WeWork IPO debacle that hurled We Company down
Just in August 2019, WeWork, a realty giant valued at $47 billion announced its aim of going public by offering IPO. The American behemoth property company rented large buildings, converted them into new-age co-working spaces, and divided and let them out to businesses that didn’t want to undergo the hassles of owning a property themselves.
With the modern-age CEO Adam Neumann known for breaking stereotypes at the forefront, We Company would have almost made it but, bam! The controversy-gripped leader with a free mind only caused the stellar fall of his company. Next you know WeWork is actually 70% lower in value, which sums up to just $14 billion . Besides, the IPO is postponed, Adam Neumann came out as a not-so-saintly figure and he has stepped down from the CEO position taking the giant company down with him (maybe he liked the song: if we go down then we go down together a tad bit much ).
To be (just) or not to be?
However, We Company still has hopes of revival but ironically, justice seems to have failed terribly in this case. As if these ghastly events didn’t do much harm, Adam Neumann walked away with a handsome compensation for stepping down as the CEO of We Company. Wait, what? Yes. How much you ask? Well, here’s the almost- clear figure. Neuman will receive in all, a whopping $1.7 billion in cash and credit. In turn, SoftBank will take over We Company and address its bankruptcy. Here is the breakdown:
$1 billion towards shares
- $185 million as consulting fee
- $500 million credit to assist loan repayment
- Maintains an unspecified stake in the company
If you are still wondering whether the compensation is a gain or a loss, here’s something that can help you decide. Adam Neumann, being the founder of WeWork, held shares that had 10 voting rights each. This means, even if he left, he would still have high stakes and power in the company. Therefore, Softbank, the company’s major investor, thought it inevitable to offer Neumann such a handsome going-away gift. Amidst such a spectacular fall of We Company, the founder still seems to have not lost it all. Well, good for both and thanks to SoftBank, the God figure.
However, WeWork’s Chairman Marcelo Claure recently challenged reports of Neuman’s payout and said it was false. Reportedly, SoftBank had declared in Oct 2019 that it would launch a $9.5-bn bailout after WeWork’s IPO failed. This bailout included a $3-bn tender offer of WeWork shares, which comprised of up to $970mn shares held by Neumann. The ex-CEO, is thus, entitled to participate in the tender along with other shareholders and sell as many shares as he likes.
Allegedly, WeWork employees were outraged with the reports of the $1.7-bn payout, especially because they had to face unpleasant situations such as layoffs and cutbacks. Thanks to the tender offer, Neumann would now be on a par with other shareholders and receive a payout equal to the number of shares he sells.
Coming to why WeWork failed, here are some reasons.
1. An overly ambitious CEO and a questionable corporate governance
Some employees placed a part of the blame for WeWork’s fall on its CEO. Neuman was known for nursing unrealistic dreams and behaving in a self-serving and outlandish manner. First, he sold the “We” trademark of We Holdings LLC to his real-estate company and made a whopping $5.9 million out of it (he did return it to the company later, but who can turn a blind’s eye to it?) Oh, and this deserves a mention, Adam bought several properties himself and leased them back to WeWork. However, the biggest showstopper that let Adam down real bad was that he sold over $750 million stocks just ahead of the IPO.
2. Softbank’s move to save the troubled company
In addition to the CEO Adam’s behaviour, one of the company’s executive also blamed WeWork’s free fall on Softbank, its biggest investor. It first poured more than $10 billion into WeWork and fed an ambitious CEO with funds to do as his heart wanted. Much to everyone’s shock, the Japan-based investor then fired the CEO after rewarding him handsomely.
3. WeWork’s questionable business model
WeWork is a realty giant that lets out co-working spaces on short-term leases. While the company owns some of these spaces, it rents other large spaces on a long-term basis, recreates them into modern co-sharing workplaces and then leases them to businesses on a short-term basis. This not only makes WeWork a giant landlord, but also one of the biggest tenants in the US with 5.2 million sq.ft. of rented space.
Analysts pointed out that while this business model seems to be attractive, it wouldn’t thrive in the existing economic conditions. Much to the investor’s despair and true to the analysts’ words, WeWork did incur a heavy loss of $689.7 million out of $1.54 billion revenue in the first half of 2019.
4. Love what you do, but remember you ‘work’
Working in a WeWork space largely resembles sweating out in a fancy workspace. WeWork’s co-sharing spaces offer creative and chic-looking office spaces that promote the slogan of ‘Love what you do’. In addition, these spaces also offer snacks, IPA on draft, nap rooms, and phone pods, all for a noble cause — to keep the workforce happy and get work done.
Lured by this idea of modern, comfortable, and coming-of-age co-sharing spaces, startups and full-fledged companies such as Slack subscribed for WeWork’s services alike. Alas, WeWork’s couldn’t gain much from all these modern facilities that it offered. Why? WeWork focused too much on offering couches, space to chit-chat and other common areas that don’t contribute to revenue generation.
5. The cost of offering all-inclusive services
Through its co-sharing spaces, WeWork did a great job of offering an all-round and feasible solution to run a business. In addition to core operational services such as catering and reception, WeWork also offered legal, financial, IT, and not to mention IPA-pantries that helped businesses optimise on many fronts. Businesses could now gain more by assuming a lower risk of owning a physical plant, shedding out minimum capital outlay, and assuming reduced operational complexity.
All these perks attracted businesses small and large, especially with millennials forming most of the workforce. Nevertheless, the business model hasn’t done much good to WeWork itself. Well, it is true that the tenants could make mammoth savings on many fronts, but that leaves WeWork to make up for the costs. The losses explain themselves now, don’t they?
Still, We Company can be saved. Here’s how it can possibly survive after all.
Action plan to save WeWork
The complex background of WeWork’s fallout complicates its revival. To clear the mess that has engulfed the company, analysts and the company’s co-CEOs suggest taking the following steps that can save We Company.
1. Immediate financial bailout
WeWork is experiencing a severe cash burnout and, in addition, has an estimated $47 billion of lease payments that will be due shortly. Given such a situation, WeWork needs a financial bailout, which Softbank has readily offered after showing its CEO the way out. Interestingly, JPMorgan had offered to rescue the failing company too, but refused to sign the deal on the spot, which gave way to Softbank. Besides, WeWork’s board also plans to reduce costs by laying off as many as 15,000 employees. Ironically, the company can’t even afford to bear the employee severance payments. As you can figure, this plan is tricky.
2. Slow down growth to curb cash burnout
Given WeWork’s high rate of cash burnout, analysts opine fresh funding is quintessential to save the company. However, even with access to fresh funding from time to time, WeWork’s ambitious growth plans can chew into all the funding that comes in. To prevent this and conserve the capital, analysts suggest curbing growth plans of the company.
However, WeWork has to show decent revenue to attract investors. For this to happen the company will need to add properties regularly, which again needs investment. How it plans to fight with this double-edged sword is up to WeWork.
3. Postpone WeWork IPO
To clear the mess and rebuild WeWork, the company’s new co-CEOs have announced that they will now concentrate on their core business for which postponing IPO was necessary.
4. Appointment of a new CEO
After Neumann stepped down as the CEO following the IPO debacle, WeWork got itself a new CEO, Sandeep Mathrani. A real estate veteran, Mathrani is expected to assume his position on 18th Feb 2020. Mathrani has, to his credit, experience in reviving ailing firms such as GGP, a mall operator that hit bankruptcy in 2010. Given his grounded personality and strong experience in real estate business, the new CEO is shouldered with the responsibility to turn around WeWork’s current state.
5. 5-year plan to achieve several goals
As per recent developments, WeWork is looking to recover by achieving one goal at a time. Between 2020 and 2024, the troubled realty-giant is looking at meeting the following goals:
- Declare the 1st ever quarter with $1bn revenue in 2020
- Post a positive EBITDA in 2021
- Be free cash flow positive by 2022
- Get 1mn memberships by 2023
- Achieve $1bn free cash flow by 2024
After all this, you must be interested in what happens to WeWork India, the US realty giant’s Indian subsidiary.
WeWork India is free of shackles
With We Company, the parent entity, laden in deep turmoil, the questions of WeWork India’s sustainability have slowly cropped up. However, Jitu Varwani, Chairman of Embassy Group, the Bengaluru based company of which WeWork India is a fully-owned subsidiary clears the air, much to the relief of its stakeholders.
He says that WeWork India is unaffected by the parent company’s IPO debacle as the former is a 100% subsidiary company, which gives WeWork no control on its operations. He goes on to reveal that the Indian subsidiary plans to fuel its growth plans by raising over $200 million. In addition, he reassured stakeholders by revealing WeWork India’s plan of doubling the number of desks in operation to 1 lakh by 2020 amidst the parent entity’s struggle at the global level.
Varwani also reveals that Embassy Group had invested Rs.1,500 crore in the WeWork India and affirms that the subsidiary has grown quicker than its global counterparts. WeWork India currently operates across the top six national markets in the country. Despite the mess caused by We Company, the subsidiary extends its continued support to the parent entity and reveals its intentions of sharing a chunk of the Rs.4,000 crore that it plans to raise to fuel expansion.
That’s pretty much about the WeWork (or not work?) IPO fiasco, folks. Let us know what you think in the comments below.
