I have some thoughts about WeWork. But first, I wanted to recap the We company’s implosion to commemorate it’s supernova-esque size and speed, as well as to celebrate the play-by-play commentary as narrated by Bloomberg Opinion’s Matt Levine, which will go down in Financial Journalism history. It was a daily spectacle for 3 short months, a fall from grace unlike no other I have ever seen. They weren’t even criminal!
All words from here on out (apart from the initial CNBC story) are taken from his newsletter, and if you don’t currently subscribe to Money Stuff, change that.
14 Aug 2019: WeWork files it’s S-1 IPO prospectus (CNBC)
WeWork released its much-anticipated IPO prospectus on Wednesday, revealing a $900 million loss in six months as the workspace rental company lined up to join a flurry of tech companies going public in 2019.
WeWork, which rebranded to the We Company, is widely expected to go public as soon as next month. It was recently valued at $47 billion after SoftBank, the company’s biggest backer, invested an additional $2 billion in January.
19 Aug 2019: We Looks Out For Ourselves
Early this year, WeWork unveiled its new corporate brand: We Co. It then sought to acquire the trademark to “we.” The name was owned by We Holdings LLC, which manages some of the founders’ stock and other assets. WeWork said it paid the founders’ company $5.9 million for “we” this year, based on a valuation determined by a third-party appraisal. WeWork legally changed the company name last month.
Okay so first of all: You can trademark “we”? Weird. But that’s not the part of this that broke me; no, the really weird thing here is that WeWork founder Adam Neumann (1) owned the name of the company he founded and (2) sold it to the company for $5.9 million…””The approach where the CEO of the company is like “hey I have an idea” and his subordinates are like “what is it?” and he’s like “you’ll have to pay me $5 million to find out” and the subordinates are like “what?” and he’s like “oh look as the CEO I just wrote myself a check for $5 million to buy the idea” and the subordinates are like “wait what?” and he’s like “do you want to hear the idea” and the subordinates are like “sure I guess I mean we paid for it” and he’s like “it’s: consciousness”—that’s a weird approach!
5 Sep 2019: WeWhoops“We talked last month about the We Co.’s (aka WeWork’s) odd decision to buy the name “We” from its founder, Adam Neumann, for $5.9 million. WeWork filed the preliminary prospectus for its initial public offering, this all became public, and everyone made fun of it because it was nuts. (I was on vacation at the time so didn’t make fun of it until the following week, but it was still nuts then.) Yesterday WeWork filed a revised offering document, and, never mind, Neumann is returning the $5.9 million…”
“Meanwhile, the roadshow for We’s IPO might start next week, and here’s the latest on valuation: “The New York-based startup is considering seeking a valuation of about $20 billion to $30 billion in the IPO, people with knowledge of the matter said. The range could end up closer to $20 billion, said one of the people, which would be less than half the valuation it secured from its biggest backer just a few months ago.”
6 Sep 2019: People Are Worried About We
At this point it feels kind of mean to dunk on WeWork? When it first filed papers for its IPO, people made fun of its hubris and conflicts of interest; now that it has filed revised papers and previewed its price range, people are making fun of its quick retreat into humility. The company raised money from SoftBank Group Corp. at a $47 billion valuation earlier this year, but now the price talk involves a $20 billion to $30 billion valuation. Everyone is piling on: “At least two analysts on Thursday said a discounted IPO valuation of $20 billion to $30 billion is still too ambitious.””
9 Sep 2019: We Might Not Be Working
Part of why WeWork is facing pushback on valuation is for straightforward business-model-y reasons: Investors are worried about profitability and unit economics and competition and other issues that go to the heart of what WeWork does. But part of why WeWork is facing pushback is that it is the absolute limit case of unicorn craziness, a company that is entirely controlled by a quirky and charismatic founder who has cashed out hundreds of millions of dollars pre-IPO while retaining voting control of the company for his lifetime and beyond, employing his family members, borrowing money from the company, owning some of the buildings that it rents, starting a separate fund to own more of the buildings, starting weird side businesses like an elementary school, renaming the company “We” and charging it $5.9 million for the name, structuring it in an unusual multi-level way in which he is a co-owner of the business alongside the public-company parent, and going around saying that WeWork is “a state of consciousness” rather than a real estate company.
10 Sep 2019: What If We Wants to Wait?
SoftBank, the biggest outside shareholder in WeWork, is urging the lossmaking property group to shelve its hotly anticipated initial public offering after it received a cool reception from investors, according to people briefed on the discussions. …
One possibility here is that SoftBank Group Corp., its affiliated Vision Fund and WeWork’s other private investors own stakes in a high-quality business with fundamentally sound unit economics.
There are other possibilities! The investors who doubt WeWork’s underlying business model have read that paragraph I quoted above, the one about how WeWork can turn on the profits at any time. They have doubts anyway.
One nice thing about postponing the IPO is that you get to find out.
11 Sep 2019: We Can Be Weird, Or It Can Be Public
WeWork is considering major changes to governance to assuage investor concerns ahead of an initial public offering this month that’s even given pause to some of its own bankers, according to people with knowledge of the situation.
Both of its lead financial advisers — JPMorgan Chase & Co. and Goldman Sachs Group Inc. — have concerns about proceeding with an IPO that could value the company as low as $15 billion, the people said, asking not to be identified because the talks are confidential. That’s set off a push to make the public sale more palatable to potential investors with governance reforms.
Look, to be clear, if (1) WeWork actually changes its weird governance stuff to be more palatable to investors, and (2) that actually makes it more palatable to investors and the IPO goes well, I will be pretty surprised myself.
Except that what I want to suggest here is that it won’t be that weird, and that maybe the last few years have been the weird time.
13 Sep 2019: We Is Sorry About The Weirdness
I am not going to pretend that this is an industry-leading list of corporate-governance best practices, but it is a meaningful change from the WeWork of a month ago. Founder-CEO Adam Neumann will still control the company through dual-class stock for the rest of his life, but only for the rest of his life; the previous version gave him control from beyond the grave.
One big area of investor pushback against We’s IPO was the governance stuff; that is now improved, though a cynic would say that as long as Neumann has majority voting control of the company governance changes can never be all that binding. There were other areas of pushback.
Really the biggest pushback that We got seems to have been on valuation, and it seems safe to say that investors are winning on that one. No one is now expecting We to go public at a $65 billion valuation, as its bankers once proposed, or for that matter at $47 billion, the headline valuation in its last private funding round. I suspect that lopping tens of billions of dollars off the valuation will do more to get this deal done than changing the terms of the super-voting stock, and that changing those terms won’t add tens of billions of dollars back to the valuation. One should not overemphasize the importance of governance here. Still, every little bit helps.
17 Sep 2019: WeWork’s IPO doesn’t Work Yet
The We Co., the parent company of WeWork, filed to go public last month, and it has been ruthlessly and continuously mocked ever since, and yesterday it apparently decided to postpone its initial public offering “until at least October,” and issued a passive-aggressive statement saying that it is “looking forward to our upcoming IPO, which we expect to be completed by the end of the year.”
There is a lot of groupthink in these things, and Neumann is a famously effective salesman for his vision, and it’s certainly possible that WeWork will use the time wisely to build support from big investors without the glaring spotlight of an imminent IPO. There is no objective catalyst, sure, but the thesis here has to be that some large public institutional investors believe, or can be persuaded, that WeWork is worth meaningfully more than $20 billion, and that in the current environment they are not willing to stick their necks out to buy shares at that valuation, but with some quiet reflection they might get there. I don’t think that’s a crazy theory at all, but it is not a strong position for the company to be in.
23 Sep 2019: We Wants A New Boss
When WeWork goes public—the IPO has been delayed but is still supposed to happen this year—it will file another revised draft prospectus. Will it include the future-success-depends-on-Adam [Neumann] risk factor? Will it include the Adam-controls-our-stock one? I dunno!
A bloc of WeWork directors is planning to push Adam Neumann to step down as chief executive after a tumultuous week in which his eccentric behavior and drug use came to light and the startup delayed its much-anticipated stock-market listing.
A group including officials tied to SoftBank Group Corp. , the company’s largest investor, wants Mr. Neumann to relinquish his title of CEO of We Co., the parent of the office-sharing company, people familiar with the matter said.
25 Sep 2019: It’s Not You, It’s We
You think I’m kidding but Neumann really told people about his plans to be the world’s first trillionaire. The path to a trillion-dollar valuation ran through him.
Yesterday he stepped down as CEO under pressure from We’s board of directors.
It seems to me that retreating to normalcy cuts the tails off the distribution. Neumann had downsides—the absolute perpetual control, the conflicts of interest, the profligacy with money—and now they are much less worrying. (Still a little worrying! He remains non-executive chairman, and “Neumann’s stock now carries three votes per share, from 20 in the initial plan,” reports Bloomberg.) Less can go wrong at a normal WeWork than at a visionary We. But WeWork’s investors, particularly SoftBank, were there because of Neumann’s upside, his ability to sell a wild vision of We as a transformative company that can dominate the world and justify a $47 billion private valuation. And now, nah, never mind, office landlord.
27 Sep 2019: We Moves Fast to Unbreak Things
At some point they should change the name, right? The We Co., formerly known as WeWork, postponed its initial public offering just 11 days ago in the face of emphatic investor pushback, and since then it has been working with really quite astonishing speed to change everything about itself that investors don’t like. Controversial co-founder and chief executive officer Adam Neumann is no longer CEO, though he’s still non-executive chairman, and his super-voting stock has been cut back from 20 votes per share to 3. His wife and co-founder Rebekah Neumann, who ran We’s experimental-school division (WeGrow), is out, and the school might be on the chopping block.
If you didn’t like We two weeks ago, when it was a fast-growing money-burning startup run by a charismatic founder-CEO who had lots of whimsical side projects in a bid to “encompass all aspects of people’s lives,” maybe you’ll like We now that it’s a fast-shrinking money-hoarding startup run by two professional co-CEOs who are frantically paring the side projects to focus on the core business of renting out office space for more than they pay for it. Or maybe you won’t; maybe you just don’t like the business of office-landlord intermediation, or don’t think that We can do it sustainably with good margins.
3 Oct 2019: You can Still Kick We Around
In April 2018, shared-office-space company WeWork Cos., which now goes by We Co., issued some bonds. WeWork was sort of an interesting credit insofar as it had had a net loss of about $884 million, on revenues of $886 million, in 2017, and was in the middle of losing even more money in 2018.
But WeWork overcame those obstacles and sold $702 million of bonds. How? Partly by paying a high interest rate, sure. But two other things helped make investors comfortable. One is what we sometimes call the “Netflix theory” around here: WeWork had such a huge equity valuation that bondholders figured a big equity cushion protected their investment.
One interesting thing that has happened recently is, oh boy has WeWork stopped being a fast-growing tech darling as its equity has lost its luster! Bad for WeWork’s equity; bad for its big equity investors like SoftBank Group Corp.
But what about the bonds? There’s an argument that withdrawing the IPO should be credit-positive for WeWork: Now instead of losing a lot of money, it will flip the profitability switch, adjust the Ebitda to the communities, and buckle down to make money.
What does the market think? Hahaha sorry, only bad things. The bonds are trading at about 85 cents on the dollar, down from almost 105 in August, and have been downgraded by S&P and Fitch.
7 Oct 2019: We’s Banks Are Still Worried
By the time the IPO was withdrawn, numbers like $10 billion—for the whole company—were being thrown around, suggesting that Neumann’s stake might only be worth $3 billion.
Even that, though, is somewhat generous, just because the fact that WeWork pulled its IPO means that Neumann couldn’t go sell his stock for $3 billion.
This is not a huge problem for Neumann because he has already extracted hundreds of millions of dollars from WeWork, and while he has spent lots of those dollars on an enormous collection of fancy houses, he presumably has enough left over in cash to pay the cell phone bill.
But it is a problem for someone! Part of how Neumann has extracted that money is by selling WeWork stock “during most of the investment rounds since 2014.” Another big part of it, though, is that he has borrowed about $380 million from a group of banks (UBS AG, JPMorgan Chase & Co. and Credit Suisse AG), secured by a pledge of some of his shares. Those banks do not seem especially happy right now.
15 Oct 2019: We Could Really Use Some Money
It blows my mind that it’s not even two months since We Co. filed for an initial public offering targeting a valuation as high as $65 billion, and now here’s this:
WeWork’s bankers are pitching investors on what would be one of the riskiest junk-debt offerings in recent years — potentially giving the venture’s top private shareholders a final chance to avoid having their stakes severely diluted.
A roughly $5 billion financing package led by JPMorgan Chase & Co. is the company’s preferred option, rather than selling a controlling stake in itself to SoftBank Group Corp., according to people with knowledge of the matter. Notably, the financing may include at least $2 billion of unsecured payment-in-kind notes with an unusually hefty 15% coupon, one person said.
Fifteen percent PIK debt! In better times, really not that long ago at all, we talked about WeWork as a clever financial arbitrage, segmenting the market so that it could appeal to debt investors as a boring stable real-estate company while appealing to equity investors as a fast-growing high-multiple tech company. Now, in worse times, it is the opposite: If you invest now, you can get some terrifying debt that lenders don’t want combined with some cursed equity that the stock market doesn’t want.
16 Oct 2019: We Has Some Bonds To Sell
“Investors have expressed concern about lack of assets that could back the proposed secured bonds,” reports Bloomberg, and, oops, right? Ordinarily you might think that the secured bonds of a real-estate company would be pretty safe, secured as they are by buildings, but then you have to remember that WeWork is an unusual real-estate company in that it doesn’t own its buildings.
And so WeWork is choosing between (1) this horrific bond package and (2) an equity investment from SoftBank Group Corp., its biggest investor, which would give SoftBank voting control of the company. That actually seems bullish for the bonds, no? SoftBank’s interest is a sign that the equity cushion is real, that SoftBank is not willing to give up on WeWork yet, and that it has both the money and the willingness to keep the company alive for a while. The first bull case was “if you have to foreclose it should work out”; the second is “SoftBank will make sure you don’t foreclose.” Neither is a slam-dunk, but neither relies on the WeWork hype of a few months ago either.
23 Oct 2019: How Do You Like We Now?
WeWork, in danger of running out of cash in the coming weeks, chose a rescue offer from SoftBank over a competing proposal from JPMorgan Chase & Co., according to people familiar with the matter. It had asked both parties to submit proposals by a deadline yesterday.
The deal is expected to value the company at about $8 billion, a far cry from what it was aiming for in an initial public offering earlier this year and even less than the $47 billion at which a January investment from SoftBank pegged its worth.
That’s nine point five billion dollars that SoftBank is putting into WeWork, on top of the more than nine billion dollars it has already put into WeWork, an astounding total of more than $18.5 billion for a company it values at $8 billion. And while WeWork is desperate for the $1.5 billion equity investment and the $5 billion loan—it is running out of cash and “so strapped that it could not afford severance payments for the employees it plans to lay off,” notes my Bloomberg Opinion colleague Shira Ovide—the $3 billion tender offer seems a little gratuitous? That is not money that is going to keep WeWork afloat; that is just cashing out other investors to leave SoftBank holding more of the bag. (The bailout will give SoftBank about 80% ownership.) Presumably—though who knows!—SoftBank does not have limitless money to pour into WeWork, so it’s strange that such a big chunk of its WeWork rescue investment is not going to fund the company.
24 Oct 2019: We Had Been Hoping To Get Paid
WeWork’s employees are mad that their options are all underwater, which is both reasonable (they were induced to effectively invest in a fast-growing startup that ended up exploding) and kind of not (they worked at a money furnace that lost almost $2 billion a year and destroyed $40 billion of market value in a few months; why should they get equity upside?).
They’re particularly mad that, while their equity value has evaporated, founder Adam Neumann will walk away with over a billion dollars in payment for his stock and also a big consulting contract:
At a meeting with employees Wednesday morning, Marcelo Claure, a top SoftBank official and WeWork’s new executive chairman, said that some of the payout to Mr. Neumann was necessary to persuade him to give up his substantial control over the company, according to a person who heard the remarks.
Yeah no that doesn’t make it better? “We had to give him a billion dollars to go away because we couldn’t afford to have him stick around,” is the basic message here; his value to the company was negative a billion dollars.
25 Oct 2019: Sometimes We Flew To The MaldivesThe New York Times reports that WeWork might have a tough time executing its pivot to profitability:
WeWork is expected to add about 10 million square feet of new office space to its bulging property portfolio in the United States and Britain this year alone. These locations, often built out at great cost, highlight the knife-edge economics confronting executives who are trying to save the company, which this week received a last-minute lifeline from SoftBank after being forced to scrap an initial public offering.
The frenetic growth under the company’s founder, Adam Neumann, may weigh it down for years and hamper the attempts to remake WeWork, which until recently was widely considered one of the world’s most valuable start-ups.
And the Financial Times reports that “China has emerged as one of WeWork’s worst performing markets as a local operation once seen as critical to the office provider’s global growth suffers from ultra-low occupancy rates and is ‘bleeding cash.’” Apparently that’s bad now! Who knew?
16 Dec 2019: We Kept Almost Making Money
This weekend the Wall Street Journal had a big story on WeWork that suggests an alternate view of the company, one that goes something like this:
- Private investors really like fast-growing companies that also make money, for fairly straightforward reasons; and
- WeWork was a fast-growing company that lost money; but
- WeWork just told investors that it made money.
I’m oversimplifying a little. You can’t just tell investors that you make money when you don’t. (I mean, you can, but it is frowned upon.) But you can get strangely close. “We made money last year” is either true or not. “We expect to make money next year” is a forward-looking statement and gives you some wiggle room. “We are in the process of making money this year” is … eh, look, I don’t recommend messing around with this, but WeWork sure did:
A presentation for prospective investors in fall 2014 projected the company would turn a $4.2 million operating profit for the year. When the year was through, just three months later, the company reported an operating loss of $88 million on $74 million of revenue, according to internal documents.
Hmm!
Mr. Neumann told The Wall Street Journal in 2015 that WeWork was profitable and it didn’t need additional funding before an IPO. It reported a $233 million loss for the year on $187 million in revenue.
In fact, WeWork has had only one profitable year in its history: 2012, when it generated about $1.7 million in net income, internal documents show.
Ross Rambles 