JAPAN'S TOP TECHNOLOGY INVESTOR TAKES A HIT A JAPANESE BESTSELLER ALLEGES FINANCIAL SHENANIGANS AT SOFTBANK. CEO MASAYOSHI SON IS FIGHTING BACK.
By EDWARD W. DESMOND

(FORTUNE Magazine) – When it comes to splashy investors, Japanese maverick Masayoshi Son is difficult to top. In the past 17 months, his Softbank Holdings in the U.S. bought trade-show giant Comdex (for $800 million), computer magazine publisher Ziff-Davis ($2.1 billion), and computer memory maker Kingston Technology ($1.5 billion), not to mention investing another $150 million in four Internet startups, including Yahoo. The press celebrated Son as a luminary showing Japan's business world how to embrace such newfangled concepts as E-mail and incentive stock options. Japanese investors embraced Softbank's stock, which trades on the Tokyo over-the-counter exchange, as a way to buy a piece of the digital future.

All along, however, Tokyo's gossip mills spun darker tales, spreading whispers that Son's empire was a financial bubble about to burst, that it was financed perhaps with mob money. No one offered proof.

Last month much of that speculation crystallized in the form of a book, The Inside Report on Softbank's Warped Management. The author, writing under the pen name Koichi Yoshida, is supposedly a disgruntled senior Softbank employee; the book is an angry catalogue of alleged wrongdoings and lapses by Son and the company, from issuing phony financial statements to mollycoddling incompetent U.S. managers. The Inside Report has sold more than 9,000 copies, making it a bestseller by Japanese standards, and its alarms drove down Softbank's stock price, already depressed by concerns about the company's debt, from 7,150 to 5,700 yen, its lowest ever. Recently Softbank sued the publisher, Yell Books, alleging 184 inaccurate and malicious statements that among other things "harm the social standing of Softbank."

The book is difficult to characterize, since it ranges from an intelligent critique of Softbank's financial disclosures to uninformed rants about its U.S. venture investments. A primary complaint is that Softbank misled investors by boasting that sales were up a "remarkable" 110% last year, without adequately explaining that most of the growth was due to the acquisitions of Ziff-Davis and Kingston. By U.S. standards, such spin is hardly egregious, but it may have rankled Japanese investors used to conservative disclosure. Mahendra Negi, an analyst at Merrill Lynch in Tokyo, thinks investors overreacted: "Softbank has been guilty at times of selective disclosure. They tell the bad news only if you ask a specific question. But they do answer the question, which is better than some Japanese companies."

Some of The Inside Report's toughest accusations center on MAC, a private company wholly owned by Son that holds 43% of Softbank and other assets. Skeptics have long suspected Son of hiding Softbank debt and money-losing enterprises in MAC. The book makes those claims specific, alleging that MAC has a dangerous load of $820 million in bank debt and a negative cash flow of $35 million a year. It even speculates that a collapse of MAC is possible and would bring down Softbank.

The claims provoked Son to hold a press conference in Tokyo, where, to some extent, the skeptics proved right. For the first time, he disclosed that MAC has bank debts totaling $610 million. He noted that MAC had acquired some of Ziff-Davis's loss-making operations, like Internet start-up ZDNet, in order to let the struggling businesses incubate without dragging down Softbank's financial results. He denied, however, that MAC suffered cash losses as high as $35 million a year.

Son's revelations did not silence all gossip, but they did help rally the stock above 6,000 yen; some analysts have reinstated "buy" recommendations. Since even at the current price of Softbank shares, MAC has assets of $3.1 billion, Son's empire seems in little danger of imminent demise.