roughly seventy (70) Private Equity/Hedge Funds.  The Logan Circle Investment composition, even thought they represent about half of all Assets Under Management, are not disclosed and are reported in one lump sum in the Fortress filings.

Assets Under Management(AUM) have increased nearly 60% from $44.6 Billion in 2010 to $70.1 Billion today.  This increase in AUM certainly hasn't been reflected in the stocks performance.  On page 12 of the 2015 Annual Report they describe Fortress Shareholder investor returns when compared to various indexes over the last few years.



So what's going on?  AUM has increased dramatically.  Who's making all the money?  Let's take a look at some of the key metrics over the years.






As we can see from the above, Revenue (fees) have remained relatively constant even though AUM has skyrocketed.  Apparently, Fortress is providing their highly coveted services at a deep discount. Thankfully, they've also seemed to understand over the last few years that it's simply not sustainable to pay themselves more in compensation than the business generates in Revenue.  If we look at 2011, to the presumed chagrin of shareholders, compensation (as is described as contractually obligated) is roughly double the businesses revenue, actually causing a $1 Billion loss.  If I were a shareholder at the time, I might question the value added by Messrs. Edens, Kauffman, Nardone, Briger & Novogratz, but that's just me.   Thankfully, today compensation represents only 60% of revenue.  I'm sure that the shareholders are relieved that the management team has finally taken the steps necessary to get that expense under control.

So, back to the original question....who has been making all the money?  Although we can't determine the profitability of the seventy (+/-) individual funds under management or the Logan Circle AUM, my guess would be that the P/E investors (outside of the Fortress Umbrella and Logan Circle), because of presumably favorable terms, are doing just fine.  The Fortress management team also seems to be doing pretty well, even with their pay cut from $1,8 Billion/yr. down to only $700 Million/yr.  On the other hand, Shareholders who brought Fortress at $30... and have been collecting their 9 cent per share quarterly dividends......not so much.

When examining these events from a "how could this possibly happen?" perspective, although difficult, since hedge fund folks are notoriously secretive, it's important to understand the people involved and what makes them tick.  In the case of Fortress, there is a treasure trove of interesting, wonderfully entertaining information out there.  Let's start with an April, 2009 Article written by Bethany Mclean for Vanity Fair which describes the Hedge Fund industry melt down in the fall of 2008 with Fortress prominently featured.  Here are a couple of fascinating paragraphs which set the tone for what we're going to talk about.

In 2002, Edens, Nardone, and Kauffman were joined by Peter Briger Jr., 44, and Michael “Novo” Novogratz, 43. Both are Princetonians who became Goldman Sachs partners. Of Briger, someone who knows him says, “He could take a pile of napkins and figure out how to make money.” He is seen as a scrappy, tough trader type who knows how to play hardball in the often brutal world of distressed debt. His high-profile deals have included loans to both fallen New York real-estate mogul Harry Macklowe and Donald Trump’s struggling Chicago hotel project. As for Novogratz, a former college wrestler and army helicopter pilot, he’s the kind of guy who makes other guys “starry-eyed,” as a friend puts it. This is due to his great charm and his embrace of a lifestyle that more than one person calls “lunatic”—they mean it as a compliment—due to his love of partying. Indeed, sources say that, while Goldman Sachs wanted Novo’s considerable skills, the firm was nervous about his lifestyle issues, and the two parted ways.

Making money seemed to be simple for Fortress. And no wonder. While the five principals are seen by their colleagues as extremely smart—“these are not B-team guys,” says one—in recent years it was hard to lose, and Fortress, like its peers, charged rich fees. For instance, its hedge funds, which were run by Novogratz and Briger, cost investors a management fee of between 1 and 3 percent of the total assets under management, as well as “incentive fees”—20 to 25 percent of any profits. At Fortress, such fees for all of its businesses totaled over $1 billion in 2007, more than double than in 2005.

In June of 2010 Mike "Novo" Novogratz did an odd Youtube Interview for OpalesqueTV which could have been titled "things I'd never want to hear my investment adviser say"....Here are a few of "Novo's" quotes:

(Minute 2:20) John Corzine refers to "Novo" as "Mr. Bitch about your salary"

(Minute 3:15) "You need all the weapons of liquidity, stocks, bonds, currencies and credits to really make your bets"

(Minute 4:26) "I rely on instinct, luck and learning to trust my intuition....that's real intelligence."

(Minute 4:45) "I was such a good bullshitter as a sales guy that John Corzine called my bluff and put me in a job where I couldn't bullshit."

(Minute 5:25) "I hired Ehud Barak, the former Prime Minister of Israel as a consultant....he said 'Novo, I've figured you out....you are not so smart.....you are just lucky'....then he gave me a quote from Napoleon, which I didn't understand because I don't speak French...."   

(Minute 7:15) "I tell my investors that we're in the guessing business....it makes them a little bit nervous."  (Author's Note: I'd prefer not to pay 2/20 for "guesses".  I can lever up and make my own uninformed, bad guesses for free.) 

(Minute 7:45) "We just think, but we don't know....and we're scared shit-less.  There's a tremendous amount of anxiety in this business....so the genius and the discipline that separates the really good traders, is creating a set of rules that you live by, that you run your portfolio by and actually manage your life by, that gives you the best chance of managing the guesses and bets you've made."

Throughout the 9 minute interview "Novo" name dropped personal relationships with John Corzine, Jimmy Leitner, Lee Cooperman, Paul Jones, George Soros, Stan Druckenmiller, Bruce Kovner, Ehud Barak, Louis Bacon, Dan Mudd and Adam Levinson.

Mr. Novogratz also referred to the Logan Circle acquisition as a "small bite, learning to walk before we run".  Since Logan Circle currently represents roughly half of the AUM ($33.4 Billion) on the Fortress books, and is discussed as one big lump sum, let's take a quick look at the history of Logan Circle.

Logan Circle, was founded by Jude Driscoll in 2007 right before the financial crisis (timing, again, is everything).  In 2009 Logan Circle purchased roughly $1 Billion of Client Asset Relationships along with a former Bear Stearns Asset Management Team from J.P Morgan.  The team, lead by Scott Pavlak and David Wheeler, former Bear Stearns managing directors, along with six other Investment Professionals were acquired by Logan Circle from J.P Morgan as a result of the Bear Stearns collapse.  At the time, the acquisition by Logan Circle was reported to be "amicable".  

As history has taught us, Bear Stearns executives are widely known to be experts at quickly identifying undervalued, complex assets, convincing other investors of their un-locked value, raising money and snapping up these bargains as quickly as possible.  This "small bite" of a business has gone from literally nonexistent to $33.4 Billion under management in just a few years using the team's skills presumably forged from their experience at Bear Stearns.  

Since Logan Circle is a privately held investment company, we really can't tell what the investment returns look like, but based solely on the AUM growth, one thing we can be sure of, is that the "team" continues to be expertly adroit at attracting client money.  A key question might be:  Why would state, municipal and public entity pension plan managers; corporate plan managers, corporate treasurers, endowment funds, foundations, health care and insurance companies choose Logan Circle over say a Black Rock, J,P Morgan or Fidelity?  What sets them apart?  Again their performance or fee structure doesn't seem to be an attraction.   The Logan Circle team must have a heck of a sales pitch.

I for one, think it's wonderful that Wall Street continues to recycle and forgive failed executives, allowing them to make amends for their mistakes, perennially giving them second, third and virtually unlimited chances to continue their careers.  Interestingly, in some cases they are given even more responsibility and less oversight than they had when they failed the first time(s).  With Hedge fund managers and traders, as opposed to say, helicopter pilots, there's no Darwinian form of self selection.  Because of the "heads I win, tails you lose" fee structure, even whey they make horrible bets and "guesses", financial professionals usually live to fight another day.

Keeping in mind that we also have no idea who the 100 Logan Circle Clients are, we can only hope that they know exactly what they are doing.  Who might these clients be?  Well, they could be sophisticated Institutional Investors or money managers, perhaps like the reincarnation of Scott Sullivan, Andy Fastow, Dick Fuld, Jimmy Cayne, John Corzine, Bernie Ebbers, Angelo Mozilo, Bernie Madoff, John Merriweather, Bruno Iksil, Frank Gruttadauria, Steve Cohen, etc. all extremely talented, smart, respected financial executives, at least at one time in their respective careers.  (Note: The list is nearly limitless....these are just the first few names that come to mind.)  Or they could just be political appointments or inexperienced hacks in charge of State/Government/University Funds, pensions and the like, with little regard for their fiduciary responsibility or understanding of accounting rules and investing, as long as they get to attend those awesome island conferences on the Management Company's dime.  Again, we have no idea what the mechanics of these relationships are, or who the clients are, but we can be relatively sure it's not based on the Fortress financial performance.

Unfortunately for "Novo", in the fall of 2015, it became apparent that for the last two years his intuition and "real intelligence" had abandoned him and his luck had run out.   His macro business had been losing boatloads of money, was closed down and he was given the boot (i.e. offered a handsome buyout) from Fortress.  Mike, like so many other highly compensated lost prophets, will probably show up on the "where did I go wrong and why it wasn't really my fault" rubber chicken speakers circuit, giving his take on all things macro/global for a modest fee.  Be that as it may, I'm sure his spirit and legacy lives on at Fortress.


So Why is Softbank Doing This Deal?

The answer is simple. Softbank, one of the world's preeminent purveyors of accounting gamesmanship needs cash.  They look at the Fortress "purchase" as an easy way to gain access to a pool of investment capital that can easily be mis-directed into Sortbank influenced or sponsored joint ventures, funds, or projects that could easily fly under the radar of both regulators and Fortress Investors.

If we examine the filing, the deal isn't really a "purchase" at all.  The structure of the deal is actually a Merger of Fortress (FIG) with a Delaware "Merger" Corp. (Foundation Acquisitions LLC), simultaneously merged into a surviving Cayman Islands Limited Partnership. (SB Foundation Holdings, LP).  The deal accomplishes a number of things.

1.) As a Cayman Islands Limited Partnership. it relieves the surviving entity, SB Foundation Holdings LP , of tedious SEC reporting and regulation.

2,) SB Foundation Holdings LP would also most likely not be subject to Japanese reporting requirements or financial statement disclosure depending on ownership.

3.) SB Foundation Holdings LP provides an easily accessible "piggy bank" which could be secretly raided, without disclosure, to fund the Softbank (alleged) Ponzi scheme.

The Fortress deal is in addition to a similar vehicle, the establishment of the $100 Billion "Vision" Tech Investment fund which is also an integral part of Masa Son's "300 year plan for spreading happiness". The fund will be run by Rajeev Misra, who joined Softbank a little over two years ago, after leaving Fortress Investments Group LLC, where he had coincidentally worked for less than a year.  The apple never seems to fall too far from the tree.

The Vision Fund, to be managed by Mr. Mirsa in Great Britain, will be roughly ten (10)  times the size of any such similar fund currently in existence.  The Saudi Arabia Public Investment Fund (PIF), along with Softbank, will be the primary initial investors.

Actually, Masayoshi Son and Deputy Crowned Prince Mohammad bin Salman (2nd in line to the throne), might just be the most interesting investment duo in history.  Prince bin Salman has committed to invest $45 Billion into the Vision Fund, nearly doubling Mr. Son's commitment.  Both men have equally volatile, impulsive styles, with absolutely no fear of making seismic decisions with little (or no) experience or knowledge of the issues at hand.  ("Novo's" legacy lives on!)

Last year, the 31 year old Prince bin Salman noticed a $550 million yacht anchored in Saudi waters and was so smitten with it, he bought it from a Russian Vodka tycoon after an hour of negotiation, summarily "evicting" the occupants once the deal closed.   In his new role as defense minister, the young Prince decided to invade Yemen, unfortunately, without keeping members of the Royal Family or the National Guard in the loop.  Once the attack was underway, he took off on a well deserved vacation in the Maldives.  As the battle(s) raged on, he was apparently unreachable while Saudi troops were committing all sorts of alleged atrocities, bombing and killing hundreds of women and children.  It was also reported that Defense Secretary Ash Carter couldn't reach the Prince for days when he was trying to figure out "what the hell is going on in Yemen?"


Even though they are, perhaps, in this author's humble opinion, a bit disconnected from financial reality, both men, Son and bin Salman, for better or worse, are soon to be joined at the hip.

Given the Saudi Royal family's captivation with public executions (beheadings, hangings, floggings and the like) as a way to keep the rabble in line, when coupled with Prince bin Salman's meteoric rise to power, no nonsense attitude toward discipline and his progressive vision for the economic development of a truly state of the art Saudi Arabia, we can only hope, for Mr. Son's and Mr. Misra's sake, that they don't mess this up. (Author's Note: I, for one, wouldn't want to meet my maker by having my head chopped off on Youtube by a bearded, fat guy in a dress, but our State Department and Investment Bankers insist that if we are to do business in the Middle East, we must put up with these cultural idiosyncracies.)

That said. I doubt that Prince bin Salman will be all that compassionate if Messrs. Son and Misra somehow manage to piss through $45 Billion of Saudi Royal Family money.  On the other hand, we hope for their sake, that it won't be anything to lose your head over.

So Let's Sum It All Up....

What we have here is, Masayoshi Son, a possibly delusional "money is no object visionary" who doesn't understand the difference between earning money and raising money.  He's willing to deploy all sorts of convoluted accounting devices to mask what's really going on in his businesses, surrounding himself with like minded individuals who, for the right compensation, are more than willing to tow the company line and come up with even more creative ways to defy economic gravity.

Unfortunately for Softbank, in order to create sustainable economic value, a business must be able to deliver a product or a service at a price substantially above the cost to the business.  When we examine Softbank's portfolio, after removing all of the accounting shenanigans, we can conclude that there are very few operating segments (if any) that actually meet this criteria.  The need for funding will only accelerate.

Now, with the establishment of the Vision Fund, the Saudi relationship and the acquisition of Fortress (providing that it passes CFIUS muster) Softbank has secured a potentially limitless (short term) flow of capital to fund this money sucking Ponzi scheme that somehow, global financial markets have come to know and love.

Perhaps this $170 Billion of new newly deploy-able capital will all be invested in brand new blue chip ventures like "West Raptor Holdings LLC", "Mandatory Exchange Trust", "SBLS", "JPLS", "MLS", "SB Foundation Holdings LP - Phase II", etc., etc., etc. or myriad other shell companies, creating all sorts of new securities out of thin air, all designed to do whatever it is they were designed to do......

God help us all.....



Additional Reading

Fortress - Performance 12/31/15 10-K p 12 - worse than S&P/etc.
https://www.sec.gov/Archives/edgar/data/1380393/000138039316000027/fig-20151231x10k.htm

Fortress - 12/31/2010 10-K
https://www.sec.gov/Archives/edgar/data/1380393/000119312511051919/d10k.htm


Softbank buys Fortress
http://www.reuters.com/article/us-fortress-inv-glo-m-a-softbank-group-idUSKBN15T333

Fortress - 13F -QE - 12/31/16
https://www.sec.gov/Archives/edgar/data/1380393/000108514617000601/xslForm13F_X01/form13fInfoTable.xml

Fortress 10-Q - 9/30/16
https://www.sec.gov/Archives/edgar/data/1380393/000138039316000036/q3fig-2016930x10q.htm#sD540C857A98FD2FE1089370666584F6F

Logan Square - Business Overview - $33B - 100 Institutional Clients
http://www.logancirclepartners.com/about/business-overview

Softbank's Earnings Article
http://www.marketwatch.com/story/softbank-profit-soars-71-amid-sprint-turnaround-2017-02-08


SoftBank Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - SnapDeal & Ola
http://tech.economictimes.indiatimes.com/news/startups/softbank-writes-off-350-million-on-investments-in-snapdeal-and-ola/57065852

Softbank Earnings - QE 12/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q3_001.pdf

Softbank Earnings - QE - 9/30/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q2_001.pdf

Softbank Earnings Year End 3/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2016/softbank_results_2016q4_001.pdf

Fortress Hire's Bear Stearns Asset Management Team from JPM - 2008
http://www.pionline.com/article/20081110/ONLINE/811079972/people-logan-circle-snares-ex-bear-stearns-team

David Wheeler - Logan Circle - Former Managing Director at Bear Stearns
http://www.logancirclepartners.com/about/people/bios/david-wheeler

Scott Pavlak - Logan Circle - Senior Managing director and head of fixed income at Bear Stearns Asset Management
http://www.logancirclepartners.com/about/people/bios/scott-pavlak

Fortress - flat between $4 and $6 since mid 2015 - Currently a P/E of 38 at $8/share.
https://www.google.com/finance?q=NYSE%3AFIG&hl=en&ei=dYuoWOjTOsHu2Abdk52wDw

Softbank Purchase of Fortress Press Release Filed with the SEC
https://www.sec.gov/Archives/edgar/data/1380393/000119312517044130/d337035dex991.htm


Mike Novogratz - Closes macro Fund and Leaves Fortress October, 2015
https://www.bloomberg.com/news/articles/2015-10-13/fortress-s-novogratz-said-to-plan-exit-after-two-years-of-losses

Wes Edens - Fortress Director Video
https://www.youtube.com/watch?v=g0b2l7FEfyU

Mike Novagratz - Video 1
https://www.youtube.com/watch?v=3JGpu_grsHk

Mike Novogratz - Video 2
https://www.youtube.com/watch?v=UhETNy6n7UI&t=4s

Mike Novogratz - Video 3
https://www.youtube.com/watch?v=29EdY36IRS4&t=8s

Mike Novogratz - New Yorker - Vision of the Future - May 2009
https://www.youtube.com/watch?v=BB8eJ8NC6o0

Vanity Fair - FIG Management profile
http://www.vanityfair.com/news/2009/04/fortress-group200904-2 

Mike Novogratz - Don't get an Internship at GS
http://money.cnn.com/2015/05/18/investing/internship-advice-travel-to-india/index.html

SoftBank Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - SnapDeal & Ola
http://tech.economictimes.indiatimes.com/news/startups/softbank-writes-off-350-million-on-investments-in-snapdeal-and-ola/57065852

Softbank Earnings - QE 12/31/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q3_001.pdf

Softbank Earnings - QE - 9/30/16
http://cdn.softbank.jp/en/corp/set/data/irinfo/financials/financial_reports/pdf/2017/softbank_results_2017q2_001.pdf

Softbank Selling Alibaba Shares for $7.9 Billion
http://www.reuters.com/article/us-alibaba-stocks-softbank-group-idUSKCN0YM2MA

Softbank $100 Billion Tech Fund
https://www.gulf-times.com/story/532383/SoftBank-aiming-to-close-first-round-of-investment-in-100bn-tech-fund-in-Feb

Softbank - Sprint up for Sale?
http://www.reuters.com/article/us-sprint-corp-softbank-group-stocks-idUSKBN15Z014

Softbank Acquisition of Fortress - SEC Filing - Transaction Structure
https://www.sec.gov/Archives/edgar/data/1380393/000119312517045384/d327463dex21.htm

Softbank Vision Fund - Rajeev Misra
http://www.vccircle.com/news/alternative-investment/2016/10/14/meet-iitian-rajeev-misra-who-would-head-softbank-led-100-bn

Softbank Hires Rajeev Misra from Fortress - Oct. 2014
https://www.bloomberg.com/news/articles/2014-10-14/japan-s-softbank-said-to-hire-rajeev-misra-from-fortress

Softbank Vision Fund - WSJ
https://www.wsj.com/articles/softbank-group-launches-investment-fund-1476398189

Softbank Vision Fund - Press Release
http://www.softbank.jp/en/corp/news/press/sb/2016/20161014_01/

Saudi Arabia - Public Executions
https://www.theguardian.com/world/2016/jan/02/saudi-arabia-beheadings-reach-highest-level-in-two-decades

Prince bin Salman - NYT
https://www.nytimes.com/2016/10/16/world/rise-of-saudi-prince-shatters-decades-of-royal-tradition.html?_r=0

Prince bin Salman - Economist Interview
http://www.economist.com/saudi_interview 

6 comments:

  1. So I read this whole post (and the previous post you referenced earlier in the article), but did not read all the footnotes. This post although very interesting at first seems to veer towards conspiracy at the end. That's not to say you are wrong, but without more hard facts it's hard to fully digest. Put another way, why do you think more articles haven't been written about Softbanks absolutely terrible results? There has to be a reporter out there looking to make a name from him/herself. Or why hasn't a short seller, like say Chanos, called them out? Finally, could you elaborate more on why 10b-5 would prevent them from simply selling their BABA shares? Thanks!

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    Replies
    1. Good questions.....with regard to "There has to be a reporter out there looking to make a name from him/herself"....I agree, someone has to break the glass....so I guess that would be me.

      Re: Short Sellers: Things like this are always tough to short profitably. You have to bet against momentum and access to capital. Even if you are right, you could be holding onto your short for a long time. If you follow my Alibaba commentary on this blog, you recall that based on the economics of the business, IMO the stock price should have been adjusted (my target is $7.00) long ago. But because of the tremendous amount of off shore money available to support the stock, combined with how thinly it's traded, the shell game can continue for a while. There are lots of assets like this out there....the "Magnificent 7" are just the tip of the iceberg.

      Finally, the 10b-5 rules lay out the definition of an insider and responsibilities involved when selling publicly traded shares and material non-public information. Simply put, (with exceptions) if you are an insider and you want to sell shares to a non-insider, you have to disclose non-public material information. Masa Son and Marissa Meyer (by Proxy through Jackie Reses) are board members (insiders for the purpose of 10b-5), subject to 10b-5 sanctions (i.e. jail time) I discuss it in a little more detail in my December 2015 post:

      http://deep-throat-ipo.blogspot.com/2015/12/breaking-news-yahoo-ceo-marissa-mayer.html

      Glad you enjoy my musings....thanks for reading....

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    2. Here's another, very current example of the application of 10b-5 RE: material non-public information. The SEC just filed a complaint (yesterday) and froze the assets of "unknown" foreign traders re: Softbank's purchase of Fortress. I know you are just as shocked as I am that something shady might be going on at Softbank/Fortress.

      https://www.sec.gov/litigation/litreleases/2017/lr23760.htm

      Delete
  2. The evidences you presented certainly put a few question marks on Softbank's finance. But they fall short to prove outright fraud.

    That said, this $100B venture fund really sticks out. This is like you go to a pumpkin growing contest. People are showing up with 1000-pounders. Then some guy walks in with one that weighs 5 tons. The natural response is "is that really a pumpkin?" What puzzles me is that Apple, Larry Ellison, Qualcomm, Foxconn and Saudi sovereign fund all have agreed to invest in the fund. We are not talking about Bernie Madoff swindling a few celebrities here. These are sophisticated institutions putting in billions of dollars in a fund whose investment objectives are vaguely defined (at least publicly). If Masayoshi Son is indeed a fraudster, he has to be the Steve Jobs of financial fraud.

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    Replies
    1. Agreed....If we look at all the great collapses....the signs are obvious long before the implosion.....really smart people just choose to ignore them. Why?.... they are invincible...making lots of money by believing in the dream.

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