Shares in SoftBank Group Corp. plunged in Tokyo on Tuesday after it unveiled its ¥3.3 trillion takeover of chip designer ARM Holdings PLC, a deal that marks founder Masayoshi Son’s biggest gamble so far on the future of technology.
The shares dropped as much as 11.3 percent to ¥5,329 as of 10:26 a.m. in Tokyo, heading for their biggest single-day decline since 2012. That followed a 5 percent fall in shares of SoftBank’s U.S. unit Sprint Corp. in New York trading on Monday on concerns it would get less support from its parent company.
Son forged a career out of betting early on some of the pivotal technology trends of his time. Now he has made the biggest bet of his life on a nascent concept known as the “internet of things.” His wager on ARM — the linchpin of the mobile revolution — is predicated on the notion that succeeding generations will grow reliant on appliances and gadgets that talk to each other and function free of much human intervention. For that to work, each of them must come with a microchip, and Son’s betting it will be an ARM design.
Investors, however, have reason to be concerned about SoftBank’s balance sheet in the short run, and the hefty premium it is forking over. The company remains mired in debt — to the tune of more than $100 billion as of the end of March — and will have to borrow more to get the deal done. SoftBank is paying a multiple of almost 53 times the U.K. company’s trailing 12-month earnings before interest, taxes, depreciation and amortization. That is more than twice the median of other deals in the sector.
While Son has raised cash from selling the company’s stake in games-maker Supercell Oy and trimming an investment in Alibaba Group Holding Ltd., the deal will add further to the company’s debt.
“We are afraid the stock market will react negatively until investors see a profit growth to justify the high premium, especially under the current situation SoftBank is struggling with recovery of Sprint,” Naoshi Nema, an analyst at Cantor Fitzgerald, wrote in a report.
Son has his eye on a longer-term horizon. SoftBank’s progenitor has been at the forefront of technology for 35 years: He founded his company to capitalize on the early PC boom, backed web startups and e-commerce in China when they were still novel concepts, and challenged older wireless operators in Japan with innovative pricing plans.
Now he is again staking his reputation on potentially the next technology revolution. By buying ARM, SoftBank is jumping to the top of the hardware supply chain and eschewing an increasingly bewildering array of devices — everything from a smart rice cooker to minirobots. He is angling for a slice of vital components in all that hardware. The concept could take off once ultrafast fifth-generation broadband goes mainstream.
“If you are going to get into something like that to position yourself, it’s now,” said Shiv Putcha, associate director of consumer mobility and telecoms at IDC Asia Pacific in Mumbai. “The whole range of connected devices is already booming but it’s just the beginning.”
“5G is a good four or five years out and SoftBank themselves come from a telco background, so they know what’s coming.”