Softbank Up Close

By Yi-Hsin Chang (TMF Puck)

Ask a group of 'Net-savvy investors to name the biggest players on the Internet, and they'll probably say America Online, Yahoo!, MSN, CMGI, Lycos, Amazon, etc. I'd be willing to bet that no one would say Softbank Corp. First of all, many people have never heard of it. Secondly, the name doesn't even sound like an Internet company. It would be reasonable to assume that the company is some sort of bank. A few might think that it has something to do with computer software.

In fact, Softbank Corp. is a Tokyo-based company that distributes PC software and peripheral hardware equipment, publishes computer books and magazines, and provides computer-related services. The company, founded in 1981, holds a 70% market share in the distribution of packaged software in Japan.

Of greater interest, however, is that Softbank is one of the world's largest Internet venture capital firms. The company holds substantial stakes in such Internet household names as Yahoo! (Nasdaq: YHOO), E*Trade Group (Nasdaq: EGRP), Buy.com, Webvan, WebMD, and Ziff-Davis/ZDNet (NYSE: ZDZ), just to name a few. Softbank has its hands in more than 100 Internet companies, many of which have yet to go public.

The genius behind Softbank is none other than founder, president, and CEO Masayoshi Son, who at the age of 19 invented a pocket translator that he sold to Sharp Corp. for $1 million. Since 1995, Son, who has a 42% stake in Softbank, has invested a couple of billion dollars in Internet ventures, largely at an early stage of the game. Softbank typically invests between $2 million and $15 million in one or more financings.

Softbank's first bet was a $2 million investment in Yahoo! in late 1995. A few months later, Son offered to pay $105 million for a 33% stake in the Internet search engine and now portal powerhouse. While the investment seemed crazy at the time, Softbank increased its total investment in Yahoo! to $357 million. Since then, Softbank has sold off part of that stake and made $450 million, while its remaining 28% interest is now worth $12.4 billion at Yahoo!'s current valuation.

That's the basic strategy: investing in Internet start-ups early on and profiting once the companies go public. In an interview with Forbes magazine, Son explained that in picking Internet investments, one must understand the business model and envision the potential market and profitability. "It comes down to a gut feeling, one based on an intelligent guess," he said. "If you look at [many] examples, you start to get a feeling for what will work." Softbank invests in one out of every 50 pitches.

Softbank doesn't just write checks to up-and-coming firms. It remains actively involved through a unique Internet-zaibatsu management concept. That is, Softbank has created an Internet consortium, a family of companies, that seeks to create synergies across brands and businesses. Softbank estimates that its portfolio companies usually have four to five ties to one another. If you had known that Softbank held stakes in Yahoo! and GeoCities, you might've seen that merger coming.

Softbank has also played an active role in localizing U.S. brands on a country-specific basis. In June, the company signed an agreement with the National Association of Securities Dealers (NASD) to build a Japanese version of the NASD's electronic, dealer-run Nasdaq stock market. Earlier in the year, the company signed a deal with Microsoft (Nasdaq: MSFT) to create a new version of MSN's CarPoint automotive service for Japan. Softbank also owns 51% of Yahoo! Japan, which controls 80% of that country's portal traffic.

Unfortunately for U.S. investors, Softbank does not trade on a U.S. stock exchange. It trades on the Tokyo Stock Exchange (Symbol: 9984). However, the stock is available through several U.S. brokerage firms that also trade in Japan. Nonetheless, Softbank's Internet holdings are largely U.S.-based companies, and knowing that they have that Softbank connection can help investors see the big picture. Here's a partial list:

BackWeb -- markets software to Fortune 1000 companies for delivering personalized content to customers, employees, and vendors

Buy.com -- sells a wide range of computing and entertainment products at discount prices

Concentric Network (Nasdaq: CNCX) -- provides Internet networking solutions to small- to medium-sized businesses

E-Loan -- online mortgage broker

E*Trade (Nasdaq: EGRP) -- online investment brokerage

InterTrust -- develops secure information storage software systems

USWeb/CKS (Nasdaq: USWB) -- provides consulting and website design, development, and hosting services to Fortune 1000 companies

Yahoo!(Nasdaq: YHOO) -- leading Internet media company

For a more complete list, see Softbank's website as well as the website for Softbank Technology Ventures.

Related links:
-- Softbank Website
-- Softbank 1998 Annual Report (PDF Format)
-- Global Crossing Teams Up With Microsoft and Softbank - 9/8/99