Softbank Will Succeed Even If Its WeWork Investment Doesn’t Work Out

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A client asked recently for my view on Japanese conglomerate SoftBank Group and its substantial investment in WeWork, whose CEO evidently has sold WeWork stock to buy properties in New York City and California that he has leased back to WeWork. The question on my client’s mind is whether this transaction is a conflict of interest (SFTBY)

The truth is that my firm is not as big a fan of WeWork as is Softbank’s CEO and Chairman, Masayoshi Son. WeWork is to us a real estate company that borrows long-term by buying office real estate or entering into office leases, and lending short-term by breaking large office spaces into small offices and leasing them out fully furnished for periods ranging from days to months.

My firm spent a lot of time analyzing WeWork’s competitor Regus a few years ago. Regus actually pioneered this business model. We came to the conclusion that the only number which matters for this business is utilization (percent of real estate leased). If WeWork is able to lease out 90% of its space, it will be a highly profitable enterprise. If the utilization drops to, let’s say, 60%, then it will start losing money and implode. This is a classic high-fixed-cost business with variable and cyclical revenues.

In contrast, Son looks at WeWork as the future of the collaborative workplace. We have our doubts. Softbank’s Vision Fund invested a few billion into WeWork, valuing it as high as $40 billion. Then came the Wall Street Journal story about WeWork CEO Adam Neumann buying properties in New York City and California and leasing them back to WeWork.

Here’s our view: By buying Softbank’s shares we effectively hired Son — a brilliant investor, a visionary — on the cheap (we are paying a 50% discount for Softbank’s shares relative to our estimate of their value) to make capital allocation decisions for us. Do we agree (or even understand) every capital allocation decision he makes? Absolutely not. He has a unique view of the world and has built an enormously successful company from scratch by getting a lot more things right than wrong.

Does Son make mistakes? Of course. Do all his bets play out? Absolutely not. Investing in private or public companies is not an exact science; it’s a messy, nonlinear, probabilistic endeavor. We analyze Softbank and Son the same way we’d want to be analyzed as money managers. We are asking the same question that our clients should be asking about every decision we make, namely:

• Does Son have integrity and intelligence?

Son’s decisions over the last 30-plus years are in the public record. We have never, even once, questioned his integrity, and he is one of the most brilliant people we have ever admired from afar.

• Does Son follow a deliberate decision-making process?

Son thinks about the future, identifies inevitable future areas of transformational growth (in the ’80s personal computers, in the ’90s the internet, in the 2000s wireless internet, smart phones, and ecomerce in China; and today it is the Singularity — computers becoming smarter than humans) and then finds the best ways to bet on that future.