Softbank nurse’s heavy losses. When the lock-in period ends on November 18, Alibaba and Elevation Capital, who are currently enjoying sizable notional gains on their Paytm holdings, are likely to cut their positions.
Warren Buffett and Masayoshi Son, two well-known investors with diametrically opposed investment philosophies, are sitting on sizeable losses on their investments in One 97 Communications, the parent company of Paytm, before the lock-in period for the company’s pre-IPO investors expires on November 18.
While Son is renowned for his high-risk, high-reward bets, many of which struggled during the 2022 tech crash, Buffett is renowned for his pursuit of long-term value.
The lock-in expiry may cause early investors like Alibaba and Elevation Capital, which are still sitting on enormous gains, to reduce their stakes in India’s top fintech.
Analysts predict that the early investors’ reduction in stake will increase management’s pressure to achieve profitability targets.
A pioneer in start-up financing, Masayoshi Son’s Softbank and Warren Buffett of Berkshire Hathaway made sizeable investments in the fintech behemoth before Paytm went public in November 2021.
But after a successful IPO process, Paytm’s disastrous listing last year has caused them to incur significant losses.
According to data compiled by Goldman Sachs India, one 97 Communications is owned by 17.46% of Masa Son’s $100 billion Softbank Vision Fund. This investment was made between 2017 and 2019 at an average cost per share of just under Rs 900.
Based on the stock’s current market value, Son’s investment has lost 27% of its value. Paytm’s stock has lost a significant amount of value over the past 10 months, leaving Softbank with a notional gain of close to 140% on its investment at the time of the company’s IPO.
Similar to this, Buffett’s Berkshire Hathaway, which holds a sizable stake in One 97 Communications (roughly 2.41%), is suffering a significant loss on its investment. Data from Goldman Sachs show that Berkshire paid close to Rs 1,300 on average in 2018 to purchase its shares in the company.
Berkshire is sitting on a notional loss on its investment in the Noida-based fintech that is even higher at 49% based on the current price.
Berkshire Hathaway and Softbank Vision Fund sold a portion of the stakes held in the company during One 97 Communications’ IPO in November 2021. Berkshire and Softbank have not said they will cut back on their Paytm investments once the lock-in period is over.
Alibaba and its earnings
Despite having significantly lower profits, Alibaba and Elevation Capital, two of the biggest pre-IPO investors, continue to generate sizable returns on their capital.
Alibaba.com and Antfin, two companies owned by Chinese billionaire Jack Ma, collectively hold 31.14 percent of the company at an average share price of about Rs 300. When the lock-in period ends on November 18, Jack Ma will likely be the front-runner to sell some of his Paytm holdings because he still has notional gains on them of over 100%.
In addition to the significant gains made by Alibaba and Antfin, the recent opposition to Chinese ownership of Indian technology companies may have significantly impacted the Chinese conglomerate’s decision to reduce its stake in Paytm.
One of the original investors in the business and the owner of a 15.1% stake in Paytm, Elevation Capital, is currently seeing a more than 600% return on investment. One of Elevation Capital’s most well-known bets was on Paytm, which it invested in from the start in 2007 until as recently as 2019. Elevation Capital was formerly known as SAIF Partners.
When many of Elevation Capital’s technology bets have lost value due to the expected crash in global technology-focused stocks in 2022, dealers believe Elevation Capital may also consider selling some of its holdings in order to book profits.
The most recent example of this was Zomato in July 2022. According to a recent note from Goldman Sachs, “We have seen other stocks in our coverage face downward pressure in the days following a lock-in expiry but recover in the week thereafter.”
Increased vigilance
Any notable reduction in stakes by organizations like Elevation and Alibaba will also have an impact on Vijay Shekhar Sharma, the founder and CEO of Paytm, in November.
Sharma was able to survive a resolution in August that permitted a significant increase in compensation thanks to a number of votes from the company’s pre-IPO investors, who continue to be close to a founder who has made them a sizable sum of money over the years.
Public institutional investors rejected the resolution authorizing Sharma’s pay increase, despite the proxy advisory firm Institutional Investor Advisory Services urging shareholders to vote against it.
After becoming enamoured with the success story of India’s startup ecosystem in the hope of joining what seemed to be an endless journey of value creation, investors scurried to participate in a flurry of IPOs from such companies in 2021.
These investors are upset about the decline in the market value of these companies after a year, which they partly blame on a sell-off in global technology firms as interest rates rose. They are requesting that the focus be shifted away from using cash reserves to chase growth and toward making a profit.
According to analysts, public institutional investors will probably increase their ownership of Paytm after the lock-in period, which could put pressure on Sharma and the rest of the management team to deliver on the company’s promise of profitability.
Paytm has promised to achieve operational profitability by September 2023 after deducting the cost of its sizeable employee stock option plan, following a nearly 70% decline in its stock price since the listing that cast doubt on its viability.
The general public may criticize Sharma and Paytm if they fail or take too long to fulfil their promises, and they are unlikely to grant the company the latitude that pre-IPO investors gave it.
150 employees at SoftBank will be cut off globally by Softbank
Approximately 150 employees worldwide will be let go by the CEO of Japan’s SoftBank Group Corp., Masayoshi Son, at both its Vision Fund division and SoftBank Group International, according to a source with knowledge of the situation.
The source, who wished to remain unnamed because the information is private, claims that notices will be given to workers on Thursday and will affect about 30% of the workforce at the two companies. The person added that major cost centres like the United States, Britain, and China are impacted.
The layoffs will affect workers in the investment teams and back-office staff in departments like finance and legal claims, a second source.
Son pledged to reduce spending in August after the Vision Fund division reported a record $50 billion loss in the six months prior to June. The rise in interest rates and the political unrest that has resulted in lower tech valuations caught the billionaire off guard.
Son said at the time, “Without sacred areas, we need to cut costs.
The cuts also affect SoftBank Group International, which was previously led by Marcelo Claure and is responsible for other group investments.
Son claimed that Vision Fund has significantly decreased its investment activity and that SoftBank’s second Vision Fund will primarily manage its current portfolio.
SoftBank has decreased its ownership of key asset Alibaba Group Holding Ltd. in anticipation of listing Arm.
Son made a meeting with Samsung Electronics Co. Ltd. public last week to discuss the potential for a “strategic alliance” between Arm and the giant South Korean tech company.
Edited by Prakriti Arora
