CYBER-MOGULTo conquer the Net, Masayoshi Son takes to the high wire
At some point amid the endless courses of sashimi, tempura, and chilled octopus, Masayoshi Son's dealmaking synapses started firing frantically. Son had invited Rupert Murdoch to a swank Ginza eatery for an evening of kaiseki ryori, or Japanese haute cuisine, in late May. Having heard that Murdoch's News Corp. might launch the Japanese equivalent of its British Sky Broadcasting Corp. satellite-TV service, Son grilled the media tycoon. Bemused, Murdoch acknowledged the plan, then mentioned some potential Japanese partners.
As the sake flowed, Son started emoting about his own digital dreams for his Softbank Corp., the software distributor he has built into a high-tech powerhouse. After a $3 billion, two-year, debt-fueled acquisition tear, Son, the president and CEO of Softbank, already had emerged as the world's biggest computer-trade-show impresario and most powerful publisher of high-tech magazines. Softbank was pumping big money into unproven but promising Internet ventures. Why not jump into the high-tech world of digital broadcasting, too? ``I told Rupert, `The partner you're talking to is all wrong,''' Son says with a laugh. ```It should be me.'''
The next morning, Murdoch summoned Son to the Park Hyatt Tokyo Hotel, and the outlines of a deal started to emerge. On June 20, the duo unveiled plans to pay $380 million for 21.4% of Asahi National Broadcasting Co. Highly rated Asahi TV would serve as the programming and news-gathering base for Japan Sky Broadcast, their 50-50 venture. Overnight, Son had escorted Murdoch the Barbarian right into the cloistered world of Japanese media.
Crashing the gates and disrupting the old order is standard operating procedure for the 39-year-old Son. In a nation where high tech is dominated by lumbering, tradition-bound electronics conglomerates, Son stands out as a Western-style entrepreneur, part Bill Gates, part Murdoch. He's a nonstop networker and dealmaker whose circle includes such Silicon Valley luminaries as Oracle Chairman Lawrence Ellison, Sun Microsystems CEO Scott McNealy, and Microsoft's Gates, a frequent golfing buddy.
Since Softbank, Son's confederation of high-tech publishing, trade-show, distribution, and software companies, went public in 1994, its stock has soared 200%, to $160, adjusted for three splits. Son's 52% stake, worth $4.5 billion, makes him one of Japan's wealthiest businessmen.Even with the stock off over 20% from its high, Softbank trades at 150 times last year's earnings.
It commands this lofty, valuation because Son's ambitions--if realized--will make Softbank a huge force in high-tech marketing in the 21st century. Already a massive marketing machine in Japan, Softbank is branching out--into the U.S. and onto the Internet.
Through a combination of print publications, TV programs, trade shows, and online services, Son is positioning Softbank to be everywhere consumers and businesses buy, sell, or talk about information technology.
RIPE PLUM. In other words, Son's empire could become the hub of a massive digital marketplace. Advertising alone--in magazines and Web sites that cater to computer shoppers--will grow from last year's $2.2 billion to $4.7 billion in 2000, according to New York-based media consultants Wilkofsky Gruen Associates. But there's a bigger plum. That's to get in the middle of the transactions that move hundreds of billions worth of personal computing products every year. In Japan, Softbank already does that through its wholesale business. Now, as more and more technology products are flogged in cyberspace, Son sees a way to get a cut of the business in the U.S. and around the world. ``The Internet is where our future is,'' he says.
To get ready, Son has been using his richly valued stock--and a staggering $2.4 billion of debt--to assemble an international network of companies. In 1994, he bought Ziff-Davis Publishing Co.'s computer trade-show business for $202 million. Last year, he paid $800 million for the Interface Group, which runs Comdex, the computer industry's biggest show. With those buys, Son got 75% of the U.S. computer trade-show business. Then, in February, he paid a stunning $2.1 billion for Ziff-Davis Publishing, the $850 million-a-year computer publisher. Among Ziff's 30 titles are the three biggest in the field: PC Magazine, Computer Shopper, and PC Week.
He's not stopping there. Softbank is now on the verge of a $1 billion acquisition aimed at further strengthening its position in the U.S. Company officials won't say what kind of company Son is after. But, says Gary Reischel, senior vice- president of the U.S. affiliate Softbank Holdings Inc., ``this is a big play in one of our core businesses.''
Where will Son's empire-building end? ``I have a 300-year plan for ourselves,'' he says without a hint of irony. Meeting with Ziff-Davis employees, Son was asked if the Ziff deal would be his crowning achievement. His reply was that Ziff is important, but just one step in his personal 50-year plan. ``I want to do something really big in my 40s,'' Son told the stunned employees.
DEEP POCKETS? There are questions, however, as to whether Softbank can keep up with the boss's ambitions. Up to this point, Son has been able to fund his drive into the U.S. by exploiting favorable currency exchange rates and Softbank's surging stock price. But he's saddled with an awesome $2.4 billion in debt and mounting interest payments. Some Tokyo analysts are concerned that the company is already stretched thin. But Chief Financial Officer Yoshitaka Kitao figures that with Japan's low interest rates, Softbank could easily handle $3 billion more in acquisitions. He cites another development that cuts his costs and also indicates confidence in Softbank: Its bond rating has been upgraded from BBB+ to A-.
So far, Son has been able to go after just about whatever catches his eye. Since early 1995, he and his scouts at Ziff have scoured Silicon Valley for promising Internet startups (table, page 59). Through two company-controlled venture-capital funds and Softbank itself, Son has put more than $200 million into some 30 Net companies, including Yahoo!, the top World Wide Web search-engine service. Son's 37% stake was worth $200 million after the initial public offering in April, but has since fallen to about $65 million.
Son wants more than a quick buck, though. He sees synergy between investments like Yahoo! and other Softbank businesses. The Yahoo! site is one of the best advertising venues on the Net. Also, Son has launched a Japanese-language version of Yahoo!. In turn, it has become a major client of Cyber Communications Inc., a joint online advertising venture between Softbank and ad giant Dentsu Inc.
Another example of Net synergy is the investment in U.S. Web, which helps companies set up online storefronts. It will sell content from Ziff-Davis and advertising services from Softbank Interactive, too. Internet Profiles Corp., in which Son has about a 10% stake, counts the number of visits made to Web sites--a Nielsen-like service that will help Softbank sell online ads.
When Son sees a company with promise, he pounces. He decided to back Yahoo! over pizza with its founders. After a preliminary feeler via E-mail, he met with CyberCash Chairman Dan Lynch last spring at a lounge in San Francisco International Airport. They cut a deal for Softbank to pay $15.4 million for a 9.5% stake. ``It took about an hour,'' marvels Lynch.
Son has now raised a separate $500 million Internet venture fund backed by Asian investors. So confident is he in his investment acumen that he has pledged $500 million of his own to guarantee investors' principal. Oh yes, he also will take a 5% management fee and 35% of the capital gains. Most venture funds keep 25%.
When he's done, Son expects to have a network of companies that will work in concert to create a new digital marketplace. Having built his fortune partly by using his Japanese computer magazines to plug the products that Softbank sells, Son sees endless possibilities for cross-promotion on the Net. The Web's hyperlinking technology nicely blurs the lines between editorial content and advertising, making it easy to lead a consumer from a product review to a vendor ad to an online store--with Softbank collecting a fee at every stop.
The pieces are falling into place. Shortly after Son acquired Ziff-Davis, for instance, it recast its startup publication Internet Life as Yahoo! Internet Life to focus on the Son affiliate. And on May 9, Son snapped up 20% of inquiry.com, which provides information on high-tech products and companies on its Web site--a natural promotional vehicle.
MOTHER LODE. Son also plans to cull a huge direct-marketing database from the 9 million Ziff-Davis subscribers and trade-show attendees. He hopes to share the data, including who owns what type of computers and software, among Softbank companies and affiliates and sell it to others. ``This is an incredible marketing tool,'' says Son.
By yearend, Softbank plans to have a Web site linking all its businesses. Then, a Net surfer visiting a Ziff magazine site will be able to link to another page to learn more about an upcoming Comdex event, or visit a Softbank online store for a software download. Softbank's first online shop, NetBuyer, will be launched by ZDNet this fall. Son says that 30% of Softbank profits will be Net-generated in five years and 50% in 10 years.
If he can get through the next few years, that is. Son's amazing buying streak has been fueled by some lucky breaks and some energetic financial engineering. Softbank bought Interface, for example, when a supercharged yen was around 80 to the dollar. Now, with the yen at 109, Softbank has lucked out again: Its earnings are getting an extra kick as U.S. profits are converted to yen. A quarter of Softbank's earnings last year were currency-driven.
But exchange rates could swing against Son, and with its huge debt load, Softbank could soon see its earnings growth stall. To pay for Ziff, for example, Son raised $630 million in cash from an equity offering but borrowed the rest with convertible and straight bonds. Softbank's $2.4 billion in debt is more than twice its equity. Interest expenses will jump from $3.4 million in fiscal 1995 to an estimated $82 million in fiscal 1996, ending next March. So far, growth has kept Softbank from feeling the pinch. Pretax earnings tripled, to $132 million, in fiscal 1995, and analysts expect a 66% gain this year, to $220 million on $2.6 billion in revenues.
Maintaining a high stock price is another key to Son's buying plans, and that may become trickier. Some analysts have already soured on Softbank stock, in part because of aggressive accounting practices that reduce the impact of the buying binge on earnings. Softbank decided to write off $2.7 billion in goodwill from the Ziff-Davis and Comdex buyouts over 30 years rather than the more conventional 10 to 15 years. ``If they wrote off the goodwill over 10 years, they would barely be profitable,'' figures Jonathan Dobson, a fund manager with Jardine Fleming Investment Management's OTC Fund. Last month, he dumped his $30 million stake, about 5% of his total Japan holdings. Softbank insists that its accounting is prudent given the brand value and market-leading positions of the properties.
Concern about possible dilution in Softbank shares also has scared off foreign investors, Dobson says. Foreigners own just 4% of Softbank shares vs. 20% at other fast-growth Japanese companies, he notes. The reason: $640 million in convertible bonds will turn into new shares over the next five years.
Then there are questions about how well the Softbank's cross-selling will work in the U.S. While Ziff employees insist there has been no pressure to compromise editorial integrity--by emphasizing companies or products that Softbank has interests in, for example--rivals suggest that Softbank inevitably will abuse its power. One fear is that Softbank could trade coveted Comdex booth positions for more ads from computer makers. ``They are positioning the business more toward a selling system and away from an independent journalistic enterprise or exposition field,'' says Patrick J. McGovern, chairman of International Data Group (box). Counters Son: ``We have a very neutral position on editorial content.''
``DARKNESS INSIDE.'' Son didn't get where he is by paying attention to such qualms. The grandson of Korean immigrants, he has spent his life making his own rules to get around barriers. He has succeeded, but the pain of growing up as a member of a despised minority has never gone away. The outwardly exuberant Son calls this pain his ``darkness inside.''
Born in Tosu on the island of Kyushu, Son was given the Japanese surname Yasumoto because of a Japanese law aimed at forcing assimilation. That didn't stop racism, however. ``When I was in kindergarten, some kid hit me in the head with a stone,'' Son recalls. ``It hurt me emotionally, and I decided to try to hide my identity.''
At 16, Son bolted to South San Francisco where he lived with family friends. He assumed his Korean name, Jung-eui Son and, after high school, enrolled at the University of California at Berkeley. An economics major, he made a small fortune importing the Space Invaders video game from Japan. He also co-developed an electronic dictionary that he later sold to Sharp Corp.
After Berkeley, Son returned to Japan and in 1981 launched Softbank. He saw two opportunities: to distribute software to Japan's consumer electronics and computer stores and to fill the need for readable high-tech magazines.
So he went looking for a bank loan, using his Korean surname. After so many years in the U.S., he was shocked by the rejections that followed. But instead of retreating, this time he persisted. He recalls that when skeptical loan officers would suggest Son was a strange name, he would snap, ``O.K., I'm a Korean, so what?'' Eventually, a sympathetic banker at Dai-Ichi Kangyo Bank Ltd. relented with a $1 million loan. ``I told him he could use my life as the collateral,'' Son jokes.
It was a bumpy start. Son would rent out booths at trade shows and phone software companies offering to display their titles for free. But manufacturers ignored him and went right to the retailers. The big break came when Osaka-based Joshin Denki Co. asked Son to supply a large quantity of software for a PC superstore it was opening. Son got an exclusive deal by offering every major software package in Japan. It took inspired salesmanship to persuade software makers to go along, but it worked.
His business almost collapsed in the mid-1980s, however, when a scandal at Dai-Ichi forced the bankers to call in risky loans such as Son's. Desperate, he received emergency financing from Industrial Bank of Japan. Then came another setback. He was hospitalized in 1984 with hepatitis and was forced to give up day-to-day control. ``The company tried to keep it very secret,'' recalls Novell Japan President Kazuya Watanabe, a Son friend for 10 years. ``Yet everybody knew he had great difficulties.''
On the mend by 1987, Son resumed control, and Softbank started to get a dominant share of the software-distribution market. The near-collapse of Ascii Corp., Microsoft's original distributor, helped. So did key alliances. Son helped set up the Japanese subsidiary of network software supplier Novell Inc.--taking a 25% stake (now 20.4%). Another joint venture, Softbank Korea was formed with Pohang Iron & Steel Co. Some ventures didn't pan out, though. Softbank dropped $10 million in a botched online shopping venture, and an attempt to distribute dozens of software programs on a single CD-ROM flopped.
Now, Softbank has taken off, along with the Japanese PC market, where shipments jumped 70% last year. Softbank moves 30% of Microsoft's Windows 95 and Word programs in Japan, as well as 15% of Novell software. And it distributes 60,000 other software titles and a variety of PC gear. Revenue is expected to hit $2.6 billion this year--up from $408 million in 1990.
HARD KNOCKS. Son has now joined the ranks of the superrich. But he scarcely hides his disdain for the old-boy network that would not let a Korean in. ``I'm maybe the fourth-richest guy in Japan--and the other three probably inherited real estate from their fathers,'' he says.
Within his business empire, Son has also busted the Japanese management mold. Instead of the usual pyramid, Softbank is run as a network of 64 profit centers. During Son's illness, he began decentralizing, organizing his workers into groups of 10, each with profit-loss statements that would be updated daily. Those who ran out of cash ran out of luck. Today, top executives meet with Son for biannual ``1,000 knocks'' sessions--grueling five-hour meetings in which the boss scrutinizes every detail of business plans. ``Son likes measuring everything,'' explains Softbank Holdings' Reischel, ``and taking a stick and tapping something 1,000 times.''
On the other hand, Son also doles out lavish bonuses to star performers. Last year, he gave $1 million to Softbank's managing director of networking and $500,000 to the editor-in-chief of the magazine that covers DOS/V, the Japanese-language version of the MS-DOS operating system.
Outside Softbank, Son is known as a charming schmoozer--and a relentless deal-chaser. Take the Ziff-Davis saga. After negotiating licensing deals to publish Japanese versions of Ziff computer magazines, Son cultivated social ties with the reclusive Ziff family. Eric Hippeau, Ziff's chairman and CEO, recalls the time when Son, along with his wife and two young daughters, visited William B. Ziff Jr. at his retreat in Aspen, Colo. When Ziff suggested a hot-air balloon ride, Son didn't hesitate. The Sons set out in one balloon and Hippeau and some other Ziff execs were in another. As they floated around, Hippeau began to wonder why he didn't see Son in the other balloon. It was not until they landed that the diminutive Son came crawling out of the balloon's basket and confided that heights made him queasy.
When the Ziff family decided to sell out in 1994, Son thought he might have the inside track. Instead, he was blindsided when they canceled an auction and sold 94% of the company to buyout boutique Forstmann Little & Co. for $1.4 billion. Forstmann offered an all-cash bid that was lower than Son's $1.6 billion offer. Son might have won it had his Japanese banks moved faster. ``Forstmann had the cash in hand,'' says Softbank CFO Kitao, a Cambridge-educated ex-Nomura Securities Co. man whom Son hired after the debacle.
BLUE PERIOD. Son went home with the consolation prize, Ziff's trade shows. But he didn't give up. He kept pressing Theodore J. Forstmann, who refused to see him, sending ``not for sale'' messages via underlings. Last fall, Forstmann relented. Son, Kitao, and Forstmann's team met at the financier's Park Avenue apartment. As they admired the Picassos and Matisses, the deal talk began. The next day, Softbank agreed to pay a whopping $2.1 billion for Ziff, handing Forstmann a $700 million profit.
The price stunned media analysts who said Son overpaid for a mature franchise. Computer makers were shifting ad dollars to TV and general-interest publications such as Time. Ziff, they figured, was most vulnerable, since PC Magazine, PC Week, and Computer Shopper deliver 80% of its profits.
Again, Son lucked out. Driven by the Net, PC ads are growing twice as fast as other print ads. Ziff magazine revenue rose a healthy 9.8% in 1996's first half, according to Adscope Inc., despite ad pages at PC Magazine being off 2%.
Now, Son has a bold plan for Ziff: to go from 80 print titles now to 1,000 in 10 years. That means adding almost two a week. It's not as crazy as it sounds. Ziff has lots of opportunity to expand internationally. It already licenses its 30 U.S. publications in 100 countries, but most countries carry only one or two titles. Softbank is also adding to Ziff through startups and acquisitions, most recently buying Chicago-based Sendai Publishing Group and its magazines about computer games.
Increasingly, though, Son is interested in electronic media. He has plowed $20 million into a TV venture, including a studio in San Francisco where ZD-TV will produce shows that promote high-tech products. The first show is The Site, which is carried on the new MSNBC cable-TV network. Murdoch's Hong Kong-based STAR-TV will carry Ziff's programming in Asia. Ziff also is exploring radio over the Net.
Softbank is also betting big on cyber advertising. Online ads are a $50 million market now, but some analysts predict they could hit $2 billion in four years. Softbank Interactive, created by merging Interactive Marketing Inc. with Softbank's Internet sales division, already places 40% of the ads in cyberspace. ZDNet itself is one of the top sites for ad revenues.
All of these ventures could indeed have the vast potential Son foresees. But it's hard to ignore the financial high-wire act needed to keep his enterprises going. Son, characteristically, seems unconcerned. He keeps a grueling schedule, crossing the Pacific two or three times a month. At the Comdex gala in May, Son cruised the floor with Ziff editors, looking for Internet investments. In a T-shirt and V-neck sweater, he looked like a Silicon Valley guy. And he acted like a kid in a candy store. This cyber mogul had arrived.
By Brian Bremner in Tokyo, with Amy Cortese in New York and bureau reports
Updated June 18, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.