WeWork: The Fall before its Rise!

Once the Fourth Most Valuable Start Up in the World, The We Comapny has faced severe backlash ever since it made it reports public. Everyone was waiting for the giants to file their papers with the SEC (called an S-1), so that their records could be made public. At 7:12 am on a fine morning, they did.

Within the next 33 days, We Work’s value plummeted over 70% to $12Billion, which was lower than the equity they had raised till date. At a time when all of Silicon Valley itself validated this Start Up, Why were the investors and analysts so upset with the Company?

We Work has raised total equity of $12.8 Billion to date, the most recent round valuing the firm at a staggering $47 Billion. But, as soon as their IPO papers were made public, chaos prevailed all around. Everyone started questioning WeWork’s Business Model, Corporate Governance and It’s ability to turn a profit.

It all started when the 359-page S-1 filing hit the internet. Investors, analysts, and journalists began digging in, and they didn’t like what they found: an abnormally extensive list of potential conflicts between Neumann and the company, a bizzare corporate structure, and losses that were growing even as revenue doubled. The company didn’t explain how it would become profitable.

The section disclosing risks to investors ran to almost 30 pages. The potential conflicts were astonishing: Neumann owned an interest in four buildings that WeWork leases. He’d gotten personal loans from the company at below-market rates to fund his lavish lifestyle. One, for $362 million, was connected to an early exercise of stock options (and has since been repaid). He had a $500 milliion line of credit secured by his shares. Perhaps most surprisingly, he had purchased the trademark to the “We” name through a holding company, and WeWork paid him $5.9 million to license it. “Related party” citations in the prospectus – disclosures that the company was doing business that could enrich an employee, director, or officer – numbered more than 100.

Neuman had uncontrollable power in the company. Investors didn’t like that either. So later on Neuman was ousted as CEO in a vote out in which, he voted against himself! Strange?

We Work had many other reasons to upset the Street. Its mounting losses despite an increasing revenue was another cause for worry for investors. Losses of the previous year stood at $1.9 Billion as opposed to a Revenue of $1.8 Billion, which means that WeWork was spending $2 for every single one that it made. This year, they had a committed revenue of $4 Billion as opposed to the $47 Billion it has to pay in outstanding lease rental value to Building Owners. The company has already burned through $2.36 Billion, this year.

All these factors led to the value tumbling to just over $10 Billion. Due to these reasons, the IPO was put off by the company, possibly till the end of the year, as the company had then stated.

The firm also said in its filing, “We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level, for the foreseeable future.”

The boiling point had been reached. Investors couldn’t take it any more. The company faced the heat. They were questioned back and forth about everything. All the company’s tactics were questioned and so were its ethics.

The IPO seemed to be off before it even started. The SoftBank backed company was forced to call off its IPO and SoftBank’s plan of liquidating their stake was put to rest.

Where is the Company Today?

Tied with the $47 Billion in payment WeWork owes to Building Owners, it finds itself in a severe liquidity crunch looking for a bailout package from either JP Morgan Chase or SoftBank. Bloomberg reported that the company favoured the $5 Billion Debt package offered by TJP Morgan Chase & Co. rather than that of SoftBank’s offer of acquiring further equity (SoftBank already owns a third of WeWork).

The debt deal offered by JP Morgan Chase involves atlease $2 Billion at a coupon rate of 15%. That is double the rate it paid for its $702 million bond in April 2018 and significantly higher than its bank loans ranging between 2.5 – 6.2%.

Everything seems to be going downhill for WeWork at the moment. As for Adam Neuman, SoftBank is looking to dilute his stake even further after his voting power was reduced to a mere 3 votes per share from 20 per share. Looks like his dreams of becoming the worlds firrst Trillionaire have been put to rest for a while by this. The company is looking to grab the deal offered by JP Morgan Chase as it does not want to dilute its stake any further.

How the comapny gets out of this mess and will the company’s IPO hit exchanges by the end of the eyar as said, will be monitered closely.

Until then, Ciao!

Note: WeWork India is owned by Embassy Group, India, and is not affected by the ongoings of The We Company, as could be seen by its recent exapnsion plans and Capital Raising round of $200 Million.