Welcome back to Patrick Boyle on Finance. In today's video we'll discuss SoftBanks
investment in wire card the German payments company that's mired in
a 1.9 billion dollar fraud. We're going to learn how SoftBank appeared to
invest a billion dollars without actually putting in any money at all and
how SoftBank employees profited from the trade without SoftBank itself
actually profiting. It's well known that when Warren Buffett invests Berkshire
Hathaway's money in a company that the company's stock price goes up. I don't
mean in the very long run - because he chose the right stock to invest in, or
anything like that. I mean that it instantly pops when it's announced that
he's made a new investment in a company, and that's because other investors mimic
Warren Buffett and buy the stock. This type of thing is often referred to in
the finance industry as a halo effect. This is obviously a good thing for
Buffett, but it mostly benefits other investors in the company who in
aggregate own more of the stock than Buffett does. In addition Buffett is a
long-term investor and so while this pop in the price possibly amuses him he
doesn't really capture the benefits of the stock price pop. In Silicon Valley
SoftBank has its own halo effect or at least it used to. SoftBank had a good
run where they had a reputation for picking tech stock winners. When SoftBank
put money into a company they were known for introducing the company to
their other portfolio companies creating a virtuous cycle that other investors
might want to come along for the ride for. SoftBanks' halo has started to look
a little bit tarnished over the last year as WeWork imploded and the IPO of
Uber fell flat. SoftBanks recent one billion dollar investment in Wirecard
unlike their WeWork investment won't force them to write down any assets
because SoftBank never put money into Wirecard itself.
What SoftBank appears to have done is monetize their halo effect,
separated out from any long-term investment returns and simply profit
from any pop in valuation from their reputation and stamp of approval from
having selected wire card. Softbank never actually put any money
into Wirecard according to Bloomberg, instead what SoftBank did was they
facilitated a 1 billion dollar convertible bond deal for the German
digital payments company without investing any cash. The deal was
structured by SoftBank and Credit Suisse. The financing structure appeared
to be backed by SoftBank implying their stamp of approval to wire card
which had faced years of scrutiny over its accounting practices. Wirecards
shares rose more than 25 percent between the announcement of the SoftBank
Credit Suisse deal and its signing in September 2019. A soft Bank fund that
manages money for soft bank employees along with Mubadala investment company a
wholly owned investment vehicle of the government of Abu Dhabi put the money in
to buy a wire card convertible bond. There was also a strategic partnership
where SoftBank would introduce Wirecard to its other portfolio companies
and otherwise provide support to Wirecard. The same day Credit Suisse quickly
repackaged and resold those instruments issued just hours before to a broader
group of investors at substantially less attractive terms and at a worse price
to SoftBank's original entry price. The market viewed the news of the SoftBank
investment as a vote of confidence in Wirecard, meanwhile Credit Suisse built
a Wirecard exchangeable bond that mirrored the soft Bank convertible. When
the deal closed, the SoftBank investors sold the exchangeable. SoftBanks
employee fund bought the convertible at the pre investment price and sold the
exchangeable at the post investment price and captured the 25 percent upside
for themselves without putting up anything. - The trade managed to monetize the
SoftBank investment halo - but SoftBank itself didn't make any money off of
it. Senior executives at SoftBank profited from this trade along with the
government of Abu Dhabi. Softbank is now trying to distance
itself from Wirecard now that the Germans payment company has gone bust,
they're seeking to terminate their five-year partnership formed with Wire
card in April 2019. According to a Bloomberg article soft bank didn't lose
any money on its Wirecard trade because it didn't actually put up any money.
What it did put up was its reputation which was enough to provide its executives
with a quick profit. SoftBank invested its reputation but unfortunately the
company they chose to invest its reputation in was Wirecard. If a
business is careless with its reputation it can end up losing it. The other
problem with a halo monetization trade like this is that if you do them too
often you end up damaging the halo. Let me know in the comments below what you
think of this Softbank trade and of Credit Suisse's involvement. Don't forget
to hit the like button, and if you want to see more content like this also hit the
subscribe button and the little bell icon next to it. See you later
bye
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