tag:theconversation.com,2011:/uk/topics/softbank-29408/articlesSoftBank – The Conversation2019-10-29T14:39:19Ztag:theconversation.com,2011:article/1260522019-10-29T14:39:19Z2019-10-29T14:39:19ZSoftbank: why WeWork’s Japanese investors are doubling down after a failed IPO<p>Why is Japanese investment firm SoftBank investing a further US$8 billion into WeWork, even though the office rental company is now valued at just US$8 billion, and buying out founder Adam Neumann <a href="https://techcrunch.com/2019/10/22/softbank-reportedly-ends-wework-ownership-debacle-with-a-1-7-billion-payout-to-adam-neumann/">at a further cost of US$1.7 billion</a>? Forgetting SoftBank’s previous sunk investments in WeWork – which exceed US$10 billion – as a standalone deal this looks to be a bad one. Some question whether WeWork is <a href="https://www.businessinsider.com/wework-valuation-could-slip-below-8-billion-softbank-bailout-report-2019-10?r=US&IR=T">even worth US$8 billion</a>. </p>
<p>To many, this looks like throwing good money after bad. The prospects of an IPO in the next few years look remote, as confidence following the <a href="https://theconversation.com/fallout-from-weworks-failed-ipo-shows-the-folly-of-excessive-valuations-125014">recent botched IPO</a> has been destroyed. Indeed SoftBank is likely to have difficulty making subsequent IPOs in its portfolio of firms work after this blow to its valuation credibility. </p>
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<a href="https://theconversation.com/fallout-from-weworks-failed-ipo-shows-the-folly-of-excessive-valuations-125014">Fallout from WeWork's failed IPO shows the folly of excessive valuations</a>
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<p>So WeWork has become a long-term investment for SoftBank, with little prospect of any serious return. The real motive for saving it may well lie in the company’s plans to raise US$108 billion <a href="https://www.ft.com/content/a4eb31d6-afcc-11e9-8030-530adfa879c2">for its second Vision Fund</a>. As with its first US$97 billion Vision Fund, SoftBank is trying to attract investors to trust it with investing in early stage, high growth companies. This next fund is touted to have a <a href="https://www.forbes.com/sites/samshead/2019/07/26/softbank-launches-new-108-billion-vision-fund-to-invest-in-ai/">focus on artificial intelligence companies</a> but the catastrophic write down on its WeWork investment has shaken confidence in it.</p>
<p>The WeWork saga follows SoftBank pouring US$20 billion from its first Vision Fund into high-risk ride hailing businesses Uber, Didi Chuxing, Grab and Ola. Ride hailing was always likely to be a <a href="https://theconversation.com/how-uber-crashed-in-china-63343">low-margin business</a> with low switching costs for drivers and customers and low entry barriers for competition. Didi Chuxing is <a href="https://techcrunch.com/2019/02/14/didi-reported-1-6-billion-loss/">haemorrhaging money in China</a> and the path to profitability remains elusive <a href="https://www.businesstimes.com.sg/brunch/show-me-the-money-whats-wrong-with-the-startups-picture">for Grab in South-East Asia</a>. Uber had a successful IPO but its shares have <a href="https://theconversation.com/overpriced-tech-ipos-sell-grand-visions-but-arent-worth-their-valuations-117292">performed poorly since</a>. As a result, India’s Ola, which looks like it might soon turn a profit, <a href="https://www.livemint.com/companies/news/ola-may-have-turned-profitable-plans-to-list-in-india-in-2-yearsola-may-have-tu-11570126128068.html">is delaying its IPO</a>.</p>
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<a href="https://theconversation.com/overpriced-tech-ipos-sell-grand-visions-but-arent-worth-their-valuations-117292">Overpriced tech IPOs sell grand visions but aren't worth their valuations</a>
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<p>But with WeWork, SoftBank has managed to destroy its own reputation as a tech investor <a href="https://techcrunch.com/2019/10/26/startups-weekly-softbank-is-screwing-up/">in one fell swoop</a>. Three months ago it was attempting to sell WeWork to the IPO market <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">at US$47 billion</a>, now they are rescuing the business with a total valuation of US$8 billion. The rescue has taken another US$9.5 billion, bringing Softbank’s investment to over US$18 billion in WeWork. </p>
<h2>No-win situation</h2>
<p>Softbank now controls the business and appears to be holding around 80% of the shares. Neumann <a href="https://techcrunch.com/2019/10/22/softbank-reportedly-ends-wework-ownership-debacle-with-a-1-7-billion-payout-to-adam-neumann/">has been bought out</a> of much of his equity and his super voting rights. Three months ago he was viewed as a major asset to the business, now he is a liability that needs a US$1.7 billion golden goodbye to remove. </p>
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<img alt="" src="https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">WeWork founder, Adam Neumann.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/techcrunch/34679798345/in/photolist-bDWXTo-bDWXVm-scg1S5-Ufx5Kj-LjqG9H-UQx2PF-RDLNxp-scg1X5">TechCrunch/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>Softbank were in a no-win situation. If they walked away, which would’ve been by far the cheaper option, then WeWork would probably have folded and Softbank would’ve lost all their investment, around US$10 billion. It would not have been a good look. The approach they have chosen to take is to invest further substantial sums. There is little real prospect of return but it does defer the bad news of write downs surrounding WeWork until a later date.</p>
<p>Various measures are in place to make WeWork viable and actually worth the current US$8 billion valuation. Bear in mind that WeWork is running <a href="https://www.cnbc.com/2019/03/25/wework-says-sales-more-than-doubled-last-year-but-so-did-net-loss.html">losses of US$1.9 billion a year</a> so this will be no mean feat. But top SoftBank executives are now <a href="https://www.cnbc.com/2019/10/26/softbank-taking-masayoshi-sons-sprint-playbook-to-wework.html">calling the shots at WeWork</a>. Major cost-cutting is on the cards and the workforce will bear the brunt – 4,000 jobs are <a href="https://www.ft.com/content/ffa49378-f5b4-11e9-a79c-bc9acae3b654">already on the line</a>. </p>
<h2>Major strategic failings</h2>
<p>SoftBank made a very big bet that WeWork (and Uber) are “winner takes all” industries – <a href="https://theconversation.com/uber-cant-be-ethical-its-business-model-wont-allow-it-85015">like Amazon was for online shopping</a>. This gamble was based on the idea that they revolutionised their respective industries with their app design and technology. </p>
<p>But WeWork has major strategic failings in that it attempts to arbitrage long-term contracts with short-term rentals. Any recession or downturn is likely to put the model under strain. If the model is successful then competitors will follow, which will lower occupancy levels and push down profit margins. </p>
<p>It’s not clear that WeWork’s technology changes any of these traditional vulnerabilities of its business model. This argument over whether or not WeWork is primarily a tech company or a property company has been one that SoftBank has had with key Vision Fund backers <a href="https://www.ft.com/content/a4eb31d6-afcc-11e9-8030-530adfa879c2">from Saudi Arabia and Abu Dhabi</a> (together, they contributed 60% of the first Vision Fund). </p>
<p>It looks as though SoftBank is hoping to prove them wrong by refusing to cut its losses with WeWork. But investors will remain very cautious about further Softbank investments unless its focus changes significantly. Perhaps artificial intelligence will succeed as the next carrot, as Softbank’s current approach has clearly run its course.</p><img src="https://counter.theconversation.com/content/126052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>SoftBank is pouring another US$8 billion into WeWork, even though the office rental company is now valued at just US$8 billion.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1257852019-10-25T12:33:02Z2019-10-25T12:33:02ZWeWork debacle exposes why investing in a charismatic founder can be dangerous<figure><img src="https://images.theconversation.com/files/298579/original/file-20191024-170484-6foi43.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">WeWork wanted to be a lot more than a shared workspace. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-nyusamay-10-2018-wework-1278091729?src=9xiaJ5BmEePlhpkb52WWiA-1-12">rblfmr/Shutterstock.com</a></span></figcaption></figure><p>WeWork went from <a href="https://www.wsj.com/articles/the-fall-of-wework-how-a-startup-darling-came-unglued-11571946003">unicorn darling</a> with a nearly US$50 billion valuation to a cautionary tale for gullible investors <a href="https://www.wsj.com/articles/softbank-to-take-control-of-wework-11571746483?mod=hp_lead_pos2">worth just $8 billion</a> in a matter of months. It did so in part by wrapping its real estate sublet business in the cloak of a tech startup destined to “change the world.”</p>
<p>Were investors like SoftBank and JPMorgan duped by the hype of a charismatic founder, as happened with <a href="https://www.cnbc.com/2019/03/20/hbos-the-inventor-how-elizabeth-holmes-fooled-people-about-theranos.html">Elizabeth Holmes and Theranos</a>? </p>
<p>As a <a href="https://csbapp.uncw.edu/data/fs/vita.aspx?id=25472">lecturer in finance</a> and someone who managed investments for 20 years, I believe that there was some of that, coupled with <a href="https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp">behavioral biases</a> that lead people to make bad decisions. But I also think something else was going on that should give investors pause the next time they stumble across a visionary founder promoting a “change the world” branding strategy. </p>
<h2>‘We’ will change the world</h2>
<p>WeWork was founded in 2011 as a <a href="https://www.businessinsider.com/the-founding-story-of-wework-2015-10">co-working venture</a>. </p>
<p>But Adam Neumann crafted and pitched a vision for his company that went well beyond office sharing and real estate. He said the “we” culture he was building would change the world.</p>
<p>“The influence and impact that we are going to have on this Earth is going to be so big,” <a href="https://www.wsj.com/articles/this-is-not-the-way-everybody-behaves-how-adam-neumanns-over-the-top-style-built-wework-11568823827?shareToken=st3fcd4c5c55d94ffc80b5721a8aa6ffa2">he told staff</a> during a music festival-like retreat, where he suggested the company could “solve the problem of children without parents” and even eradicate world hunger. </p>
<p>Such statements weren’t uncommon from him. But moreover, they fit neatly in the messianic-like Silicon Valley tech world, where companies believe their inventions can actually <a href="https://www.gq.com/story/the-most-bullshit-motivational-slogans-in-silicon-valley">“free the world.”</a> </p>
<p>Neumann’s ambitious plans hit reality recently as <a href="https://www.bloomberg.com/news/articles/2019-10-22/neumann-clings-to-billionaire-status-after-wework-gets-a-bailout">investors soured on the company</a> in the runup to a planned initial public offering. On Oct. 23, existing investor SoftBank agreed to rescue the embattled company with <a href="https://group.softbank/en/corp/set/data/news/press/sb/2019/20191023_01/pdf/20191023_01.pdf">billions in additional capital</a> in exchange for increasing its ownership stake to 80%. The deal pushed out Neumann, who will get US$1.7 billion despite burning through earlier investments. </p>
<p>Neumann’s “exit” package may be unusual in its scale, but otherwise similar fates have befallen numerous other founders, such as Theranos’ Holmes and <a href="https://www.washingtonpost.com/technology/2019/09/30/inside-new-uber-weak-coffee-vanishing-perks-fast-deflating-morale/">Uber’s Travis Kalanick</a>. Even Elon Musk, CEO of Tesla and founder of SpaceX, often seems to be <a href="https://www.businessinsider.com/elon-musk-shocking-quotes-tweets-2018-10">one outrageous tweet</a> away from his own ignominious end. </p>
<p>Each of these leaders embodied varying traits that <a href="https://www.salon.com/2017/05/20/silicon-valleys-ceo-worship-problem/">inspired almost cult-like followings</a> among investors who forked over billions to be a part of their rise. In cases like Tesla and Uber, the companies have managed to become successful despite their CEOs’ shortcomings. Theranos and WeWork are examples of what can go wrong when the founder is both owner and executive in a venture capital-backed startup.</p>
<h2>Principals and agents</h2>
<p>Finance scholars like myself think about this in terms of the <a href="https://www.cfainstitute.org/en/research/foundation/2014/the-principalagent-problem-in-finance">principal-agent relationship</a>, an issue that is crucial to the management of almost every business and organization. </p>
<p>The principal is a party or group that enlists the agent to manage some asset or process in their best interest.</p>
<p>In a healthy corporate structure, the alignment of principal and agent is accomplished through governance and executive compensation policies that provide management incentives to act in the best interest of owners. For example, the CEO’s compensation might include stock in the company that vests over some period of years and is dependent upon specific performance targets. </p>
<p>In the case of WeWork, Neumann was acting in both roles: He was principal as the investor with the controlling stake and agent as the executive tasked with running the company. Even the <a href="https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm#toc781982_1">prospectus</a> for the company’s ill-fated IPO included language that would have given him <a href="https://www.bloomberg.com/opinion/articles/2019-08-19/we-looks-out-for-our-selves">control for life</a>.</p>
<h2>Why it’s a problem</h2>
<p>You might wonder what the problem is with this arrangement given that it’s common for managers to be owners, as is the case with small businesses and family-owned companies. </p>
<p>When it’s their own money at stake, surely they’ll be looking out for their own best interests, right? In those situations, yes, and the downside risk is assumed by the owner-managers. </p>
<p>The difference between those types of companies and the likes of WeWork and Theranos is that startups typically have significant outside investment capital. SoftBank, for one, was also a principal in WeWork. In such situations, the interest of a founder like Neumann may not necessarily align with those of the company itself and its other investors. </p>
<p>During WeWork’s buildup, for example, Neumann borrowed hundreds of millions of dollars <a href="https://www.wsj.com/articles/softbank-to-take-control-of-wework-11571746483?mod=hp_lead_pos2%20%22%22">against his stock in the company</a>, leaving himself and WeWork exposed depending on the shares’ future valuation. He also charged his own company $5.9 million for trademark rights to the word “we” – <a href="https://www.businessinsider.com/wework-ceo-gives-back-millions-from-we-trademark-after-criticism-2019-9">a sum he gave back</a> after intense criticism.</p>
<p>Even in leaving the company, he was able to <a href="https://www.bloomberg.com/opinion/articles/2019-10-23/how-do-you-like-we-now">negotiate a generous go-away package</a>, including the ability to cash out almost $1 billion in stock and receive a $185 million consulting fee. This at the same time that the company’s future is uncertain and it’s <a href="https://www.theguardian.com/business/2019/oct/15/wework-sack-staff-workers-adam-neumann">laying off 2,000 workers</a> – which it delayed doing because <a href="https://www.wsj.com/articles/softbank-offers-to-put-6-5b-into-wework-including-5b-loan-11571687872">it couldn’t afford their severance</a>. </p>
<p>Unemployed workers and wasted capital are the collateral damage when investors fall prey to the principal-agent problem. And unfortunately, I don’t think this will be the last time.</p>
<p>[ <em>You respect facts and expertise. So do The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=yourespect">You can read us daily by subscribing to our newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/125785/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Greg Putnam does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Adam Neumann both controlled and managed the co-working company he founded in 2011. A finance scholar explains why that can be a serious problem in venture capital-backed startups.Greg Putnam, Lecturer in Finance, University of North Carolina WilmingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1250142019-10-14T10:09:22Z2019-10-14T10:09:22ZFallout from WeWork’s failed IPO shows the folly of excessive valuations<p>WeWork has undergone a dramatic fall from grace in the last few weeks. Just two months ago the office rental start up was expecting to offer shares to the public at a total business <a href="https://techcrunch.com/2019/07/23/wework-ipo/">valuation of US$47 billion</a>. This <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">soon halved</a> and then investors rapidly pulled their support for an initial public offering (IPO) above US$12 billion. The IPO was withdrawn <a href="https://www.businessinsider.com/weworks-nightmare-ipo?r=US&IR=T">with catastrophic consequences</a> for the business and its charismatic founder Adam Neumann. </p>
<p>The fallout for tech IPO markets, and investment in start ups more generally may also be severe. WeWork follows a number of so-called unicorn valuations of more than US$1 billion that have gone public and subsequently nosedived in value. Its uncertain future reflects how investors have wised up to the hype around Silicon Valley start ups. </p>
<p>Certainly, WeWork had problems that were specific to the company. Its chief executive Adam Neumann was a worry to investors – he has since been deposed and is now a <a href="https://www.theguardian.com/business/2019/sep/24/adam-neumann-wework-step-down-ceo">non-executive chairman</a>. He is being followed to the exit by 20 of his senior supporters and family. The company jet is up for sale, nearly all future development is being curtailed, at least a third of the workforce of 15,000 are likely to lose their jobs and a number of recent acquisitions are being sold off. </p>
<p>WeWork’s financial situation was also a worry to investors. Its debt has been categorised by banks as “distressed” and concern is rising among landlords as to its viability. The company’s future liabilities to landlords <a href="https://www.ft.com/content/83decf7a-c04d-11e9-b350-db00d509634e">total US$47 billion</a>. There are even fears of a property recession as a consequence of curtailed demand. </p>
<p>WeWork has less than one year’s worth of cash left and without the IPO it will be very difficult to raise new money. It is losing almost US$2 billion a year and now <a href="https://www.cnbc.com/2019/03/25/wework-says-sales-more-than-doubled-last-year-but-so-did-net-loss.html">needs to stop the losses</a>. Some reports even suggest that WeWork <a href="https://www.ft.com/content/f29ecc58-eba9-11e9-a240-3b065ef5fc55">may not be viable beyond November</a> without an immediate rescue package. Investment bankers are desperately working on an attempt to rescue some value from this catastrophe.</p>
<h2>Excessive valuations</h2>
<p>The WeWork IPO saga follows hot on the heels of IPOs from taxi hailing apps <a href="https://edition.cnn.com/2019/09/04/investing/uber-lyft-ipo-market/index.html">Uber and Lyft</a> earlier in 2019, as well as the messenger app <a href="https://www.forbes.com/sites/sergeiklebnikov/2019/09/11/slack-stock-has-plunged-33-heres-what-happened/">Slack</a> and the much-hyped home exercise business <a href="https://fortune.com/2019/09/26/peloton-ipo-stock-drop/">Peloton</a>. All are now trading well below their offer prices. </p>
<p>Founders, early investors and investment banks have hugely overpriced a number of IPOs in the last few years, which means new investors could not profit from them. Appetite for technology IPOs is waning fast, as a result. An immediate consequence is the <a href="https://uk.reuters.com/article/us-endeavor-group-ipo/talent-agency-endeavor-abandons-ipo-amid-weak-investor-demand-idUKKBN1WB2HD">withdrawal of some planned IPOs</a> and deferral of others <a href="https://www.theguardian.com/technology/2019/sep/19/airbnb-ipo-2020-value">such as AirBnb</a>.</p>
<p>What is becoming clear is that investment banks cannot value loss making technology start ups for an IPO. <a href="https://www.nytimes.com/2019/05/15/technology/uber-ipo-price.html">Uber</a> was originally claimed to be worth US$120 billion, its IPO was valued at US$83 billion, and its current valuation is around US$55 billion. Many believe even <a href="https://techcrunch.com/2019/09/13/wework-and-uber-are-proof-valuations-are-meaningless/">that is excessive</a>. Similarly, WeWork was originally claimed to be worth US$70 billion, then US$47 billion but failed to reach even US$15 billion before withdrawal. </p>
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<span class="caption">Uber’s stock has been down since its IPO in May.</span>
<span class="attribution"><span class="source">NYCStock/Shutterstock</span></span>
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<p>The same story for other IPOs has destroyed the credibility of investment bank valuations in loss making companies at their early stage of life. It may be that greed is driving these valuations, but the outcome is closing the IPO market so early investors cannot capitalise by exiting. </p>
<h2>Softbank’s hard landing</h2>
<p>Ultimately, venture capital investors like Japanese tech investment firm Softbank, must take some blame for inflating the IPO market. It is one of WeWork’s biggest backers, <a href="https://fortune.com/2019/10/10/softbank-wework-ipo-valuation-hedging/">with US$10.4 billion invested</a>, and has major stakes <a href="https://www.businessinsider.com/softbank-masayoshi-son-embarrassed-with-investments-after-wework-uber-troubles-2019-10?r=US&IR=T">in both Uber and Slack</a>. These are all companies with high growth rates but which remain a long way from profitability. </p>
<p>This focus on growth without regard for future profits has been a feature of the <a href="https://theconversation.com/why-2019-could-be-the-year-of-another-tech-bubble-crash-109468">recent boom in tech start-up investments</a>. Everyone is hoping to get in early on the next Amazon or Facebook. But, given that so much of the vast venture capital injections of cash into start ups has been wasted or extracted by founders as a result of poor supervision, investors must be more wary of who they are getting involved with. If there is a struggle to find a buyer or values fall dramatically, they must change the strategy of the businesses they invest in to produce profits more rapidly, which in turn will reduce growth rates. </p>
<p>Venture capital investors have none but themselves to blame for severely handicapping their own business model through excessive valuations. With the hype for tech start ups starting to recede, their choices are limited. Either invest further in a business with limited prospects or allow it to fail. This would be reminiscent of the dot.com era which sent significant numbers of start ups to the wall.</p><img src="https://counter.theconversation.com/content/125014/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>WeWork’s uncertain future reflects how investors have wised up to the hype around Silicon Valley start ups.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/859932017-11-13T04:49:08Z2017-11-13T04:49:08ZWhat we can learn from the Warren Buffett of the web<p>Softbank’s founder and chief executive Masayoshi Son, or “Masa” as he is known outside Japan, has often been called “<a href="https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjWg9vGpLLXAhUCJJQKHbI3AvcQFggnMAA&url=http%3A%2F%2Fwww.telegraph.co.uk%2Ftechnology%2F2016%2F07%2F23%2Fmasayoshi-son-the-bill-gates-of-japan-who-masterminded-britains%2F&usg=AOvVaw1LddhX6n82EOVUcV17xNtW">the Bill Gates of Japan</a>”. Today, I suggest a more appropriate moniker may be the Warren Buffett of the Web. </p>
<p>Strategic and with an eye for long-term value, Masa has led Softbank to become an online giant now valued at more than US$100 billion (A$130.44 billion), as the result of many investments, joint ventures and strategic decisions — and not simply from the proceeds of one dominant network business. </p>
<p>Therefore, Softbank’s business model can offer valuable lessons for how to make it in the high-stakes world of tech. And although his recent investments in <a href="https://www.wework.com">WeWork</a> have seen some industry observers questioning his fiscal wisdom, the evidence suggests that it too will ultimately reap rewards.</p>
<h2>Who is Masayoshi Son?</h2>
<p>Masa is a Japanese businessman with Korean ancestry who studied Economics at the University of California, Berkeley in the late 1970s. While still a university student, Son brought Japanese coin-operated arcade games such as Space Invaders, Scrambler and Pacman to California. </p>
<p>His approach to his first arcade games business reveals his Buffet-like mind. Atsuo Inoue’s <a href="https://www.amazon.com/Aiming-High-Biography-Masayoshi-xFF08-ebook/dp/B00F77T9A8">biography</a> explains how Son recorded a log of daily cash received for each video game machine and its trends. Some games were popular at the beginning and quickly tapered off, while others were perennial hits. Analysis of this data helped him decide which machines to keep and which to replace in order to optimise daily returns.</p>
<h2>Seeing the value of centrecourt</h2>
<p>In many games like chess, the centre of the board is prime real estate. Anyone who has played squash or racquetball also knows that positioning yourself at the central ‘T’ puts you at a distinct advantage. Similarly, with many multi-sided marketplaces, being in the centre as the “market maker” is often the most powerful and stable position. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=510&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=510&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193273/original/file-20171104-1055-f2qi2v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=510&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Great squash players understand the importance of centre court. Here world champions
Mohamed El Shorbagy and Gregory Gaultier.</span>
<span class="attribution"><span class="source">https://www.flickr.com/photos/mariannebevis/</span></span>
</figcaption>
</figure>
<p>After University, Masa returned to Japan to create Softbank in 1981. He got his start creating packaged wholesale software distribution businesses but soon expanded into <em>people-network</em> businesses such as technology magazine publishers (Ziff Davis) and events (Comdex) that connected many parts of the industry together. He called this information “industry infrastructure”. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=276&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=276&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=276&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=347&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=347&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193274/original/file-20171104-1055-1vkq1ej.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=347&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Softbank strategically positioned itself for three waves of technology growth by early investment in information industry</span>
<span class="attribution"><span class="source">Author</span></span>
</figcaption>
</figure>
<p>Softbank began in technology magazine publishing, as well as hosting large trade shows for the tech sector. They did this first in Japan, but in the 1990s expanded into the US via large acquisitions including the biggest trade show (Comdex) and technology magazines including PC Week and many other titles. </p>
<p>This really put him in the “centre of the squash court”. </p>
<h2>An eye for investment</h2>
<p>In the earliest days of the web, Masa invested in some 800 companies during the dot-com boom, including well-known brands like Yahoo. For <a href="http://indiatoday.intoday.in/story/its-actually-sad-to-be-rich-softbanks-billionaire-chief/1/825579.html">three days</a> Masayoshi Son was the richest person in the world — richer than Bill Gates. </p>
<p>But this was short-lived, and in the dot-com crash of 2000 his stock fell 99%, costing him more than US$60 billion (A$78.44 billion) in personal wealth. But despite the crash, one of his investments in 2000 was a US$20 million (A$26.1 million) placement in Alibaba. That stake is now valued at around US$90 billion (A$117 billion). </p>
<p>Masa thinks his largest investment to date, the acquisition last year of UK Chip designer <a href="https://www.arm.com/products/processors">ARM</a> for £23.4 billion (A$40.1 billion), will one day become more valuable than Google. As the Internet of Things takes off and chips become a part of everything, the dominant position of ARM will pay off big time.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=311&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=311&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=311&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=391&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=391&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193276/original/file-20171104-1055-605fhu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=391&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Masayoshi Son at the 2008 Softbank Conference.</span>
<span class="attribution"><span class="source">nobihaya/flickr</span></span>
</figcaption>
</figure>
<h2>Softbank’s latest move — A homecoming?</h2>
<p>In 2017 Son has created an extraordinarily ambitious $100 billion (A$131 billion) <a href="https://softbank-ia.com/vision-fund">Softbank Vision Fund</a> that is aligned to his own personal vision. It is a three-century plan to invest in technology to help protect people from the many of the worlds physical problems and dangers - such as autonomous vehicles that once operational promise to save millions of lives each year from avoided road deaths.</p>
<p>Already the fund has attracted US$1 billion (A$1.3 billion) each from Apple and Oracle founder Larry Ellison. After one 45-minute meeting with a Saudi Crown Prince, he attracted a commitment to co-invest US$45 billion (A$59 billion) with the plan to turn that investment into a trillion dollars through <a href="https://www.japantimes.co.jp/news/2017/11/12/business/tech/investments-softbanks-huge-vision-fund-shake-tech-world/">far-reaching investments</a> in Artificial Intelligence, space exploration and the Internet of Things. </p>
<p>The announcement in August that Softbank has <a href="https://techcrunch.com/2017/08/24/softbank-pours-4-4b-into-wework/">invested $4.4 billion in co-working space leader WeWork</a> to help fund their ambitious global expansion has met with mixed responses from the media with the Wall Street Journal’s Eliot Brown calling it “<a href="https://www.wsj.com/articles/wework-a-20-billion-startup-fueled-by-silicon-valley-pixie-dust-1508424483">A $20 billion Startup Fueled by Silicon Valley Pixie Dust</a>” and Author of bestselling book <a href="https://g.co/kgs/PjGjwD">The Four</a>, <a href="https://www.businessinsider.com.au/scott-galloway-wework-overvalued-company-world-2017-5">Professor Scott Galloway</a> calling it overvalued in May prior to the Softbank Investment.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193277/original/file-20171104-1032-47lg28.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">WeWork CEO and cofounder Adam Neumann and UK Prime Minister Theresa May at wework New York, 19 September 2017.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/number10gov/36933844430/">number10gov/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Some such as <a href="https://medium.com/@neilswmurray/analysis-is-wework-at-10b-the-most-unjustified-valuation-since-the-dot-com-bubble-5f49055a5d1f">Neil Murray</a>, commentator on the Nordic startup and technology scene think Softbank’s investment is overpriced and it wildly overvalues the company — whose nearest competitor the more traditional serviced office provider <a href="http://www.iwgplc.com/">IWG</a> (formerly Regus) doesn’t enjoy such a generous valuation from the market. </p>
<p>However, as WeWork is now a trusted partner to thousands of the fastest growing new businesses in the world, Softbank may well have again have bought themselves front row seats for a whole new generation of high-growth investee companies.</p>
<p>Masa’s approach is a lesson to all in business how a strategic approach to technology investments with a long view and a portfolio approach — some of which position the investor for future investments — can pay off handsomely.</p><img src="https://counter.theconversation.com/content/85993/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Professor McCarthy is Chairman of The Studio: a new global mediatech hub based in Sydney. </span></em></p>Softbank has become one of the biggest global names in tech. The story of its founder and CEO Masayoshi Son offers some prescient insight in how to navigate highly competitive global markets.Paul X. McCarthy, Adjunct Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/627012016-07-19T10:51:26Z2016-07-19T10:51:26ZAs ARM enjoys a Japanese embrace, the lessons it can teach UK tech firms<figure><img src="https://images.theconversation.com/files/131073/original/image-20160719-13851-1qk6r0a.jpg?ixlib=rb-1.1.0&rect=3%2C0%2C2044%2C1253&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">ARM gets ready to grapple with a Japanese adventure.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/shinichiro_hamazaki/17274056186/in/photolist-sjs45W-ecYAVY-7ny9AG-5po9kd-c5Lbgd-jnWzcX-jnZvv5-jnZuY3-jnZAHQ-bKNam-5V4WJR-4s3WXA-fxcW4z-aS33MP-eb6Tre-piFgPd-piFgE5-jnX2df-jnWDna-jnUVjg-jnZBih-jnV2PF-jnWZG9-p2dRME-aS343D-jnZzFj-iVMwZ-ogjV4B-jnWAgv-6oVDZX-jnUWfp-hti5vU-jnWyQp-ebcvbW-jnZAxE-aS342c-ibT6bE-9JmFSA-aS33Xp-aS344z-NeHW8-jnWwst-p2cZ3z-jnZz2y-p2d2hK-jnV51V-htdBoz-aS33UR-CK25mh-5TbXZX">Shinichiro Hamazaki/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>When the 12 founding engineers of chip designer ARM Holdings met in a 14th century barn near Cambridge in 1991 to welcome their new CEO, (now Sir) Robin Saxby, he <a href="http://www.thecasecentre.org/educators/products/view?id=95198">asked them a brutal question</a>: “Should we strike out for something, or just be in the hand-to-mouth chip design consulting business?” </p>
<p>With Saxby’s enthusiasm and the founding engineers’ belief in their technology, the team decided they would aim to become a global standard. They set a target to embed ARM designs into 100m chips by the year 2000. It was an ambitious goal for a tiny company with only £1.32m of investment from its then-struggling backers Acorn, Apple, and VSLI. At the time, many said it was no more than a pipe dream.</p>
<p>But this week, ARM agreed a <a href="http://www.wsj.com/articles/softbank-agrees-to-buy-arm-holdings-for-more-than-32-billion-1468808434">US$32 billion sale to Japan’s Softbank</a>. ARM’s chip designs are embedded in more than 95% of the world’s mobile phones, as well as tablets, servers, and many other types of smart devices. Last year, ARM’s designs went into some 15 billion semi-conductor chips. An incredible feat from an inauspicious start. So what lessons does ARM’s success have for other budding British technology companies? </p>
<p>The first is: don’t try to do everything yourself. Instead, specialise in the activities where you have a distinctive advantage. In ARM’s case, that was designing capable, reliable chips that used little power and could be manufactured efficiently in volume at low cost.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131045/original/image-20160719-13843-iy49pj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Building networks.</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/cat.mhtml?lang=en&language=en&ref_site=photo&search_source=search_form&version=llv1&anyorall=all&safesearch=1&use_local_boost=1&autocomplete_id=&searchterm=%22computer%20chip%22&show_color_wheel=1&orient=&commercial_ok=&media_type=images&search_cat=&searchtermx=&photographer_name=&people_gender=&people_age=&people_ethnicity=&people_number=&color=&page=1&inline=403343065">Raimundas/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Workhorses</h2>
<p>Then, catalyse the development of a network of partners around you who will fill in the gaps and make you successful as they strive to grow their own businesses. ARM broke the mould at the time, abandoning the conventional wisdom that to succeed in semiconductors you had to be a vertically integrated company which made huge investments in wafer fabrication such as Intel, or remain as a small band of design consultants. </p>
<p>Instead, it decided to become a “chip-less, fab-less chip company”. It would specialise in designs for <a href="https://cs.stanford.edu/people/eroberts/courses/soco/projects/risc/whatis/index.html">Reduced Instruction Set Computing (RISC) chips</a> – the workhorses that control all the background activities users aren’t even aware of. But instead of being a small, specialist provider of designs for RISC processors, ARM was able to turn itself into the pivot of a huge ecosystem, becoming the “glue” that bound a network of hundreds of partners together as well as a magnet for knowledge fragmented between different players.</p>
<p>These include phone and tablet makers, chip fabricators, tool developers, software providers, and makers of complementary chips. Lesson one, therefore, is focus on your core and harness the power of ecosystem partners to do the rest.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131051/original/image-20160719-13859-1o40a13.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Focus.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/kgnixer/8448192355/in/photolist-dSxcfT-6dnqx-j89QAj-ePCTGv-sZmGb-yve4C-5ySudS-ePCWQx-9EnApA-5nhqE9-fGEUmg-7jcjfH-ePQkBQ-ePCS8t-dVRbNQ-8ryuLT-71TPqp-ePQmPq-ahxGh1-yXmr-ePCUaF-ePQhrq-4CqcTR-k2BCR1-4sMSrG-fxWsoV-aj6aB1-e8arVT-857pq4-5RdZkJ-gYD6F2-yve4E-5yNcDP-9mLHtH-ahuWjK-ePCXZe-2TTE7t-5hJ2yU-6YxGJC-aMsf32-n1qzRL-6gY6pQ-8ZmLo7-3qyxtR-dKrLJU-5Ygw7v-nU2i4K-7xsfvG-i1awaF-bstS1w">niXerKG/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<h2>Growing the market</h2>
<p>That leads on to the second lesson: concentrate what you can do to make the overall ecosystem “pie” bigger, rather than worrying about maximising your share of that pie. Given the difficulties of scaling up a technology company from a UK base, ARM shows the benefits of letting your ecosystem partners drive global scale for you, propelling your product into billions of devices and accumulating a small royalty from each to create a massive flow of cash.</p>
<p>The third lesson is to think global from day one. ARM grew with hardly a single customer in the UK. It realised that the volume, and the lead customers driving the direction of its industry, were scattered around the world. So, from the outset, it’s early customers and partners were in the US, Japan and Korea including Texas Instruments, Sony and Samsung. Later, a few were added in Europe, such as ST Microelectronics and Nokia. ARM had to be global almost from birth. Now clients include leading Chinese players such as Huawei and ZTE.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/131047/original/image-20160719-13837-1km6113.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Grow the pie!</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/s/pie/search.html?page=2&thumb_size=mosaic&inline=361187264">KucherAV/Shutterstock</a></span>
</figcaption>
</figure>
<p>The SoftBank takeover is certainly not evidence that life will be rosy if and when the UK <a href="https://theconversation.com/uk/eu-referendum-2016">leaves the European Union</a>. In fact, the deal probably has more to do with the decline in sterling relative to the yen and the dollar, which has made ARM shares cheaper for foreign buyers. Add the fact that ARM has hardly any customers in the UK and few in Europe; most of its sales are in Asia and the US. As a result, it’s pretty well insulated from a downturn in the UK economy. </p>
<p>The genuine threat from Brexit would come from any future restrictions on migration; ARM has a very multi-national army of engineers and faces an extreme shortage of suitably trained developers in Britain. Any problems here, and SoftBank’s soothing words about maintaining and growing ARM’s presence in the UK might fade into history. </p>
<p>But ARM is also attractive to the Japanese firm because it has the potential to become a major player in the “Internet of Things” – the emerging world where smart machines, sensors, and devices talk to each other. It is another lesson for UK tech firms to keep moving into new spaces. </p>
<p>ARM is particularly well placed to benefit from this emerging network, not only because of the strength of its technology and development capacity, but also because its ecosystem approach is a perfect fit for a market that requires a multitude of specialist companies, institutions and governments to work together. Even at a 40% premium over ARM’s share price before the deal was announced, Softbank’s acquisition looks like a smart move.</p><img src="https://counter.theconversation.com/content/62701/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Williamson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Cambridge-based chip designer offers a useful blueprint for others.Peter Williamson, Honorary Professor of International Management, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/626512016-07-18T18:58:01Z2016-07-18T18:58:01ZJapanese bet on UK tech group ARM is no backing for Brexit Britain<figure><img src="https://images.theconversation.com/files/130928/original/image-20160718-2115-1lizw57.jpg?ixlib=rb-1.1.0&rect=16%2C16%2C5599%2C3724&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The chips are down.</span> <span class="attribution"><a class="source" href="http://www.shutterstock.com/">Dario Lo Presti/Shutterstock</a></span></figcaption></figure><p>SoftBank, a Japanese technology business, has agreed to <a href="http://www.bbc.co.uk/news/business-36822806">buy Cambridge-based chip designer ARM Holdings</a> for a European record US$32 billion for a technology business. The deal was <a href="http://uk.reuters.com/article/uk-arm-holdings-m-a-softbank-group-brita-idUKKCN0ZY0GD">hailed by the new chancellor of the exchequer</a> as a sign that Britain remains “open for business” following the <a href="https://theconversation.com/uk/eu-referendum-2016">vote to leave</a> the European Union.</p>
<p>In truth, SoftBank’s punchy move is a bet on ARM’s technology offering, not on Britain’s economic future. And it is a risky bet at that.</p>
<p>The timing does however reflect the weakness in the pound since the Brexit vote. ARM, which has seen startling growth since it was founded in 1990, now provides a cheap sterling cost base for designing chips and software while sales are dollar denominated. Margins will therefore increase as a consequence of Brexit and the price paid for the business is at least 10% less than it would otherwise have been.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/130930/original/image-20160718-2122-qzulip.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Sterling work.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/howardlake/4550760086/in/photolist-7W8QqN-9NwACM-9kMwDm-ndnFky-4uuDPQ-9NFVNX-2hYsBf-a2YbjP-fvG2B3-9NH9LR-bmdkbV-egkhku-9chSab-5Sus9W-7W8S5L-8x6Fdh-9Ebx4k-88jr2T-gc4HKC-s7tt27-5Ybbkb-fUkmTs-9NGYZA-9NF1UU-qGXScM-fyu7Fw-8m75qT-9LPBnH-55jYqQ-9kJCnM-fvFV5o-5QCqN7-a31WN9-9NFhVS-a2YtoH-6Ro2v4-9NBTQp-4S7Zut-qj74Ls-bEKdHx-9VE8JS-9kMJaE-7W5zge-mfgj32-7Zgydh-8HcKL5-5xnD51-9VAk2x-7ZkWpL-5sL1NB">Howard Lake/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Chipping away</h2>
<p>All that considered, SoftBank have still paid an enormous price at 70 times the earnings and 50 times the net income of the company. The agreed bid offered a 43% premium to the previous share price. This is a major bet on chip technology development for products which may be <a href="http://www.telegraph.co.uk/technology/mobile-phones/11812322/smartphone-sales-in-china-fall-says-gartner.html">approaching saturation</a>.</p>
<p>ARM was created through a spin-off from early home computer maker Acorn and US firm Apple. Its chips predominantly <a href="https://www.arm.com/products/index.php">end up in phones and tablets</a> – the designs are found in billions of devices. There appears to be no real synergy benefit to SoftBank owning ARM Holdings as the UK head office is to be retained and there will be no integration of any other activities. A benefit will be the promise of significant UK investment over the next five years. However, promises made to secure agreement to acquisitions are not always reliable. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/130934/original/image-20160718-2153-mz36rv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Staying put?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/maxf/7495063252/in/photolist-cqjabu-6uz7WM-eAgULg-4aXNhX-7j1vow-xtJUb-7cNnwc-5VxDMM-5WB6nY-86ofSz-86Tx1w-kFhtS-3ky8an-7iJ6jr-JjUL4-5Nh61u-dWK8Rr-2HhMYe-9M4M4j-2HhLC8-63yp4S-7adfA6-ohazj-7TXSQH-94TGe-gj2bE-2rqR3-5kWha2-F3s97-3cdszY-tRwmy7-4uPmN1-59ijLg-vait8-4QVjUm-zgX17J-z33fy-EneMY-B6MSi-Afy4X-qmQTt-5nuaph-8nWWo4-a5t2yK-2y5kR-o7vQF-9ckuJP-9iqkwk-q1vudb-boZRZz">Max Froumentin/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Most acquisitions <a href="https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook/ar/1">destroy value</a>. More than half are sold off within five years. The principal reasons for failure are paying too much – which seems very likely here – and a lack of strategic clarity motivating the deal, which also seems likely in this case. The good news is that a major source of value destruction is the integration process which usually involves lost market share and key staff leaving. Distraction and uncertainty are hugely destructive forces. In the case of ARM there won’t be an integration which improves the prospects of success. </p>
<h2>Tech failures</h2>
<p>Technology acquisitions have a poor record of success and are especially risky. Look at Hewlett Packard’s <a href="http://www.wsj.com/articles/SB10001424053111903596904576516914051864044">acquisition of Compaq</a>, which ultimately cost Carly Fiorina her CEO job and <a href="http://www.computerworlduk.com/galleries/it-vendors/hps-botched-autonomy-acquisition-timeline-of-saga-3594523/">latterly HP’s deal to buy software group Autonomy</a> which required nearly all the US$11.1 billion cost to be written off in a year. Another Hewlett Packard CEO left as a consequence. </p>
<p>Microsoft also has a poor record when it comes to its technology acquisitions, with the US$7.4 billion purchase of Nokia completely written off followed by a <a href="http://money.cnn.com/2012/07/02/technology/microsoft-aquantive/">US$6.3 billion writedown on aQuantive</a>. Some <a href="http://www.telegraph.co.uk/business/2016/06/14/the-alarm-bells-are-ringing-over-linkedin-deal/">have similar concerns</a> over their recent US$26 billion purchase of LinkedIn. In ARM’s case, the benefits are largely revenue based and merger research finds these are rarely realised. The business is also to be kept separate so there are not expected to be any cost benefits.</p>
<p>The principal problem with technology acquisitions is the speed and unpredictability of technology change and market trends in usage. A successful proposition often generates enormous cash returns which are then invested in making a bet on the next big technology which has a high chance of failing. Easy come, easy go as they say.</p>
<h2>More to come</h2>
<p>Merger activity has collapsed in the UK following a <a href="http://www.ibtimes.com/merger-acquisition-activity-hits-record-high-2015-report-2213166">strong year in 2015</a>. The basic conditions for a successful acquisitions market is high liquidity which means corporate cash piles, cheap borrowing and institutions with large cash balances to invest. These conditions still largely persist and are driving global acquisition activity outside the UK. </p>
<p>However merger markets also require a benign growth outlook. Continuing uncertainty regarding Brexit is to blame for the UK situation which may take some years to resolve. Whatever the chancellor Philip Hammond says, Softbank’s US$32 billion bet is not on the UK but on the chip technology market because much of ARM’s sales are overseas and dollar denominated. The more realistic appraisal is simply that UK businesses are now cheap and more acquisitions may follow, especially those with substantial export sales and UK based costs.</p><img src="https://counter.theconversation.com/content/62651/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>SoftBank’s US$32 billion deal for the Cambridge company makes use of the weak pound and may presage more to come.John Colley, Professor of Practice, Associate Dean., Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.