Masayoshi Son. Picture: REUTERS/ISSEI KATO
Masayoshi Son. Picture: REUTERS/ISSEI KATO

Tokyo — Just when investors thought Masayoshi Son was reining in risk at SoftBank Group, the Japanese billionaire’s foray into leveraged derivatives is giving them extra reason to worry.

SoftBank’s share price fell 7.2% on Monday in Tokyo, erasing about $9bn of market value. The drop came after the conglomerate made huge bets on high-flying tech stocks using equity derivatives and despite a report that it has billions in paper gains.

Son’s career has been full of head-scratching acquisitions and strategic shifts, but the 63-year-old has spent much of this year taking investor-friendly steps that made it seem he was finally listening to shareholders such as activist Elliott Management. His latest move sparked concern that SoftBank is embarking on another risky endeavour that could lead to losses such as those it suffered on office-sharing start-up WeWork. Son is leading the options trading with a small staff that executes his ideas, according to people familiar with the matter.

“Son is a speculator, not this visionary everyone claims he is,” said Amir Anvarzadeh, a market strategist at Asymmetric Advisors in Singapore, who has  covered SoftBank since it went public in 1994. “This is yet another proof of that, as he is never too far from the action when a bubble is formed.”

SoftBank disclosed in August that it was starting an asset-management arm to trade public securities and mentioned it could use derivatives. What alarmed shareholders is that Son appears to be using options to amplify his exposure to a corner of the market where valuations have soared and mercurial individual investors are playing an ever-greater role. SoftBank has not  disclosed details of its trading and declined to comment for this report.

Son’s announcements earlier this year that he would sell ¥4.5-trillion in assets and buy back ¥2.5-trillion in shares had helped SoftBank’s stock recover from a plunge after the WeWork missteps and coronavirus outbreak. The share price more than doubled from March lows, touching the highest levels in two decades last month.

It is far from certain that SoftBank’s options bets exposed the company to undue risk. Indeed, derivatives are designed to help investors hedge their exposure to sudden stock moves or surges in volatility. SoftBank’s derivatives trading began in June with relatively conservative positions, such as collar trades, according to an insider, who asked not to be named.

The Financial Times reported that SoftBank spent about $4bn on options focused on tech stocks with an overall exposure of about $30bn. The company is sitting on paper profits of about $4bn in gains from those stakes, the newspaper said, citing informed sources.

Son has experimented with dozens of businesses since founding SoftBank in 1981. He began his career in software distribution, trade shows and magazines, before expanding into telecoms and start-ups. He built his reputation when he took stakes in hundreds of fledgling companies, including what became Chinese e-commerce giant Alibaba Group.

Son’s big bets have often baffled investors. In 2006, SoftBank acquired the Japanese wireless operations of Vodafone Group Plc in Asia’s largest leveraged buyout yet Asia at the time. Few gave him any chance of turning around the troubled business, but he exclusive rights to the first iPhone in Japan.

He tried a similar playbook with his purchase of wireless operator Sprint in the US, but that turnaround proved far more difficult. Son sold the business this year. His $32bn purchase of chip designer Arm four years ago sent his stock tumbling, and he’s now negotiating to sell the business.

In another controversial move, he set up the $100bn Vision Fund to take stakes in scores of tech start-ups. The fund reported $17.7bn in losses for the year to end-March after writing down the value of holdings, including WeWork and Uber Technologies. The outlook for those types of investments has since brightened thanks to a market surge that helped boost start-up valuations and demand for initial public offerings.

“SoftBank keeps changing its strategy. We are now a long way from ‘taking minority stakes in technology start-ups,’” said Atul Goyal, senior analyst at Jefferies. Still, Goyal said betting against SoftBank shares was risky while the company remained committed to its buyback programme.

As for SoftBank’s potential effect on the broader stock market, the idea that any single options buyer could drive marketwide swings has drawn scepticism in the past. But as volumes have surged in specific stock options over the summer, some analysts are beginning to revise their thinking.

“SoftBank has a bit of a reputation for taking big, one-way bets. It wouldn’t surprise me if market participants looked at what they were doing — throwing around big directional exposure — and trying to ride their coattails to some extent,” said Ilya Spivak, head Asia Pacific strategist at DailyFX. “But could they be solely responsible for driving markets in a direction? Sounds very far-fetched.”

What’s clear is that news of SoftBank’s position injected a jolt of uncertainty in the market, with questions about Son’s exposure and plans for future trading.

“Now that these trades have been uncovered they are likely to continue to influence trading so expect a bumpy ride ahead as we find an equilibrium and traders look to exploit their newfound knowledge,” Deutsche Bank global strategist Jim Reid said in a note. “Experience tells you we haven’t heard the last of this story. Unintended consequences often happen around these types of events.”

Bloomberg

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