The WeWork Dilemma

After the failed attempt of an IPO in September ’19, WeWork has been saved by SoftBank after the firm’s valuation dropped from $47 billion to only $8 billion. The Japanese giant is injecting capital to reboost the productivity of the firm and relaunch its image in the market. The rescue deal will increase SoftBank exposure for more than $10 billion in the company with approximately 80% stake. In the process Mr. Neumann, co-founder of WeWork, was forced to step down with a more than generous buyout. WeWork experience raises question about SoftBank bet and more broadly on the IPO market for “tech unicorns”.

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A bit of context

Last weeks there was one indisputable trend topic in finance: WeWork. Unconventionally, we are starting this article by the end: SoftBank’s takeover. The rescue deal will allow Softbank to reach 80% of stake in WeWork “providing a significant capital infusion and operational support”, Softbank chairman Masayoshi Son said in a statement. The Japanese investment giant justifies this huge capital exposure in WeWork with his strong belief in a radical paradigm shift in the way people work. The press maintains its skeptical position in the future of WeWork even after Softbank’s bailout, while investors are concerned that the investment could turn out to be a sunk cost fallacy.

The Rescue Deal

After a valuation of $47 billion in January –when the last funding occurred – and after a talk of $20 billion valuation by Goldman Sachs and JPMorgan main underwriters of the last minute failed IPO of September 17, Softbank’s deal is based on an EV of approximately $8 billion. If we compare this valuation along with JPMorgan’s of $5 billion, the dramatic loss in value gives reason to such a drastic rescue deal. More specifically, Softbank’s statement could be sum up in the following key terms:

    • “Sine qua non” condition was the conclusive exit from the decision panel of the company of its exuberant co-founder Mr. Neumann. This ultimatum comes as a follow-up action of the end of his mandate as CEO after the failure of the IPO;
    • Mr. Neumann has the right to sell $970 million of shares – roughly one third of its stake – as part of Softbank’s tender offer to buy up to $3 billion in WeWork stock from employees and investors;
    • In addition, Mr. Neumann will benefit from the deal a $185 million consulting fee, which could be arguably justified for managing to avoid bankruptcy at the expense of approximately 83% in EV in a few months;
    • Softbank will help Mr. Neumann to repay a $500 million loan facility led by JPMorgan;
    • In terms of fresh capital, Softbank already has an exposure of approximately $10 billion in the company, the Japanese investment firm reserves $1.5 billion of investment in the firm and extends the firm a $5 billion loan.

Mr. Neumann poor governance

Many observers argue that the cause of WeWork’s critical financial position is a result of Mr. Neumann poor governance. Its eccentricities have been accepted for a long time since the founding of the company in 2010. However, after the failed IPO attempt in September many investors openly criticized his governance from his freewheeling ways to his party heavy  lifestyle. In addition, his majority voting control was a result of a highly unconventional categorization of shares which gave him the absolute control of the company. As a result, once he failed to get the company’s IPO underway, he was replaced as CEO and subsequently he will soon loose his role as chairman of the company being relegated to a simple adviser of the board. His successor, Marcelo Claure – SoftBank COO – will be the new executive chairman with the goal of a challenging turnover of the firm attempting to exploit the momentum generated by SoftBank’s injection of capital in the company. Clearly, observers argue about Mr. Neumann work even if only a minority of investors support the founder well reimbursed exit from the company. “The consulting arrangement is mind boggling.

 

 Adam Neumann, cofounder of WeWork

It’s terrible governance,” said Nell Minow, vice chair of shareholder advisory firm ValueEdge Advisors. “Why pay the guy who got WeWork into this mess for advice. It’s adding insult to injury and a little more injury too.” This is not the first step-down from a start-up founder. Uber Technologies Inc co-founder Travis Kalanick resigned as CEO after a series of scandal comprehensive of allegations of creating a “toxic work culture” in the firm. Uber recent history has some similarities with WeWork’s: an unsuccessful IPO and the resign of the founder as a result of poor governance.

Consequences

Uber and, especially, WeWork experiences make us believe there is something changing for the so-called tech “unicorns”. It seems the 2 IPO market is changing with fewer IPOs and less successful. Early investors used to see at IPO as the easiest way to liquidate their position in successful companies in order to monetize their investment. This “IPO golden age” seems to be at its end after what we saw in recent years. Investors are becoming more and more suspicious of unprofitable tech companies with high potential but highly dependent on brilliant founders though often eccentric and unreliable. With an increasing private equity market and an extremely volatile public equity market many future unicorns will have multiple thoughts before an IPO, evaluating thoroughly being acquired by institutional investors, private investors or conglomerates.

Conclusion

Overall, SoftBank attempted rescue deal highlights what a few may refer as the “WeWork Dilemma”. Can WeWork be saved? SoftBank hopes are based on the fact that without Mr. Neumann, WeWork will be back to be the successful $47 billion company it used to be. Will this bet payoff or will it be a “a classic rookie error by succumbing to the sunk cost fallacy” 1 . At the same time, many questions about the incoming future of the IPO market are arising. Should we expect an increasing number of scenarios comparable to those of Uber and WeWork in the future?. As a counter move will early investors rely on different exit strategies rather than IPOs? All these questions will only be solved in the future by observing CEOs reaction to this dilemma. On the other hand, the final lesson of this experience is that there is a diffused feeling that WeWork’s dilemma will leave a mark and something is changing in the public market, the real challenge, though, is understanding in which direction.

References

    • [Reuters, October 22] Anirban Sen, Jessica DiNapoli, Jane Lanhee Lee : SoftBank clinches WeWork takeover deal, bailing out cofounder
    • [BBC, October 23] BBC News : WeWork accepts multi-billion dollar Softbank rescue deal
    • [IlSole24Ore, October 23] Riccardo Barlaam : WeWork travolta dai debiti salvata da SoftBank. Verso 4mila esuberi

Stefano Ramella

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