The Journal The Authority on Global Business in Japan

When shares of Lyft, Inc. started trading in New York on March 29, one of the biggest beneficiaries of the US ride-hailing giant’s initial public offering (IPO) was more than 10,000 kilometers away in Tokyo

Rakuten, Inc., the online mall operator known as Japan’s answer to Amazon.com, Inc., is rarely thought of as an investor in the same vein as its compatriot SoftBank Group Corp., which has poured billions into ride-hailers, artificial intelligence (AI), and a myriad technology companies worldwide. Yet Rakuten, too, has quietly amassed stakes in more than 40 tech companies—Lyft included.

The company insists that investing is not its core focus. But its actions tell a different story and raise an intriguing question: Is Hiroshi Mikitani, Rakuten’s chairman and chief executive officer, hoping to offset headwinds in its online commerce business by taking a leaf out of SoftBank’s strategic handbook?

WINDS OF CHANGE
Rakuten’s bet on Lyft is paying off handsomely. Since 2015, Rakuten has pumped about $700 million into the ride-hailer, taking a 13-percent interest. That stake is worth $2.26 billion, after Lyft priced its IPO at $72 a share. Though Rakuten has already factored in past gains in Lyft’s valuation, analysts expect the IPO to add hundreds of millions of dollars in paper profits.

As of December 2018, Rakuten said its overall investment holdings were worth about $3.3 billion. That is equivalent to a quarter of its current market capitalization, and the stock market is starting to suspect Rakuten’s portfolio might be far more valuable than previously thought.

Rakuten led a $350 million funding round for Dubai-based ride-haling company Careem in December 2016. On March 26, Uber Technologies said it would acquire Careem for $3.1 billion. In 2012, Rakuten led a $100 million funding round in US image-sharing app Pinterest. It recently filed for an IPO, and its valuation sits at $12.3 billion, according to tech-market intelligence platform CB Insights.

Rakuten’s attempts to expand globally in e-commerce have been widely considered unsuccessful. But the returns from its portfolio of investments have created “a changing perception that Rakuten is capable of investing,” said David Gibson, an analyst at Astris Advisory Japan KK. Since the beginning of 2019, Rakuten’s own stock price has soared more than 40 percent.

Mikitani (left) and Financial Times digital media correspondent Tim Bradshaw
Photo: Kmeron [cc BY-SA 2.0] via Wikimedia Commons

RIVALS
People who know Mikitani say the billionaire businessman has always seen SoftBank founder Masayoshi Son as a personal rival. Like Son, his ambition has been to create a global tech giant and, in recent years, Rakuten has built a professional investing business focused on technology. In 2013, it set up a corporate venture capital arm. It later added funds dedicated to financial technology and e-commerce, and integrated the portfolio under a team that operates in Singapore and Tokyo. By doing this, it aims to bring discipline and consistency to what was once considered an unpredictable deal-making business.

“We focus our efforts on maintaining an optimal portfolio,” a Rakuten spokesperson said.

The investment team woos prospective entrepreneurs with the promise of not only capital but also operational collaboration. It offers a chance to work with a business that is not only an e-commerce juggernaut in Japan, but one of the country’s largest credit-card companies. Meanwhile, assets such as the messaging app Viber are available worldwide.

That strategy is beginning to bear fruit at a critical time for the company.

The Lyft windfall comes as Rakuten’s foothold in the Japanese e-commerce market is slipping, due to pressure from Amazon and other rivals. Rakuten is now diversifying into telecommunications and is set to join NTT Docomo Inc., KDDI Corporation, and SoftBank as Japan’s fourth mobile network operator this year. But skeptics say it lacks the firepower to compete with the established trio.

Mikitani, in another parallel with SoftBank’s Son, is regarded as a maverick in corporate Japan. The former banker set up Rakuten in 1997 based on a business plan he designed with a friend while attending Harvard Business School. He has since built a sprawling ecosystem of more than 70 services spanning travel bookings, credit cards, and stock trading services. Most were patched together through acquisitions and have been financed by cash flow from Rakuten’s e-commerce business, as well as through new share offerings.

Rakuten’s roughly 100 million members can access these and other services with a single ID. To lock them in, the company rewards loyal customers with points that can be redeemed on its sites. Using a Rakuten credit card to shop on its online mall, for example, can generate twice as many points as paying with a conventional card.

“It built a wide range of services very aggressively,” said Shinji Moriyuki, an analyst at SBI Securities Co., Ltd.

At the same time, Mikitani has always been keen on over­seas deals. In 2005, Rakuten acquired LinkShare, a US affiliate marketing company. Other investments have included Thai e-commerce site Tarad.com and French peer Priceminister.

In 2010, Mikitani cemented his anti-establishment image—and underscored his global aspirations—when he declared that English would be the official language in Rakuten’s offices.

GLOBAL AIM
The larger plan has long been to export the Rakuten ecosystem and to corral customers around the globe. But this has proven difficult. Unlike in Japan, where Rakuten pioneered the e-commerce business, expanding into new markets often means confronting Amazon and local rivals. There were other challenges as well, such as insufficient logistics infrastructure in emerging economies. By 2016, it exited Southeast Asia and some parts of Europe.

Rakuten’s revenue outside its home market came to ¥223 billion ($2 billion) in 2018, accounting for 20 percent of the total. This beat Alibaba Group Holding Limited’s eight percent but was below Amazon’s 31 percent.

Nevertheless, Mikitani has doggedly built connections and name recognition in the United States, Europe, and elsewhere. He invites investors and entre­preneurs to his residence in Silicon Valley for barbecues and golf every year. Rakuten paid a record €220 million ($250 million) for a four-year sponsorship contract with FC Barcelona in Spain’s La Liga professional soccer league in 2016. The company followed this up in 2017 by entering a pact with the Golden State Warriors, the National Basketball Association team based in Oakland, CA.

Mikitani picks winners in sports, too: Barcelona and Golden State have both won their league championships in three of the past four seasons.

Credit Suisse analyst Keiichi Yoneshima said Mikitani’s efforts have been worthwhile. “There was much more risk-taking in the early days,” he said. “Recent investments are in well-known companies with better chances of success. It means [Mikitani] is getting access to good deals.”

Rakuten’s list of holdings encompasses AI, financial tech­nology, and other sectors. It has interests in companies as diverse as:

  • Kreditech, a German online lender
  • Folio, a Japanese asset management startup
  • Go-Jek, the Indonesian app for ride-hailing and other on-demand services

Last year, it made a rare investment in China, leading a $50 million fun­ding round for e-commerce startup Blackfish Technology.

Many of Rakuten’s targets are still unproven, and its market capital of roughly $13 billion is far behind SoftBank Group’s $106 billion. But the company’s rising stock price suggests the market has picked up on the similarities to SoftBank.

DIFFERENT PATHS

During Mikitani’s stint in banking, one of his biggest clients was Masayoshi Son. The SoftBank chairman and CEO was an early investor in Alibaba, and many analysts now say the stake in the Chinese e-commerce juggernaut is SoftBank’s most valuable asset.

SoftBank has since launched the $100 billion, Saudi-backed Vision Fund, which generated more than 40 percent of the group’s operating profit for the April–December 2018 period. Son has made no secret of his intention to transform SoftBank into a pure investment holding company.

Mikitani has denied that this is the future of Rakuten. “SoftBank wants to become the next-generation Warren Buffett, which is a very respectful initiative,” he said in English at a company conference in 2017. “That’s not what we want to do. We want to become a unique service company in the world.”

The company hopes its range of investments will open up new avenues for spreading the Rakuten ecosystem. “While generating returns is the priority, we are constantly looking for new trends in technology and how it can add value to our existing business,” said a spokesperson.

The biggest challenge will be to balance the desire to invest, expand, and diversify with the need for cold, hard cash.

Rakuten sold ¥15.5 billion worth of its securities holdings last year, up from ¥4.4 billion a year earlier. Analysts say the company is hungry for funds to fight its e-commerce competitors in Japan. Amazon has become an even more serious threat by dangling benefits to subscribers of its Prime membership plan, which includes free shipping at a time when delivery costs are rising. Since Rakuten is a marketplace, delivery costs vary from seller to seller.

Some industry watchers say Amazon’s membership program is more appealing, and Japanese consumers seem to agree: Rakuten fell behind Amazon in the market in 2016, according to Euromonitor, and the gap has widened since.

Mikitani (third left) with Golden State Warriors stars
Draymond Green (23) and Andre Iguodala (9)
PHOTO: RAKUTEN

The new mobile business also requires cash, though Rakuten insists the latest technology will limit the burden. Rakuten is budgeting about ¥600 billion for this through 2025—roughly what the top players spend in a single year. But since the system is new, investors are taking a wait-and-see approach, said SBI’s Moriyuki. They want to be sure the service—scheduled to be launched in October—actually works.

So, Rakuten faces the dilemma of whether to nurture its promising investment arm into something bigger or to cash out.

It may not have much time to make the decision. Private tech giants such as Uber, Slack Technologies, Inc., Airbnb, Inc., and WeWork Companies Inc. are reportedly lined up for IPOs in what looks to be one of the biggest years for listings in the United States since the dot-com bubble burst in 2000. Meanwhile, “valuations of ‘new economy’ companies coming out of China are being pushed back,” said Arun George, an analyst at London-based Global Equity Research. “I think the trend is only going to get worse.”

But scaling down the investments would leave Rakuten with less room to work with overseas startups—and potentially rob Mikitani of his best chance to build the global business ecosystem he always wanted.

The stock market is starting to suspect Rakuten’s portfolio might be far more valuable than previously thought.