Masayoshi Son’s investment woes worsen with Oyo layoffs

The layoffs at Indian hospitality startup Oyo are troubling, coming just months after the near collapse of US-based WeWork, a high-profile investment that has cost Masayoshi Son’s SoftBank US$4.6 billion in write-offs. After expanding rapidly in China and India, Oyo is restructuring its operations to pursue more sustainable growth.

Illustration by Tech in Asia, from photo by Softbank

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The development comes as the SoftBank CEO races to come up with cash. Some investors in the Japanese conglomerate’s US$100 billion Vision Fund receive interest payments of about 7% annually. While Son’s successful investments in US tech firm Nvidia and Indian ecommerce player Flipkart helped make those payments, some investors are concerned about his riskier bets following the WeWork fiasco.

Once valued by SoftBank at US$47 billion, the office-sharing startup struggled to sell shares in an initial public offering last year at a reported valuation of US$10 billion. WeWork’s woes prompted a pivot at SoftBank, pushing it to focus on profitability instead of chasing reckless growth.

nSaving gracen

At the time, Son’s investments in India, including Oyo and cab aggregator Ola, were seen as a saving grace. Now, Oyo is faltering as well.

Photo credit: OYO

The hotel startup has asked some 600 of its employees in China and about 1,200 staff in India to leave, Bloomberg reported. Oyo is restructuring its operations and trimming redundancy in both markets, the report said, citing sources who asked not to be named.

“This has not been an easy decision for us,” Oyo founder Ritesh Agarwal told employees on January 13 in an internal email seen by Tech in Asia.

“We sometimes went ahead of ourselves and pressure-tested our organization at multiple levels. This year, we are taking steps to address this,” Agarwal added.

Photo credit: Eloise Ambursley

nnBigger than WeWork?n

While the jury is still out on Oyo, SoftBank stakeholders are right to be concerned.

“Oyo is a much bigger shitshow than WeWork,” says Amir Anvarzadeh, a Singapore-based senior markets strategist at Asymmetric Advisors. “In the case of Oyo, the business strategy itself has failed.”

Prior to the retrenchments in China and India, Oyo scaled back its Japanese operations, with Yahoo Japan pulling out of a joint venture. Moreover, the startup reportedly hasn’t paid hotel owners in Japan and India, sparking lawsuits.

Apart from the troubles at Oyo and WeWork, Son’s foray into the US mobile market hasn’t gone smoothly, with the proposed merger between T-Mobile and SoftBank-backed Sprint facing roadblocks.

n‘No cash crunch’n

SoftBank-backed firms laid off 2,600 people in the first week of January, according to Business Insider. That’s in addition to the 7,000-plus figure in the past year.

“SoftBank has a massive cash flow problem right now,” says Anvarzadeh, adding that the pressure is being passed onto investee companies. When an IPO isn’t an option, the company has tried to seek dividends and mergers or an outright sale.

SoftBank’s Vision Fund has also been backing out from promised funding. There are also renewed questions over its accounting practices.

The conglomerate, however, has rejected suggestions of financial problems.

“There is no cash crunch whatsoever at SoftBank,” according to spokesperson Daisuke Sawatake. It had cash of about 2.1 trillion yen (around US$19 billion) as of September 2019, while standalone debt to equity value of holdings stands at 16.8%, lower than the 25% ratio it normally holds, he says.

Vision Fund also maintains that it complies with global accounting standards in valuing the startups it invests in. “Our valuations have been validated by more than 120 sophisticated investors who’ve invested alongside and after us,” Navneet Govil, chief financial officer of SB Investment Advisers, the Vision Fund’s manager, told Bloomberg in December.

nStrategic objectivesn

Despite SoftBank’s financial standing, Son has been emphasizing the importance of improving free cash flow.

And Agarwal is taking heed.

Oyo’s strategic objectives are profitability and corporate governance, he told employees in the internal email. “Unfortunately, some roles at Oyo will become redundant as we further drive tech-enabled synergy, enhanced efficiency, and remove duplication of effort across businesses or geographies.”

While some analysts say Oyo’s restructuring efforts could be a prelude to an IPO that would allow SoftBank to monetize some of its investments in the startup, Agarwal is in no hurry for an exit strategy.

“Oyo has no immediate plans for an IPO and neither has it received any such direction from SoftBank or any of the other investors,” a person familiar with the company’s thinking told Tech in Asia.

It’s understable why Agarwal isn’t looking at a public listing yet considering that there’s more work that needs to be done. It will probably take another two years before Oyo could be profitable in India and China, estimates Reuters, citing internal reports.

“They need to restructure these operations and move them into black as quickly as possible to have a shot at IPO-ing,” Anvarzadeh says.

Currency converted from Japanese yen to US dollar: US$1 = 110.21 yen.