Creating a unique synergy group structure through the Cluster of No.1 Strategy
When I was 19, I invented an electronic translator with a voice function, which was my very first invention. Subsequently, it was the basis of later electronic dictionaries and used by people all over the world. Without my invention, the birth of electronic dictionaries may have been delayed by several years. However, this electronic translator is only one of the world's many inventions. In the future, if I were to be asked what I have invented, the answer will not be an electronic translator but the “Cluster of No.1 Strategy.” This strategy entails establishing a group structure that is based on holding stakes of usually between 20% and 30% as the largest shareholder in companies that are leading the evolution in their respective fields and, in doing so, growing substantially along with those companies. This approach appears similar to that of existing Zaibatsu (Japanese conglomerates) and other types of conglomerates but in fact is totally different. My enthusiasm in having the SoftBank Group grow continuously for 300 years has led me to invent this strategy.
Driving the evolution of the Group and accelerating the Information Revolution
In inventing the Cluster of No.1 Strategy, I drew inspiration from the way bacterium has evolved since 4 billion years ago when it is said to have originated as the source of organisms. The bacterium that first formed on Earth perpetually multiplied through self-propagation. However, if the bacterium had only grown in quantity, life on Earth would not have developed into its present state. Many diverse life-forms exist today because the bacterium had undergone another crucial change: self-evolution.
Similarly, in the context of the Information Revolution, self-evolution, which occurs in response to environmental changes, is very important. In the past 30 to 40 years, the environment has changed dramatically. Initially, the introduction of the personal computer (PC) changed the world significantly. We then saw the proliferation of the Internet, which connects those PCs. As the next step, I expect explosive growth in artificial intelligence (AI). Such environmental changes influence the rise and fall of companies. Many companies prospered in the PC era. In the Internet era, however, such new superstars as Google and Amazon have emerged. Today, Internet-related companies account for the majority of the world's top 10 companies as measured by market capitalization. The advent of the AI era is likely to revolutionize medicine, construction, transportation, and a whole host of other fields as well as significantly changing the companies that are included in world's top 10.
Thus, the Information Revolution, our main battleground, will go through profound changes. The SoftBank Group must consider how to survive amid such changes. In fact, it must not only consider how to survive but also how to continue growing for the next 300 years. After much deliberation, I concluded that establishing a group structure based on the Cluster of No.1 Strategy was the best approach going forward. Consequently, I have incorporated the self-evolving characteristic of organisms that I mentioned earlier into our Group structure. The Cluster of No.1 Strategy will enable us to not only propagate but also evolve ourselves continuously.
The Cluster of No.1 Strategy has two features. The first is that this cluster will comprise only No.1 companies. Zaibatsu comprise many group companies, but these are not necessarily the leaders of their fields. In contrast, the approach of the Cluster of No.1 Strategy is to create a group that consists solely of the top leading companies of their respective fields and thereby markedly enhance the competitiveness of the Group as a whole. The second feature is that we do not overly control or manage those companies in the Group. When asking companies to join the Group, we do not demand brand integration or equity ownership of 51% or more. For example, when we invested in Alibaba in 2000, we did not request inserting the “SoftBank” brand in the company name or acquiring a stake of 51% or more. If we had, I think Jack Ma (Yun Ma) would undoubtedly have rejected our investment offer. Entrepreneurs have a great deal of pride in and aspirations regarding their businesses. Moreover, this shareholding level is practical when divesting stakes in the Group companies that have matured or have not grown as expected. Divesting companies with “SoftBank” in their names or in which we have a majority stake is not easy. In other words, with shareholding limited to 20%–30%, the Group can easily enter or exit from investments. In creating a group of brilliant No.1 companies, this second feature is indispensable.
Transforming from telecommunications business to strategic holding company
In accordance with the Cluster of No.1 Strategy, we are going through a major transformation. On July 9, 2018, our subsidiary SoftBank Corp., which plays a central role in domestic businesses such as the telecommunications business, made a preliminary application to list its shares on the Tokyo Stock Exchange. Upon the success of the listing, Ken Miyauchi (Director, SoftBank Group Corp.; President & CEO, SoftBank Corp.), who has been my right-hand man for more than 30 years, will lead the company as it pursues growth with even greater flexibility and autonomy.
Having overcome many difficulties, our U.S. subsidiary Sprint is approaching another milestone. After much struggle, Marcelo Claure (Director, Executive Vice President & COO of SoftBank Group Corp.; Executive Chairman of Sprint Corporation) has led the company to an impressive V-shaped turnaround. For our next step, we announced in April 2018 a merger with T-Mobile and are awaiting approval from the U.S. authorities.
Through the aforementioned listing and merger, the SoftBank Group is transforming from a telecommunications carrier into a strategic holding company. Contrary to the general approach to value the SoftBank Group as a telecommunications carrier, the fact is that the SoftBank Group has focused on the telecommunications business for only about a dozen of its 36 years in existence. Transforming into a strategic holding company will restore the SoftBank Group to its original profile before advancing in the telecommunications business. Similarly, for the past dozen years or so, I have devoted most of my time to the telecommunications business and the remaining time to investment activities. In conjunction with our transformation into a strategic holding company, I will switch my time allocation. In this way, I will advance the Cluster of No.1 Strategy and step up our efforts to accelerate growth.
A growing list of SoftBank Vision Fund portfolio companies
I am now devoting a majority of my time to the investment activities of SoftBank Vision Fund. The fund began its full-scale operation in May 2017 and has invested in 24 companies*1 so far. The fund differs from venture capital funds in general because, rather than investing in start-ups, it almost exclusively selects and invests in companies that are leaders in their industry or on the verge of becoming leaders. Furthermore, on average, the fund invests about ¥100 billion in each company.
One of SoftBank Vision Fund's portfolio companies, WeWork, which operates a global network of workspaces, posted sales of $890 million (¥97.0 billion) in 2017 despite being established only several years ago. In India, meanwhile, since receiving support from Alibaba, Paytm, a provider of one of the country's largest payment services,*2 has grown rapidly, achieving a 35-fold increase in total payment volume between fiscal 2014 and fiscal 2017. Another Indian company that is one of the largest in its field,*3 the hotel network OYO Rooms, has an extremely promising future. At merely 24 years old, the company's founder is an exceptionally talented entrepreneur who has built India's largest hotel network in just four years. In addition, OYO Rooms has launched operations in China and is growing very quickly. Since it began services in China in November 2017, the company has achieved a 250-fold rise in the number of used room nights on its platform in just seven months. In Europe, one of the continent's biggest marketplaces for used automobiles is Auto1 Group, which started its business in 2012 and rapidly grew to sell 420,000 units across 40,000 dealers in 2017. Yet another company showing fast-paced growth is Compass, which is based in the U.S. and offers real estate agents a technology platform to make the home buying and selling process intelligent and seamless. Meanwhile, China's Full Truck Alliance connects shippers with truck drivers and is among the largest of China's matching platforms. Already, 2.9 million truck drivers use the service, and Full Truck Alliance has a market share of more than 90%.
- *1As of March 31, 2018.
- *2Based on total payment volume
- *3Based on booked room nights
Establishing a strong position in ride-sharing for SoftBank Group Corp.
SoftBank Group Corp. has established an overwhelmingly strong position in the ride-sharing field. The SoftBank Group is currently a significant shareholder in the world's major ride-sharing companies: Uber, DiDi, Ola, and Grab. In 2017, these four companies had an aggregated annual gross merchandise volume (fares) of $65.0 billion (¥7.1 trillion) and delivered 35 million rides per day. In the major cities of the U.S., such as New York, Washington D.C., Chicago, and Los Angeles, we expect the ride-sharing market to keep expanding steadily as it continues to become cheaper for commuters to use ride-sharing services than to drive private automobiles.
Our share price of ¥8,070 is undervalued; our shareholder value is ¥14,199 or more
The share price and market capitalization of SoftBank Group Corp. were only ¥8,070 and ¥8.8 trillion, respectively, based on the closing price on June 19, 2018. Many shareholders are probably more interested in our current share price than learning more about the Cluster of No.1 Strategy. Some, I think, may feel uncertain about whether the share price will rise. In reality, however, SoftBank Group Corp.'s shareholder value of ¥14,199 per share is far above the current share price. Our enterprise value is ¥23,153*4 per share, of which Alibaba accounts for ¥13,999; Sprint ¥2,166; Yahoo Japan ¥822; Arm ¥2,471; others ¥710; and SoftBank Vision Fund, Delta Fund, and investments in Uber, DiDi, and other companies by the SoftBank Group ¥2,987. Deducting from this enterprise value the net interest-bearing debt of ¥8,954*5 per share gives us a shareholder value of ¥14,199 per share as I mentioned earlier. Moreover, this amount does not include the value of SoftBank Corp., which is currently preparing for listing. Therefore, the shareholder value of SoftBank Group Corp. is ¥14,199 per share plus the shareholder value of SoftBank Corp., which will be crystalized after the company becomes public. I think consideration of these figures should ease any uncertainty shareholders might have.
But then again, our market capitalization is still less than half of the peak level of more than ¥19 trillion that we reached in 2000. Meanwhile, the shareholder value was only ¥4,472 per share at the end of March 2000. This means that, while the shareholder value was a third of its current level and only amounted to approximately ¥5 trillion in total, the market capitalization of ¥19 trillion was disproportionately more than double the present level. In 2000, the overvaluation caused me concern every day. Subsequently, after the dot-com bubble burst, our market capitalization fell below ¥300 billion. We have overcome a variety of crises and problems, and the market capitalization has finally recovered to ¥8.8 trillion. True, our market capitalization remains at less than half of its peak level. However, four years ago, our per-share shareholder value already exceeded the ¥4,472, the value recorded in the year 2000, and now it has risen to at least ¥14,199 or more. The comparison of this shareholder value with the current share price clearly shows, I believe, that SoftBank Group Corp. shares are much undervalued. Looking back at the relationship between shareholder value and market capitalization over the past 20 years, market capitalization has tracked shareholder value closely like the ivy plant climbing around a long pole. Although market capitalization is well below shareholder value at present, the gap between the two should narrow before too long.
- *4Each company's enterprise value is calculated as follows.
Alibaba: Calculated by multiplying the number of Alibaba shares held by the SoftBank Group, excluding those pledged for Mandatory Exchangeable Trust Securities, by the closing price of Alibaba shares at the New York Stock Exchange on June 18, 2018.
Yahoo Japan: Calculated by multiplying the number of Yahoo Japan shares held by the SoftBank Group by the closing price of Yahoo Japan shares at the Tokyo Stock Exchange on June 19, 2018.
Arm: Calculated based on the consideration transferred for the SoftBank Group's acquisition, excluding the number of Arm shares (24.99% of total issued shares) to be held by SoftBank Vision Fund after the completion of in-kind contribution to the fund by the SoftBank Group.
Sprint: Calculated premised on a future merger with T-Mobile and by multiplying the closing price of T-Mobile shares on June 18, 2018 by the exchange ratio of 0.10256.
Others: Calculated mainly based on the fair values of unlisted shares held by the SoftBank Group as of March 31, 2018.
SoftBank Vision Fund, Delta Fund, Uber, DiDi, and other companies: Total fair value of investments held by SoftBank Vision Fund, Delta Fund, and investments such as Uber and DiDi held by the SoftBank Group was multiplied by the percentage of the SoftBank Group's contributed capital for the performance-based equity among the total contributed capital at SoftBank Vision Fund and Delta Fund. The fair values of the public stocks are based on the following calculation: the closing price at NASDAQ or New York Stock Exchange on June 18, 2018 or the closing price at the Hong Kong Stock Exchange on June 19, 2018.
The total number of issued shares is as of March 31, 2018. An exchange rate of $1 = ¥110.64 was used.
- *5The amount of net interest-bearing debt excludes financial liabilities relating to sale of Alibaba shares by variable prepaid forward contract and net interest-bearing debt of Sprint, Yahoo Japan (incl. The Japan Net Bank), Arm, SoftBank Vision Fund, and Delta Fund. As of March 31, 2018.
Becoming corporate group that drives evolution of humanity
Humanity has experienced three revolutions: the agricultural, industrial, and information revolutions. Of these, I am convinced that the Information Revolution will be the largest revolution in human history, surpassing the length of the Industrial Revolution and lasting for more than 300 years. To realize the ambitious goal of becoming the top corporate group to lead humanity's evolution during this Information Revolution, I invented the concept of the Cluster of No.1 Strategy. Around the core of brilliant star companies, the planets will form, and so do the satellites. Eventually, like the stars in the Milky Way, the SoftBank Group companies will continue shining for 300 years. This is the type of group structure that I always envision. I am sure that realizing our philosophy of “Information Revolution — Happiness for everyone” will also make shareholders happy. As the Group makes this transformation, I would like to ask our shareholders and stakeholders for their continued support and understanding.
Chairman & CEO, SoftBank Group Corp.