SoftBank Prioritizes AI Investments Amidst Pressure For Share Buybacks From Elliott

SoftBank has reaffirmed its commitment to prioritizing investments in artificial intelligence (AI), choosing this strategic direction over immediate share buybacks, despite pressure from activist investor Elliott Management for a substantial $15 billion capital return program.

In a recent interview with the Financial Times, SoftBank’s Chief Financial Officer Yoshimitsu Goto emphasized that leveraging the company’s robust balance sheet for AI acquisitions is the optimal path forward. “We believe this is a time when new investment activity should be taking place that will be the basis for the future growth of SoftBank Group,” Goto stated, while abstaining from discussing specific interactions with Elliott.

Elliott Management, which has reportedly rebuilt a stake of approximately $2 billion in SoftBank, has been urging the company to initiate a buyback program following the release of its first-quarter results in August. However, founder Masayoshi Son indicated during SoftBank’s annual general meeting that previous investments, including significant but troubled ventures like WeWork, were merely preliminary steps towards a more substantial engagement with AI. He dismissed share buybacks as “small stuff.”

Elliott’s standpoint is that buybacks would enhance return on equity and reduce the significant discount between SoftBank’s asset portfolio value and its market capitalization. The hedge fund also contends that SoftBank’s financial strength could accommodate both capital returns to investors and AI investments.

SoftBank’s loan-to-value ratio, a key risk indicator for Son, currently stands at close to 8.5%, a figure Goto described as “perhaps too safe.” While not dismissing the possibility of buybacks in the medium term, Goto stressed that the immediate focus of SoftBank’s capital allocation is set. “We don’t need to be this safe and we need to take on more challenges,” Goto explained. “This is why Masa is saying that now is the time to invest.”

Elliott’s current push for buybacks mirrors its approach from early 2020, when it accumulated a stake of about $2.5 billion in SoftBank. That year, SoftBank launched a buyback program and divested assets to reassure shareholders amidst the COVID-19 pandemic.

This time, however, SoftBank is proactively seeking AI deals that would bolster its premier asset, the UK-based chip designer Arm. According to Goto, many investors have shown support for this strategy. The company’s share price has also surged more than 75% this year, reaching record highs.

Despite these gains, support for both Son and Goto declined at the recent annual general meeting. Son, who owns 30% of SoftBank shares, received 79% of the vote, down from 96% the previous year, following a recommendation by proxy adviser ISS to vote against him due to “unfavourable return on equity performance.” Goto’s approval rating fell to 89% from 98%.

Son’s significant shareholding and SoftBank’s reliance on numerous retail bondholders provide some insulation from activist demands, Goto noted. “So while other companies may have a strong reaction to the word activist, we may not be the same as them,” he added.

Goto also highlighted that SoftBank is prepared to undertake “large-sized deals,” identifying power generation and data centers as potential investment areas. Nevertheless, he reiterated the company’s intention to protect its balance sheet by utilizing project financing or non-recourse loans. “Because Masa is thinking about such big pictures and the big solution, his movement may be slower than before,” Goto cautioned.

Investment activities are indeed gaining momentum. In May, SoftBank spearheaded a more than $1 billion investment in UK self-driving car startup Wayve, marking Europe’s largest AI deal to date. The company is also reportedly in discussions to acquire UK chip designer Graphcore, further cementing its commitment to expanding its AI portfolio.

As SoftBank navigates the complexities of balancing investor demands with long-term strategic investments, its leadership remains steadfast in positioning the conglomerate at the forefront of AI innovation. This approach underscores the belief that current investments will lay the foundation for future growth, ensuring that SoftBank remains a pivotal player in the rapidly evolving technology landscape.