Staff Reporter of THE WALL STREET JOURNALOnce Asia's Top Tech Rainmaker, Masayoshi Son's Role Is Shrinking
By Robert A. Guth
TOKYO -- Among Masayoshi Son's claims to fame is this rare feat He once impressed Bill Gates with a raw display of wealth.
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A few years ago, Japan's best-known
entrepreneur had the Microsoft Corp. founder over to his Tokyo mansion.
They gazed upon the $3 million electronic golf range in the basement
that simulates conditions on real courses. When Mr. Son pushed a few
buttons, the floor tilted, an ocean-scented breeze swept the room and a
light rain fell from the ceiling. Mr. Gates's response, according to Mr.
Son and others in the room, was "Wow."
Panache and hard-won links to titans like Mr. Gates have made Mr. Son the No. 1 gateway for U.S. technology companies looking to enter Japan. After helping Microsoft crack the software market, the 43-year-old founder of Softbank Corp. ushered into Japan a parade of top-tier Internet and technology businesses, including Yahoo! Inc., Cisco Systems Inc. and E*Trade Group Inc. Softbank now has holdings in Yahoo and some 600 other companies world-wide. |
But choice deals have started to dry up for Asia's top tech rainmaker. The global meltdown in technology shares has hit Mr. Son, just as it has exacerbated his country's longer-term economic woes. The fall in Nasdaq stocks in the U.S. has helped set off a decline in Japanese tech shares such as Softbank, which has seen its stock shed 90% -- more than $170 billion -- of its market value since a year ago. Mr. Son's own net worth, which once was rising so fast with his Softbank stake that some people wondered whether he would overtake Mr. Gates, has fallen to about $6 billion from more than $70 billion.
The fall in Softbank's shares intensifies a deeper problem for Mr. Son His dominance of deals in Japan is slipping just as the country's Internet market is reaching a point where it is too big for one man to function as gatekeeper. At his height, Mr. Son was seen as one of the few Japanese executives who could help the best Silicon Valley firms navigate the world's second-largest economy. For years, his command of English, knowledge of technology and access to cash made him uniquely suited to helping Americans penetrate Japan. Now that Japan's tech market has opened up and matured -- in part thanks to Mr. Son -- those days are ending.
Harder Bargains
Some U.S. technology companies are driving harder bargains, as Softbank learned in its recent dealings with Silicon Valley stars such as Cisco, Exodus Communications Inc. and Ariba Inc. Other potential partners are bypassing him altogether. Last summer, executives at BEA Systems Inc., a leading seller of electronic-commerce software based in San Jose, Calif., discussed the possibility of Softbank investing in BEA's Japan unit. But BEA Chief Executive William Coleman later canceled a meeting with Mr. Son. "I didn't see that Softbank could help us," Mr. Coleman says.
Some executives express concern about Mr. Son's ability to manage his sprawling empire. They note that his energy and enthusiasm can spark a deal, but that he can lose interest quickly and shift attention elsewhere. They cite an ambitious proposal to bring Internet access to the developing world. Announced a year ago by Mr. Son and the World Bank, the idea appears to have been scaled back, although a Softbank spokeswoman says plans are on track.
Mr. Son remains a tech-industry force. Some partners say working with Softbank is a big plus, viewing its stable of companies as a cornucopia of potential customers. And Mr. Son is learning to focus. Softbank insiders say that since he signed the deal last October with Ariba, which makes electronic-commerce software, he has taken the rare step of closely directing the venture himself.
Mr. Son himself insists that Softbank hasn't lost its allure. "We have such accumulated experience and know-how and people and base of customers that any good company that wants to come to the Japanese market or Asian market -- who else would they choose?" he says.
A Japanese of Korean descent, Mr. Son began as an underdog in insular Japan, but he succeeded early through charm and determination. As a youth, he didn't have the grades for a prestigious cram school, where students prepare for the crucial exams that will admit them to the best universities. He got in by approaching the mother of a friend who knew the school's owners. Mr. Son ended up going to the University of California at Berkeley, but before leaving for the U.S., he landed a rare audience with Den Fujita, who made a fortune building the McDonald's empire in Japan. He offered the younger man this career guidance "Computers."
Mr. Son followed that advice, applying Mr. Fujita's formula of introducing U.S. innovation to Japan. He set up Softbank in 1981 and did well distributing U.S. software. Aiming to be an even bigger player, he set out to cultivate the man at the pinnacle of the U.S. computer industry, Mr. Gates. Mr. Son went to great lengths to woo the software tycoon and his staff. During one night out partying in Tokyo, Microsoft Japan executives laughed as bar hostesses removed Mr. Son's shirt and doodled on his chest with lipstick.
Over the years, Mr. Son's association with Mr. Gates gave him credibility with both Japanese and U.S. business leaders.
Pitch to Cisco
In 1993, Mr. Son made a pitch to John Chambers, then the No. 2 executive at Cisco Softbank could help Cisco win Japan's market for routers, specialized computers that are the brains of the Internet, "without a fight." Mr. Son helped cajole a dozen Japanese computer makers into taking small stakes in Cisco's Japan unit, convincing them that allying with Cisco was the only way to keep up with U.S. technology. Mr. Son took a 12% stake for $15 million. As Cisco Japan grew to dominate Japan's lucrative router market, Mr. Son came to be regarded by U.S. technology companies entering Japan as one of the best partners to have.
Softbank's 1995 purchase of Comdex, the large Las Vegas computer trade show, expanded Mr. Son's base for wooing and networking. Comdex, bought for $800 million from the Interface Group of Needham, Mass., made him the host of the world's splashiest technology bash. It was at Comdex that he met Yahoo's then-president, Timothy Koogle, paving the way for Softbank's biggest coup.
Before Yahoo went public, Mr. Son began investing what eventually would total $360 million in the Internet portal. Yahoo's stock later soared. In 1996, he brought Yahoo to Japan, taking a 60% stake in the local unit for Softbank and overseeing the company's Japan operations. The Japan unit went public in 1997, and its share price rocketed, growing nearly fourfold in the first year of trading from its initial trading price of 125,000 yen. It is now trading around 5.9 million yen, down nearly 98% from its peak. Although he has been paring what had been a 37% stake in the U.S. company, selling $760 million of Yahoo shares, he stills holds a 22% stake in the Internet portal.
From then on, Softbank would be in the business of trying to repeat the Yahoo formula find a cutting-edge Internet business in the U.S., then import the idea to Japan on Mr. Son's terms. That process would be expanded in a cycle that fed Softbank's growth attract leading foreign partners into joint ventures; own majority control of those ventures; eventually take the units public; use the proceeds to do more such deals. Mr. Son, cultivating U.S. executives while playing on Japanese fears of falling behind, saw Softbank prospering by helping Japan catch up with the West, just like the Japanese conglomerates that imported the industrial revolution from the West to Japan a century ago.
A torrent of deals followed. Mr. Son guided E*Trade, E-Loan Inc., Morningstar Inc. and many others into Japan, almost always taking majority stakes in the Japanese units and often putting Softbank executives in charge. As its network of companies grew, so did Softbank's market value and power. The share price surged more than 11-fold in 1999 and its market value passed the $100 billion mark.
Executives at Exodus Communications, a California-based operator of data centers, got a taste of Mr. Son's influence in 1999. Exodus approached Softbank about a venture in Japan to build data centers, buildings filled with computers that host Web sites. Mr. Son pushed his standard demand for a majority stake. Exodus President Ellen Hancock, a hard-nosed, 30-year veteran of International Business Machines Corp., decided in the summer of 1999 to go around him by buying an Internet-technology outfit in Japan called Internet Research Institute Inc.
Barrage of Phone Calls
On the way to seal the Exodus deal in California, Hiroshi Fujiwara, Internet Research Institute's president, says he went to Alaska for a few days to "commune with nature." Mr. Son launched a barrage of phone calls to his hotel, asking him to back out of the Exodus deal and help with a Web-hosting operation he was forging with Microsoft and an Exodus rival, Global Crossing Ltd. Mr. Son was no stranger to Mr. Fujiwara. He had helped Internet Research Institute through some rough patches by investing in the company. Mr. Fujiwara canceled the California leg of his trip and returned to Japan to join forces with Mr. Son.
As Internet fever gripped the world, Mr. Son was at the top of his game. Softbank led a consortium that bought a failed Japanese bank. It formed a venture with Microsoft and a Japanese company to provide cheap Internet access. In February 2000, Softbank's share price surged to 61,000 yen ($500), giving it a market value of nearly $190 billion.
Behind the scenes, though, some partners were seeing a down side to working with Mr. Son. Months after the Internet-access venture with Microsoft was unveiled, it stalled. The partners have squabbled over what technology to use and how to deliver the service, say people familiar with the venture. Officials at the companies acknowledge the delays but won't comment on whether there is tension among the participants. Slated to start last year, the launch is now expected sometime this year.
One problem is that Mr. Son turned over execution of the businesses to Softbank units at a faster pace than they could digest, some partners say. One of his ablest executives, financier Yoshitaka Kitao, is president or CEO of no fewer than 12 Softbank-related companies.
Nasdaq officials discovered the downside of Mr. Son's penchant for risk and showmanship when they sought his help in setting up an exchange in Japan. He rankled Japan's bureaucrats and old-guard businessmen, and Softbank failed to persuade authorities to let Nasdaq set up an independent stock market in Japan. Nasdaq later turned to the existing Osaka Securities Exchange, which agreed to host the U.S. market. Softbank, which initially received a 50% stake in Nasdaq Japan, now owns about 43%, and many investors and potential listers wonder whether Nasdaq Japan isn't a vehicle for Mr. Son to unload his investments on the public. Far fewer companies have listed on the exchange than Mr. Son initially estimated, a shortfall that stems in part from the global tech-share meltdown but also from overly rosy projections by Mr. Son, say people familiar with the plan. Nasdaq officials say the exchange's owners don't sway the market's policies on which companies go public.
Some Internet moguls say Mr. Son's help costs too much. "He wants a big fraction of the [joint venture] company," says Jeff Bezos, founder and president of Amazon.com Inc. It declined a deal with Softbank and instead teamed up with a book wholesaler and a delivery company to enter Japan.
Exodus, once outmaneuvered by Mr. Son, turned the tables late last year, with a $6.5 billion purchase of rival Global Crossing's Web-hosting operations. The deal makes Exodus majority owner of the Web-hosting business into which Mr. Son coaxed Internet Research Institute. "I'm suddenly running a company, if you like, that has Softbank as a minority shareholder," says Exodus President Hancock.
Even some of Mr. Son's strongest relationships are yielding less than he envisioned. He had prodded Cisco to take its Japan unit public for years, but Cisco decided not to do so. Instead, it recently bought out shareholders in the Japan unit, paying Softbank $275 million for its stake. Analysts in Tokyo estimate that had Cisco Japan gone public, Softbank's stake would have been valued at between several hundred million dollars and well over $3 billion.
Consolation Prizes
To be sure, Cisco also bought a 1.7% stake in Softbank for $200 million and hired Softbank to manage a $1 billion venture-capital fund focused on Asia. In addition, Mr. Son has the right to buy back his Cisco Japan stake if Cisco ever takes the unit public. But people familiar with the deal say these were largely consolation prizes for dashing Mr. Son's desire to take Cisco Japan public immediately. Mr. Chambers says he values Mr. Son as a partner and was trying to meet Mr. Son's "reasonable expectation of a good return on his investment." Mr. Son says he would have preferred Cisco Japan to go public, but is now focused on running Cisco's fund.
Indeed, Mr. Son's enthusiasm seems undimmed as he races to do more deals. But he is often working hard to nab smaller stakes than he used to win. When officials from Ariba approached Mr. Son as a potential partner early last year, he demanded a controlling share in the venture. Ariba had done its homework. A study it commissioned from McKinsey & Co. warned that a deal with Softbank might make it hard to win business from big Japanese computer companies, which the report said were wary of Softbank.
Ariba also consulted with Mr. Son's friend, Cisco's Mr. Chambers, who says he told Ariba that a Softbank deal can be fruitful, but that prospective partners must remember Mr. Son "is by nature a risk taker." He says "When you take risks you're going to hit some home runs, and you're occasionally going to miss."
With that in mind, Ariba President Larry Mueller invited Mr. Son to his home near Denver in September. Mr. Son, then on business in China, chartered a plane to a tiny airstrip near the Ariba executive's house. Mr. Son brought a Mikimoto pearl pen for Mr. Mueller, pearl earrings for his wife and gifts for his two children. That night, Mr. Mueller said he wanted to form a Japan partnership -- on Ariba's terms.
Ariba would keep control of the venture, in which Softbank would have a 40% stake. And Mr. Son had to guarantee he would sign up several specific computer vendors as business partners and produce $125 million in revenue within two years -- or else Softbank must pay that amount, say people familiar with the deal. Mr. Son agreed. He concedes that Ariba got the upper hand, but says the Ariba deal could be one of his biggest yet, so he has been zipping around Tokyo promoting Ariba software. The revenue guarantees, he says, "help me concentrate."
At the end of the evening, Mr. Mueller poured some cognac and presented Mr. Son with a gift that the Japanese tech pioneer now keeps in the foyer of his home. It is a statue of a cowboy, trying to stay on a bucking bronco bent on throwing him off.