WeWork
IPO has successfully hinted towards how IPO markets are not so favourable
towards companies who focus lesser on profitability and more on scaling up. This
post I try to look at WeWork as a company and how it has led to some serious
loss of investor focus and decline in valuations.
To set the stage, let
us look at what WeWork as a revenue model is. WeWork is a young company which
leases properties in 100 cities (as of 2018 data) across the globe wherein
there is a substantial demand from companies. The company then renovates the
space to tailor it to suit the needs and desires of the millennial community
and give it a young fresh look to attract GenZ and GenY class of population.
When the rental income starts flowing in, the surplus is used to recover the
renovation costs and remaining cash is used to generate economies of scale. The
target clientele for the company are mature growth companies that are looking
for short-term workspaces and also big behemoths who want to experiment with WeWork
(The 527,000 memberships of WeWork
represent global enterprises across multiple industries including 38% of the
Global Fortune 500). On August 14, WeWork filed the paperwork for an
initial public offering. Before the filing of the prospectus, the investor
community was enthusiastic about the company. However, as the prospectus came
under scrutiny, the zeal transformed into serious profitability concerns as
WeWork delayed its IPO with stepping down of its CEO Adam Neumann. To be frank,
business model does appear blunt and flawed at places. WeWork has dedicated
substantial spaces to non revenue generating space like cubbyholes and
chatrooms. Being in real estate segment, WeWork has also failed to create cash
even in the best of economic scenarios.
Apart from profitability issues, Neumann’s
inappropriate corporate decorum added fuel to the fire. He was seen smoking
weed on a private plane, had tequila party post laying off his employees and
banned meat from the offices only to be seen consuming meat himself. The kind
of behaviour does set the right wavelength chord with the investor lobby whose
discontent plunged the valuations from USD 70 bn to USD 15 bn. Besides, WeWork
has been constantly flirting with the line between being a technology company
and being a real estate company. The leading banks that once extended loan
support to help WeWork rise to the occasion have grown cautious with red flags
popping up in its prospectus. JP Morgan Chase and Goldman Sachs arranged large
fees and strict protections that reflected their growing averseness to
company’s future prospects. As per the Wall Street Journal, even, Wells Fargo
agreed to give monetary support in return of a bank executive’s promise to keep
an eye on Mr Neumann’s activities as a CEO. Even few days before launch of its
IPO, WeWork had considerable friction with the Securities and Exchange
Commission (SEC) over a key financial metric called the contribution margin
through which WeWork concealed its heavy losses. The SEC directed the company
to erase the metric; however it still made its way in the prospectus only to be
mentioned 100 times in the document.
With exit of Neumann
and heavy debt of USD 47 billion categorized as distressed future liabilities
to landlords, WeWork is all set to run its scissors across 15,000 jobs and sell
its non -core investments in order to restructure and redefine its operations
in its 90-day turnaround plan. The stage set for IPO hasn’t been much conducive
in 2019 for much of the companies going public. WeWork’s fall has proven to be a
reminder of Uber, Lyft, Slack and Pelotron that are trading much below their
initial offer prices. The venture capitalists are inflating the market by
focussing their capital on growing companies. However, profitability doesn’t
seem to be the intellectual spine of their investment philosophies which has
led to a serious IPO hype amongst young growing companies. Recently, Softbank
has injected a package and took reins of control from Adam Neumann. With
Mayoshi Son’s strong acumen and SoftBank’s strategic know-how, it is left for
us to see how they look at the future of WeWork.
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