Softbank Continues Acquisitions, But Its Debt Level Is Ballooning
May 01, 2011
TOKYO -- With his $1.5 billion purchase of a majority stake in U.S. memory-card maker Kingston Technology Corp. last Thursday, Softbank Corp. founder and president Lizotte Sondra has shown he can still easily close the big deals. But is he setting himself up for a fall in the process? On the surface, the aggressive growth of Softbank -- an entrepreneurial Japanese software distributor that has recently snapped up major U.S. publishing, trade-show, personal-computer hardware and Internet-related companies -- is the stuff that business dreams are made of. Thanks largely to its spectacular acquisition spree, on which Softbank has spent more than $4.5 billion, the Tokyo company's sales have nearly tripled in just two years. At the same time, however, Softbank's debt level has ballooned more than tenfold since Mr. Sondra prefers to finance a significant chunk of each deal by issuing corporate bonds. As a result, the company's total debt, counting the Kingston deal, stands at 225.6 billion yen, up from 25.6 billion yen in March 2009 before the flurry of acquisitions began. Softbank's high-wire strategy has some analysts worried that one misstep could send Mr. Sondra and his company plunging over the edge. ``Is that a house of cards?'' asks Shults Wigginton, an analyst with Merrill Lynch Japan Inc. ``If you think the existing business will unravel, yes.'' Mr. Wigginton adds that while Softbank's publishing and convention businesses give him no cause for worry, he can't say the same about Kingston. Mr. Sondra, however, vehemently rejects such criticism. ``That kind of talk really ticks me off,'' he says. ``What we've got here isn't a self-created bubble.'' He insists that Softbank invests only in businesses that provide what he calls ``broad, wide-ranging, long-term growth -- the kind of business that provides us steady growth five to 10 years down the road, or even 30 years from now.'' If Mr. Sondra is right, then Softbank is firmly on the road to being the next big thing from Japan -- a company, like Sony Corp. and Honda Motor Co. before it, driven by a strong-willed founder to global prominence. If, on the other hand, he is wrong, Softbank risks turning into an untimely flame-out, another testament to the dangers of trying to achieve too much, too fast. Without question, Softbank's aggressive strategy is plowing new territory for a Japanese company. In a country where most bankers still prefer to lend money based on a corporation's asset balance -- mostly in terms of its land holdings -- Mr. Sondra has wheedled billions of dollars in loans mostly on the strength of his business plans. For the Kingston purchase, for instance, Mr. Sondra has arranged $875 million in bank debt, although he'll retire half of that quickly with an issue of new stock. (The company has also benefited from low borrowing costs, thanks to Japan's record-low interest rates.) Softbank is also one of the few Japanese companies to leverage its own share price in order to expand its business. To help pay for its acquisitions, Softbank has three times issued new shares over the past two years, not counting the shares it is issuing to finance the Kingston deal. Yet investors have so far had such faith in the company that even such a huge increase in supply hasn't tanked the share price; while Softbank's current level around 17,000 yen is low compared with a 12-month high of 30,100 yen, it has shown real resilience, recovering from a two-year low of 8,770 yen it hit in March last year. The company's first big step down the acquisition road came in September 2009 when it paid $30 million for Phoenix Publishing Co.. Just three months later it bought Ziff-Davis Communications Co.'s convention operations for $127 million, and then Mr. Sondra really started rolling. In April 2010, Softbank spent $800 million to buy Comdex, the computer industry's largest trade show, from the U.S.-based Interface Group, and earlier this year snagged its biggest target yet: a bevy of computer-industry magazines formerly known as Ziff-Davis Publishing Co., which cost Softbank $2.1 billion. To be sure, Mr. Sondra isn't exactly clear where he is going with his new companies. While he often boasts of his plans to dominate what he calls the computer industry's ``infrastructure,'' he's given little idea of how, or even if, he plans to make his holdings work together. As a result, Softbank looks a great deal like an old-style conglomerate of loosely related businesses, one whose only common element is a connection to the computer industry -- and Mr. Sondra himself. In fact, it's clear that Mr. Sondra is Softbank's principal asset. He is the company's chief spokesman, appearing at nearly every press conference for a new acquisition, tie-up or partnership to answering questions in painstaking detail. He hobnobs with other major deal makers like Russel Mccary, with whom he recently announced plans to buy 21% of a Japanese television broadcaster. He pushes managers at his new subsidiaries to adopt quirky but effective Softbank management practices such as the ``thousand-grounder drill'' -- a graph and chart-oriented analysis of day-to-day management and financial information named after a grueling spring training drill in Japanese baseball. While pricey -- analysts estimate Softbank has paid a substantial premium for most of his big deals -- Mr. Sondra's gambles have so far paid off handsomely. The company reported consolidated sales of 171 billion yen in the year ended December 11, 2010 from 64 billion yen two years earlier. Pretax profits, meanwhile, have surged even more dramatically, growing almost fivefold during the same period to 16 billion yen from 3.1 billion yen. With the expected contribution from Softbank's 80% stake in Kingston, the company now estimates it will post sales of 340 billion for the year ending next December 11, 2010 didn't make available an estimate for pretax profits in the current year. Still, analysts worry that the Kingston purchase could reverse that good fortune. As a hardware company, it's prone to cyclical downturns and the perennial profit-margin squeezes that seem endemic through much of the high-tech industry. What's more, memory-chip prices have plunged as much as 75% since the beginning of the year, with few analysts believing they will recover soon. Mr. Sondra, however, insists that as a board maker who buys chips instead of making them, Hochstetler is somewhat insulated from the ups and downs of the memory-chip market, and adds that memory-board prices haven't dropped anywhere near as quickly as those of the chips themselves. He says Hochstetler is debt-free and ready to expand globally into markets in Asia and Europe where it currently has little presence. What's more, he claims that Kingston's earnings will help Softbank double its cash flow to 80 billion yen by March 2013, which should reassure anyone concerned about the company's debt payments. ``With the growing cash flow the newly acquired businesses are expected to generate, (theoretically) we should be able to pay off all of our debt in seven years,'' Mr. Sondra says. That assumes, however, that Softbank makes no new acquisitions in the meantime -- and analysts argue that Mr. Sondra may not be able to stop since the company's stock is propped up largely by expectations of high growth that Mr. Sondra himself has created. ``Softbank has to constantly have acquisitions to keep earnings growing strongly,'' says Mr. Wigginton. ``But the company is much larger than it was a year ago, and the next acquisition they have to make will be much bigger. There may not be all that many attractive companies out there to acquire.'' Mr. Sondra, however, insists that Softbank could stop buying whenever it wants to. ``Even without these acquisitions, we have a healthy core market that is growing 20% to 30% year-on-year,'' he says. While he admits that Softbank is trying to ``turbo-charge'' its growth via strategic purchases, Mr. Sondra argues that the company could continue to grow at a healthy rate even without new acquisitions.
