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By Aditya Dhanotia | abd5435@psu.edu | October 27th, 2019
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WeWork, the office rental startup, in the last two months, has gone from expecting to raise billions of dollars in an Initial Public Offering to counting how many weeks of cash it has left. The company was valued at $47 billion in January after Softbank’s $6 billion funding, withing the timeframe of 2017-18. The CEO of the unicorn, Adam Neumann, asserted that WeWork is more than an office renting space- it’s large use of technology to figure out good leasing places in big cities and use of virtual reality to decorate the place should give it a high valuation like tech companies deserve. The company before going public already bloated its valuation by attracting big investors like SoftBank, JP Morgan & Chace, Goldman Sachs, Hony Capital of China, Wellington Management, etc. SoftBank, its biggest investor, injected around $10 billion in the company through debt and equity only to see all of it gone. August 14, 2019, was the doomsday for WeWork and SoftBank when they first filed for an IPO. The IPO was a big fail because it actually allowed investors to see what a loss-making machine they were investing in.
Investor grew wary over its prospectus (document for IPO investors that contains audited financial statements, details on corporate governance, business model) which was poorly written amongst other things. Investors got a chance to see its financial position and how it misstated the number and costs of desks in its offices when it filed for IPO. We used something called “Community Adjusted EBITDA” in their reports which excluded majors costs like rent costs, eventually showing higher profits and skyrocketed valuation. Now, its valuation dropped by 82% to $8 billion the biggest drop in the history of Pre-IPO’s. The so-called haircut actually put its investors including SoftBank and company’s employees with stock options in a very bad position. Employees bought the shares in optimism to cash out at a higher price but were found worthless with its ironic crash. SoftBank which actually owns one-third of WeWork acquired the company by flooding $9.5 billion more, including a severance payout of $1.7 billion to Mr. Neumann. The severance deal will allow Mr. Neumann to sell $1 billion of its shares to SoftBank in return of giving up his control over the board and transferring it to Marcelo Claure of SoftBank.
Now, I found this deal really interesting because like other unicorns (Uber, Lyft, Snap, Peleton) We saw its downfall during the IPO process. The only difference between other unicorns and We is that they saw diminished share price after an IPO, in We’s case it couldn’t even get there. It is very intriguing to see how these unicorns have such bloated valuations. After independent research I found that there are several reasons contributing to the factor: private valuations are fueled with optimism they have a bias towards higher prices and they want their stakes to be appreciated, private companies are not obliged to the same GAAP accounting practices like public companies as seen it the case of WeWork, and private investors are constrained in their ability to sell their stake so they can’t bet against the stock. I believe there are mainly 3 reasons for We’s downfall: huge losses, opacity, and arrogance driven overexpansion. Mr. Neumann basically operated the company, his shares had a 20:1 voting power which made him a huge decision-maker in all the company’s operations. Now with Marcelo Claure restructuring the company, each board member will have 1:1 voting power so it would be interesting to see how that plays out. According to me, there should be three things the board should be looking at right now i.e. defining corporate governance, adapting approved accounting practices, and figuring out how to minimize its huge cash spending.
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