(More Bank Opinion) – Day traders may be looking forward to the biggest buyout ever made by SoftBank Group Corp., but for followers loyal to Masayoshi Son's wand, this is another worrying development.

SoftBank unveiled the buyback program last week, promising to spend up to 600 billion yen ($ 5.5 billion) in own shares over the next year. That would be enough to buy 71 million shares, or 6.5% of the total, based on the closing price on February 5th. The maximum limit is 112 million shares, or 10.3% of the total.

That's a lot of redemptions – good news, right? SoftBank shares climbed 17.7 percent to a four-month high on Thursday.

There is a risk in such largesse, however. Redemptions reduce the free float, potentially reducing SoftBank's weighting in benchmarks and forcing passive investors following these indicators to reduce their holdings. As a result, market sentiment towards institutional buyout is changing, with large buyouts increasingly seen as lower than exceptional dividends.

Passive investments have been on the rise since the Japanese central bank began buying equity ETFs in early 2013. In the last three years alone, Japanese ETFs have received more than $ 140 billion in net inflows. . Billions will have been invested in SoftBank, a member of the Nikkei 225 and Topix indexes. Nomura Holdings Inc., which manages a $ 77 billion Topix ETF, holds 4.9% of the company's capital. The Government of Japan's pension investment fund became the second-largest investor after favoring equities at the end of 2014.

Keeping a big float is how to play passive money. HSBC Holdings Plc, listed in Hong Kong, for example, is a master in this game. Dividends rather than share repurchases are the primary means by which the bank rewards its shareholders. Investors may elect to receive cash or stock dividend payments in the form of new shares. As a result, HSBC has a weighting of 9.4% – the third largest – of the Hang Seng benchmark, although it is not among the top five in terms of total market value.

Aware of the non-scientific construction of the Nikkei Index, which allocates weights based on price levels, the Bank of Japan is gradually moving towards the market-weighted Topix index, which closely examines business. Over the last three years, Nomura's Topix ETF has received more than $ 50 billion in net cash inflows, while the Nikkei 225 ETF has received less than half.

So, SoftBank has to be careful. It has a weighting of 5.4% in the Nikkei 225 because of its relatively high share price (around 10,000 yen compared to, for example, less than 5,000 yen for Sony Corp. or 570 for Mitsubishi UFJ Financial Group Inc .). But SoftBank represents only 1.9% of the Topix.

It is surprising that a company that is financially sophisticated enough to use pass-through transactions to limit the loss of its holdings in Nvidia Corp. do not know the pitfalls of buying back shares.

Chances are, a splashy buyout has been considered to have a public relations value that a dividend could not provide. His son is back in the media spotlight, lamenting the lack of valuation suffered by his flagship holding company. The redemption also rewards investment banks, which can earn money by executing transactions. Dividends, on the other hand, are just boring checks from the company's financial department, which do not use reporters or brokers.

His has alienated many fans over the last year. Last March, he placed SoftBank's bondholders in the bus as part of the preparations for the IPO of the national telecommunications company. In Japan, small individual investors, who have long supported Son's quest for the world's hottest unicorns, now feel burned after the bankruptcy of supply.

Cash dividends are money in the bank, while rising stock prices are just a paper gain that can evaporate quickly. As SoftBank's fortune is increasingly tied to Nasdaq, it would take another correction of US tech stocks to make that happen. His son would do better not to alienate fund managers this time; otherwise, he may be short of fans.

To contact the author of this story: Shuli Ren at sren38@More Bank.net

To contact the publisher in charge of this story: Matthew Brooker at mbrooker1@More Bank.net

This column does not necessarily reflect the opinion of the Editorial Board or More Bank LP and its owners.

Shuli Ren is a More Bank Opinion columnist covering the Asian markets. Previously, she wrote on the markets for Barron, after a career as a banker and holds a CFA.

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