WeWork
From Invertopedia, the encyclopedia of how things fail
WeWork leased office buildings, split them into desks and rooms, and rented them out on short terms. SoftBank's January 2019 investment valued it at $47 billion[2]. Its IPO filing that August showed $47.2 billion in future lease payments and a $1.9 billion loss for 2018[3], and the offering was pulled that September[4]. It reached the stock market through a SPAC in 2021 at about $9 billion[5] and filed for Chapter 11 on November 6, 2023, with $18.65 billion in debts[6].
Contents
The bet
WeWork believed it was not a landlord but a platform. The second sentence of its IPO prospectus was "Our mission is to elevate the world's consciousness"[7], and Adam Neumann described the business as "space-as-a-service," a play on software-as-a-service[3]. If people saw it as a tech company, it could be valued like one.
The bet underneath was that demand for flexible desks would keep growing faster than its rent bill, and would hold up in a downturn. WeWork wrote that freelancers and startups would find its flexible terms more attractive in a recession, while admitting that "there can be no assurance that this will be the case"[7].
What happened
| Jan 8, 2019 | SoftBank puts in $2 billion at a $47 billion valuation, bringing its total to more than $10 billion since 2017. The company renames itself The We Company.[2] |
|---|---|
| Aug 14, 2019 | The IPO prospectus goes public: 528 locations in 111 cities, a $1.9 billion loss in 2018, and $47.2 billion in future lease payments.[3][7] |
| Sep 24, 2019 | Neumann steps down as CEO and gives up some of his voting power. Artie Minson and Sebastian Gunningham become co-CEOs.[4][8] |
| Sep 30, 2019 | WeWork withdraws its IPO filing. Public investors had been looking at a valuation as low as $10 billion.[4] |
| Oct 2019 | Weeks from running out of cash, WeWork is taken over by SoftBank in a deal valuing it at $7.5 billion to $8 billion. Neumann's exit package is reported at up to $1.7 billion.[5][9] |
| Nov 21, 2019 | WeWork lays off about 2,400 employees, 19% of its workforce, after a $1.25 billion third-quarter loss.[10] |
| Oct 21, 2021 | WeWork goes public through a merger with BowX Acquisition Corp., a deal that valued it at about $9 billion.[5] |
| Nov 6, 2023 | After losing about 98% of its market value, WeWork files for Chapter 11 in New Jersey, listing $18.65 billion in debts against $15.06 billion in assets.[6] |
| Jun 11, 2024 | WeWork emerges from bankruptcy with a new CEO, John Santora. Its old shareholders are wiped out.[1] |
The kill shot
WeWork owed landlords for 15 years and its tenants owed it for about 15 months. That is a property business with a timing mismatch, and it was priced and run like a software company.
The prospectus laid it out. The average US lease WeWork signed ran 15 years, while its average member was signed for 15 months[7]. Renaissance Capital's Kathleen Smith told CNBC: "That mismatch can be deadly in a recession"[3]. Losses were not coming from launch costs or marketing but mainly from the leases and running costs of its own locations[7].
The tech valuation set the pace. More money meant more leases, and more leases meant more future rent. Future lease payments rose from about $34 billion at the end of 2018 to $47.2 billion by June 30, 2019[3]. When public investors looked at the numbers, the valuation they would accept fell to as low as $10 billion[4]. When the pandemic hit, many members ended their leases and the downturn closed more of them[6]. The company still owed close to $16 billion in long-term lease obligations when it filed[6].
Red flags ignored
- Long liabilities, short revenue. 15-year leases on one side, members averaging 15 months on the other.[7]
- Losses at the core. Losses came mainly from the leases and running costs of its own locations, not from opening costs or marketing.[7]
- A tech story for a landlord. "Space-as-a-service" and a mission to "elevate the world's consciousness" were attached to a business that rented desks.[3][7]
- Governance built for the founder. The IPO structure, the Financial Times reported, gave Neumann and other executives tax benefits that public shareholders would not get, and the seven-member board had no women.[3]
- One backer setting the price. The $47 billion figure came from SoftBank's private round, not from any public market.[2][4]
The cost
SoftBank invested a total of $18.5 billion in WeWork before the failed IPO, then agreed in October 2019 to spend $10 billion for an 80% stake[5]. It cut its own valuation of WeWork to $2.9 billion in early 2020, and Masayoshi Son later said he had been "foolish"[5].
Public investors who bought after the 2021 listing lost about 98% of their value before the bankruptcy[6]; by the time trading was suspended the whole company was worth just under $50 million[11]. Shareholders were wiped out when the company came out of it[1]. About 2,400 jobs went in the 2019 layoffs alone[10].
The inversion
Price yourself on the business you actually run, not the one you describe on stage. If your costs are locked in for 15 years and your revenue can leave in 15 months, plan for the year when it leaves.
What survived
A smaller WeWork. In bankruptcy it renegotiated more than 190 leases, left more than 170 locations it called unprofitable, cut more than $800 million a year in rent and raised $400 million in new equity[1]. It came out in June 2024 with about 600 locations in 37 countries and a board that includes Anant Yardi of Yardi Systems[1].
References
- ^ “WeWork emerges from bankruptcy, announces John Santora as new CEO”. CNBC, June 11, 2024. Founding in 2010, emergence with Santora, the 190 renegotiated leases and 170 exits, $800 million rent cut, $400 million equity, 600 locations, the Yardi board seat, shareholders wiped out.
- ^ “WeWork receives additional $2-billion from SoftBank, changes name to The We Company”. Reuters via The Globe and Mail, January 8, 2019. SoftBank's $2 billion at a $47 billion valuation, more than $10 billion invested since 2017, the rename to The We Company.
- ^ “WeWork IPO filing: strangest and most alarming things”. CNBC, August 17, 2019. $47.2 billion in future lease payments, up from about $34 billion, the 2018 and first-half 2019 losses, "space-as-a-service", the mismatch quote, the Up-C tax structure and the all-male board.
- ^ “WeWork pulls IPO filing”. CNBC, September 30, 2019. The S-1 withdrawn, Neumann's Sept. 24 step-down, the $47 billion SoftBank valuation and public investors' as-low-as $10 billion.
- ^ “WeWork goes public through SPAC”. CNBC, October 21, 2021. The BowX merger at about $9 billion, SoftBank's $18.5 billion before the IPO, the October 2019 $10 billion for 80%, the $2.9 billion markdown and Son's "foolish" quote.
- ^ “WeWork files for bankruptcy”. CNBC, November 6, 2023. Chapter 11 in New Jersey, $18.65 billion in debts against $15.06 billion in assets, the 98% drop since the SPAC, lease exits during Covid, close to $16 billion in long-term lease obligations.
- ^ “Five things we just learned about WeWork”. The Boston Globe, August 14, 2019. The prospectus: 528 locations in 111 cities, $1.9 billion 2018 loss and where it came from, the mission line, $47 billion in lease obligations, 15-year US leases versus 15-month members, the recession caveat.
- ^ “WeWork co-CEOs Sebastian Gunningham and Artie Minson: an overview”. CNBC, September 24, 2019. Neumann stepping down as CEO; Minson and Gunningham named co-CEOs.
- ^ “WeWork's Adam Neumann will get as much as $1.7 billion”. CNBC, October 22, 2019. Neumann's exit package, the $7.5 billion to $8 billion takeover valuation, cash running out by mid-November.
- ^ “WeWork lays off 2,400 employees”. CNBC, November 21, 2019. About 2,400 layoffs, 19% of staff, and the $1.25 billion third-quarter loss.
- ^ “SoftBank paid WeWork lenders almost $1.5bn before bankruptcy filing”. The Guardian, November 8, 2023. Market value under $50 million before trading was suspended; 69 leases WeWork moved to break.