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SoftBank takes Masayoshi Son's Sprint playbook to WeWork

SoftBank Group Corp. Chairman and CEO Masayoshi Son speaks during a press conference on May 10, 2017 in Tokyo, Japan.

Tomohiro Ohsumi | Getty Images

SoftBank has a recycling project on its hands. This week, CEO Masayoshi Son agreed to take 80% control of WeWork in what constituted a rescue for the office-sharing company after the public markets rejected it.

We've seen this before. Last time, the results were not quite amazing.

Six years ago, SoftBank acquired a 72% stake in Sprint, increasing it to over 80% over time, in an effort to become a major player in the wireless United States. [1[ads1]9659002] Sprint and WeWork have very little in common as businesses. But the same SoftBank executives – Son, Marcelo Claure and Ron Fisher – are calling the shots and trying to steer a floating company to sustained profitability.

By the time SoftBank took its first $ 4.4 billion stake in WeWork, the company had already established itself as a major money player in Silicon Valley. The environment was very different in October 2012, when SoftBank agreed to take 70% control over Sprint for $ 20.1 billion (up to 72% for $ 21.6 billion at the close of the deal). Son said at the time that he could use SoftBank's wireless industry experience in Japan to create the fastest network in the United States.

SoftBank successfully developed Sprint's sale of $ 6.62 per share to T-Mobile in 2018. (State Attorney General is in court to try to terminate agreement because it would unacceptably reduce competition.) But SoftBank bought its majority stake in Sprint for $ 7.65 per share in 2013. When SoftBank purchased Sprint, it was the third largest US wireless carrier of subscribers. When SoftBank sold, Sprint was a distant fourth behind Verizon, AT&T and T-Mobile.

Sprint even acknowledged in April that it did not have a sustainable path forward in a filing with the Federal Communications Commission, and asked the regulator to approve the sale.

"Sprint is in a very difficult situation that is only getting worse," the company said in the letter. "Sprint loses customers – which then reduces revenue and cash flow – further limiting the ability to invest in the network and service debt. In simple terms, Sprint is not on a sustainable competitive path."

Adding its positions to Sprint and WeWork, SoftBank has about $ 40 billion at stake, putting the company's trio of executives at the center of two highly consistent corporate plans that could make or break Son's image as a titan for the US business.

There is little reason to believe Son, Claure and Fisher can use their Sprint playbook to give WeWork investors and employees confidence in their future success, said Craig Moffett, a telecommunications analyst at MoffettNathanson.

"Sprint has been an unsolicited disaster," Moffett said. "Sprint has been contracting regularly since SoftBank bought it, even in a growing wireless market. Their only hope for an exit is to ask their agreement to sell it to T-Mobile approved."

Marcelo Claure's leadership

Claure's role as Son & # 39; s right man crystallized this week when SoftBank's chief operating officer was named CEO of WeWork.

Claure, 48, served as Son & # 39; s handpicked CEO of Sprint from 2014 until late last year and has since held the role of Chairman. He and Son (62) are so close that after SoftBank took control of Sprint, they bought houses right next to each other, near the company's headquarters outside Kansas City.

Claure made his first effort to rally the WeWork troops this week at. their first meeting with all hands in New York. After sending an email to employees acknowledging that layoffs are coming, Claure talked about his leadership experience, highlighting his time at Sprint, a 120-year-old company with tens of thousands of employees that he helped modernize with a WeWork- similar office model.

"As you walk through the corridors, the high cubicles, people didn't talk to each other, people didn't communicate," Claure said, according to a leaked recording of the meeting obtained by Recode and confirmed by CNBC. "When we brought them to an open and collaborative space, the magic began to happen."

Claure's plan at Sprint involved loosening the second floor of one of the company's buildings at its sprawling headquarters in Overland Park, Kansas, to look more like a modern bullfight-type office building rather than offices and large cubes. Free food and snacks appeared along with cases of Claure's favorite drink, Fiji Water, and beer for Friday's happy hour, according to former employees. Sprint eventually approached WeWork for a more thorough renovation in one of the main buildings.

Chaos at Sprint

Son and Claure are both founders themselves and could relate to Neumann's dreamy idealism, whose stated mission at WeWork was to "lift the world's consciousness." Business management and financial discipline are not their strengths, according to people who have worked with them.

Fisher is Son & # 39; s business guys, who has been on the founder's side for 24 years and started SoftBank Capital, the company's investment wing. Fisher joined the WeWork board at the time of the company's initial investment in 2017. He is a respected voice, but a much less furious presence than Son or Claure, the people said.

A SoftBank spokesman did not make the executives available for an interview and refused to comment on this story.

Former executives who worked at Sprint during Claure's transition said that his fast-moving, down-to-earth approach created a cultural conflict and left employees unclear about the company's direction. The people asked not to be named so that they could speak honestly about their experiences.

As chairman of the board, Son kept a good grip on Sprint even after Claure succeeded Dan Hesse as CEO one year into the deal. Each month, around 50 to 60 executives, including executives from Sprint's headquarters and SoftBank's Tokyo operations, met in San Carlos, California, where Son created a Silicon Valley beach head. There, depending on the path for the business, Son would either fire up the team with support messages or tell them they were not delivering, according to people who participated.

A former leader said that while the leadership events were to promote collaboration between the leaders from SoftBank and Sprint, there was a real contempt for Sprint's more conservative culture.

T-Mobile CEO John Legere (L) and Sprint CEO Marcelo Claure (R) arrive to testify on Senate Judiciary Committee subcommittee on antitrust, competition policy and consumer rights hearing on proposed merger of T-Mobile and Sprint into Dirksen Senate's office building at Capitol Hill in Washington, DC, June 27, 2018.

Mandel Ngan | AFP | Getty Images

It was also clear at the gatherings that Son was running the show, and there was no room to contradict him or question his decisions, participants said. The same was true at board meetings, where Son was clearly in charge, whether he was in Kansas or Japan, according to people in the room.

Son hasn't said if he wants to take a formal role on WeWork. In the announcement of the new funding package on Tuesday, WeWork said the board would expand, and a person familiar with the matter told CNBC that SoftBank will get more seats. Artie Minson and Sebastian Gunningham, who were two of Neumann's top deputies, are now co-CEOs and will receive millions of dollars in pay if they leave, Bloomberg reported.

SoftBank funding includes $ 5 billion in fresh capital and up to $ 3 billion in an offer to existing shareholders as well as accelerate an existing $ 1.5 billion financing commitment, bringing SoftBank's total investment to around $ 18.5 billion . That's $ 6.5 billion more than WeWork's valuation of money.

Co-founder Adam Neumann is paid up to $ 1.7 billion to leave the board, just over two months after he was ready to take over the company's publicity in one of the most awaited IPOs of the Year. Son had been such an enthusiastic supporter of Neumann that he set a few railings as the company's dominant investor, allowing Neumann to invite thousands of employees to an annual summer camp outside London while also flying around the globe on a $ 60 million private jet.

"It really is a tail of quite failed governance, and almost of the highest order, that lacks anything deceptive," venture capitalist Chamath Palihapitiya said in an interview on CNBC last month. "It's really a shame and something we really have to address as an industry if we are to have credibility with the public markets."

Desperate for a deal

SoftBank's management of Sprint has been anything but smooth. From the beginning, Son wanted to buy T-Mobile as well, but dropped the plan in 2014 when it became clear that antitrust regulators would block it. The company then tried to compete aggressively for wireless customers, setting prices to attract customers from AT&T and Verizon.

But Sprint's annual revenue has shrunk since SoftBank took over, from $ 35.3 billion in 2012 to $ 33.6 billion in the last fiscal year. Recently, the number of subscribers has dropped and the company lost $ 1.9 billion last year. Claure continued to earn over $ 40 million in compensation from 2015 through 2017, primarily due to stock prices resulting from holding the shares above $ 8 per share, which was only marginally higher than the price SoftBank paid in 2013.

business was unclear before Donald Trump was elected in 2016, which significantly helped the prospect of a merger with T-Mobile (perhaps helped by Son's pledge to invest $ 50 billion in the United States). Sprint's position in the market had deteriorated so much that T-Mobile was now the stronger company, which means that Sprint's only way to execute a deal was to be the seller.

President-elect Donald Trump, accompanied by SoftBank CEO Masayoshi Son, speaks to media members at Trump Tower in New York, Tuesday, December 6, 2016.

Andrew Harnik | AP

"The argument for regulators has essentially been that Sprint is a failing company," said Walter Piecyk, a telecommunications, media and technology analyst at LightShed Partners.

While Sprint appears to have been trying to clear its own growth outlook To get regulators more on board with sales, Piecyk was skeptical that this was the company's big plan.

"I'm not sure you will fail for five years," he said.

Even today, SoftBank must hope that the state either loses opposition to the deal or that Sprint and T-Mobile prevail in the courts because Sprint has little hope as a standalone entity. A lawsuit has been set for December 9.

The Sprint book with or without an agreement does not appeal much to those who expect SoftBank to save WeWork, which is salted by $ 17.9 billion in long-term leases and lost $ 900 million during the first half. And unlike Sprint, there are no natural purchasers of WeWork – certainly not at a price that would put SoftBank's $ 18.5 billion investment over water.

SE: Blodget calls WeWork a case of "gross misconduct" [19659046]

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