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The "Lehman Brothers" of the digital economy: investing fortunes in buying companies and inflating the new bubble

The "Lehman Brothers" of the digital economy: investing fortunes in buying companies and inflating the new bubble
The paradigm of constantly investing in "unicorns" that lose money is in check. The industry seeks to convert to the new economic landscape
08.11.2019 00.03hs Innovación

The numbers in red are perpetuated over time. There are small lapses in which the bright green on the quotation screens interrupts the following of losses to placate the doubts of the brokers, but it is just a placebo: in 2019, the future of the IPOs (public offer of shares) of Technology companies seem already written.

"Alea iacta est" (the die is cast) must repeat again and again by these hours Masayoshi Son, founder of Softbank who built an empire based on very heavy investments and who, in recent months, saw how his touch of King Midas It disappeared as the valuations of its two top bets crumbled: Uber and WeWork.

Precisely, there are already several on Wall Street that catalog Softbank, this Japanese holding company that does not stop investing in companies, mostly deficits in billions of dollars, such as the Lehman Brothers of the digital economy. And there are more who accuse him of being inflating the new bubble, now in version 4.0.

- In the case of Uber, it was called to be the great favorite of Wall Street: disruptive business, global reach and a brand image so omnipresent that it has already passed the field of metonymy: no one asks for a car at home, it is requested "a Uber "

- On the WeWork side, he managed by force of overwhelming marketing and a "cool" millennial tone to become the object of desire for thousands of investments, even though his business, behind his technological facade, was a simple platform for office rental

There was a common denominator in both companies, in addition to the lush history of controversies of their CEOs: the absolute impossibility of generating a positive profit that would satisfy the shareholders, product of business strategies that pointed to an aggressive expansion supported fresh money as a fuel extracted from Your financing rounds.

In this sense, Softbank was the "service station" that fed the dreams of two megalomaniacs such as Travis Kalanick (Uber) and Adam Neumann (WeWork). Both are already out of the companies that catapulted them to fame, but with "gold parachute" included. That is, after agreeing exit clauses of several hundred million dollars.

Meanwhile, Son continues to lead the Japanese colossus, but is about to give its shareholders a quarterly balance that puts it on the tightrope and, along with it, an entire industry. If Uber and WeWork failed, can anyone? The ghost of the 4.0 bubble stalks and many in Silicon Valley that makes them sleepy.

2019: a compendium of failures

The decline in the valuations of these companies reflect the great fear and sensation of investors:

- Softbank shares have plummeted more than 30% since April, due to poor results of Vision Fund, its investment fund that moves a whopping $ 100 billion

- The same fate was the Uber papers, which accuse a skid of over 30% that led Vision Fund to accumulate losses greater than US $ 800 million.

But this is not all, since other Softbank bets have also suffered strong cimbronazos:

- The popular Slack messaging app fell about 45% from its public offer not long ago (in June)

- Vir Biotechnology registered a 30% decrease and analyst projections show that it can go for the worse

Only two companies backed by Vision Fund in the last year, Guardant Health and 10X Genomics, are listed above their IPO. This constant procession of initial public offers was intended to validate Softbank bets and lay the groundwork for a strong return on these investments.

"The problem is that the shot went through the butt. After a strong injection of capital ($ 45,000 million) from Mohamed bin Salman, crown prince of Saudi Arabia, the Japanese firm had an almost unlimited wallet to invest in signatures of high risk. So far, it is far from achieving some degree of success, "says an important City analyst.

His biggest failure was WeWork, in what constituted a true compendium of bad decisions that led to the startup valuation of $ 50,000 million to less than $ 10,000 million in just two months. Upon abandoning its IPO plans, the real estate platform was left in an extremely fragile position, since its money will run out in mid-November.

This forced Softbank to speed up a $ 10,000 million salvage plan, which will give WeWork a market valuation of just $ 8 billion. That is, only 15% of those 50,000 million in August.

But this is not all, since there are doubts about that assessment. Its main rival, IWG, records revenues similar to WeWork's, is highly profitable and has a capitalization of US $ 4 billion. According to several international analysts, "everything that is above that figure is pure bleff."

The big winner of the agreement will be Neumann, who will take a compensation package of $ 1.7 billion. The big losers will be the employees of the firm, since more than 4,000 jobs will be cut.

"We created a monster and gave him all the capital," he said weeks ago. They are with their board of directors, words that anticipate that the worst, far from having passed, may be yet to come.

Meanwhile, the doubts of the financiers expand to other businesses of the holding:

-Oyo, a startup based in India, is already 50% owned by Vision Fund, but its excessive growth and some maneuvers of its founder, just 25 years, lead to anticipate a new disaster

-The same goes for Didi Chuxing, the great rival of Uber in Asia, which saw its growth slowed down in 2019 by the security problems of its users

It is also not expected that other high-caliber bets will generate profits in the short and medium term, such as the disbursement of US $ 500 million in the improbable virtual reality platform.

-For its part, Fair, a car rental startup associated with Uber, anticipated that it will lay off 40% of its workforce while struggling to be profitable

-Wag, a dog walker company backed by an investment of $ 300 million from Vision Fund, was put up for sale

For analysts, it is difficult to formulate a coherent image of SoftBank and its Vision Fund, partly due to the incessant negotiations of. They are, and also due to the extreme levels of financial engineering employed by the company that, in the end, do not yet lead to profits that justify their exorbitant cash injections.

A budding bubble

Softbank already has experience in ups and downs. At the end of the 90s it was one of the big investors of the incipient industry "dot com"; with the explosion of this bubble in 2000 it was about to disappear, since its value in the stock market fell almost 80%. However, he survived.

Twenty years later there are many who predict a new bubble, this time baptized as "4.0". And the Japanese firm has much of the merit in its apparent conformation.
The huge amounts of money injected into startups led, in many cases, to value companies with unpublished figures. Uber and WeWork, again, are two witness cases.

The problem also extended to other Silicon Valley jewels:

- Lyft, the great competitor of Uber saw his papers fall 30% from his initial public offering

- Beyond Meat, whose actions reached US $ 2,335 in July, today are worth "barely" US $ 89

- Pinterest, between ups and downs, quotes at only 20% than its starting price in April

For José Bano, Investment Manager of InvertirOnline, there is a problem that exceeds technology-based startups: "On the one hand, we come from many years of free silver, at zero rate. Many businesses are profitable when you have no cost in money, but when this stops being like this and the rate goes up, they begin to doubt ".

"On the other hand, there are serious questions about the growth of the global economy. The United States today basically keeps up with consumption, since investment and trade have fallen tremendously as a result of the trade war with China," he says.

In relation to the overvaluation of many of these startups, he states: "To value a company, I take its projected cash flow and discount it at a rate. Being zero, future flow is worth the same now as in 50 years. But if you apply more rate to a project that will take years to generate profits, you realize that the situation changes a lot. "

Gustavo Neffa, Partner and Director of Research for Traders, warns of Uber's millionaire losses in his last quarterly balance, exceeding US $ 1,200 million, and US $ 8,000 million so far in 2019. No However, he clarifies that for now he has money to insert cash into his business, due to the low interest rate and the high issuance of many central banks.

In that line, he emphasizes: "The market measured by the S&P 500 and Dow Jones reached new historical highs this year. That attracts financiers who want to capture that optimism."

In his vision, "the problem is going to be when the picture turns and the central banks adjust their pegs a bit. A rise in interest rates and the injection of less money into the economy will be lethal in products with a lot debt and unprofitable. "

Fortunately, Son can still rely on investments that in the last decade have generated a gigantic value for Sofbank that allows it to be sustained even when its latest high-profile bets have not paid off.

-Currently, your company owns a 26% stake in the powerful Alibaba Group of Jack Ma

-It owns the British firm ARM, whose chip designs are used by virtually all smartphone manufacturers

-It owns 80% of Sprint, the fourth largest mobile operator in the United States

-It is the largest telecommunications holding company in your country.

These assets give you oxygen at least for now. Startups are their real headache: their success or failure will, to a large extent, decree the future of the Softbank - and of an entire industry based on innovation - in the next 10 years.

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