Tag: IPO

WeWork forces founder forced to step down

Source: BBC

Adam Neumann led WeWork, the property firm he co-founded in 2010, to become a global juggernaut and a symbol for office cool.

The company has more than 500 locations in 29 countries and as recently as August, had viewed Mr Neumann as central to its fortunes.

But on Tuesday, WeWork announced that he would step down as chief executive and relinquish significant control over the company, after the firm’s plans to sell shares publicly ran into trouble.

It marks a startling fall from grace for the ambitious 40-year-old billionaire.

So what’s his story?

From kibbutz to co-working
Born in Israel, Mr Neumann served in the Israeli Navy before moving to New York to “get a great job, have tons of fun and make a lot of money”, as he put it in a 2017 TechCrunch interview.

He enrolled at Baruch College at the City University of New York in 2002, but dropped out just shy of graduation to go into business.

One of his early ventures was a baby clothing company that evolved into the luxury Egg Baby brand.

Later, he and business partner Miguel McKelvey, an architect, renovated an office space and sublet the property. They sold the business but the idea grew into WeWork.

In interviews, Mr Neumann – who finally got his degree in 2017 – has tied WeWork’s origin story to his own, linking his itinerant childhood and time spent living on a kibbutz to WeWork’s emphasis on communal working.

He told Israeli newspaper Haaretz in 2017 he sometimes even refers to WeWork as “Kibbutz 2.0”.

Easy money
Mr Neumann’s colourful personality once charmed investors, including Japanese investment giant Softbank, a major backer of WeWork.

Softbank Chief Executive Masayoshi Son reportedly worked out the terms of one of its investment rounds during a car ride, after a 12-minute tour of WeWork’s New York offices.

Softbank’s investments helped the company reach a peak valuation of about $47bn (£37.7bn) despite steep, ongoing losses – a mismatch that has drawn repeated questions.

Mr Neumann attempted to address that puzzle, telling Forbes in 2017: “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”

Is WeWork really worth nearly $50bn?

Blurred lines
WeWork’s growth made Mr Neumann a billionaire, with an estimated net worth of $2.2bn, according to Forbes.

His glamorous personal life – his wife Rebekah is the cousin of actress Gwyneth Paltrow, while his sister Adi is a former model who was once a Miss Teen Israel – contributed to the buzz around the company.

But the mixing of work and pleasure – which had been a key element of WeWork’s culture – became a problem as the firm set out plans to go public.

Potential investors questioned the links between Mr Neumann’s personal finances and WeWork, as well as his decision to expand WeWork into areas of personal interest, such as surfing and a school.

They also raised questions about his judgment amid complaints about his hard-partying ways.

Magic fades
WeWork tried to respond to those concerns. Among other steps Mr Neumann returned $5.9m in stock he received for selling WeWork the trademark “We”.

But even the announcement on Tuesday that Mr Neumann would step aside and reduce his voting power failed to quell questions about WeWork’s long-term prospects.

Critics have long said WeWork was little more than a typical real estate company, and its shaky finances had been obscured by Mr Neumann’s personal style.

Why WeWork doesn’t work

Source: The Economist

With its stylish shared workspaces and chic occupants, lubricated by fruit-infused water and nitro coffee on tap, WeWork, a firm that rents out temporary offices, had seemed to be riding the wave of a new trend in managing desk-jockey life. But the nine-year-old private company has suffered a setback, announcing on September 16th that it would postpone an initial public offering (IPO) that had been expected to raise $3bn-4bn. Investors, it seems, cannot decide what the firm is worth.

They have four main worries. The first, and most glaring, is WeWork’s lack of profits. The firm argues that this is explained by the huge investments needed to secure economies of scale. It says that mature locations are profitable—revenues doubled during the first half of 2019 over the same period in 2018, to $1.5bn. But its net losses also rose, if more modestly, to $905m. A second concern is how the company would fare in a recession. It has taken on $47bn in lease payments but has only $4bn in committed future revenues from customers. A third bugbear is corporate governance. WeWork will issue multiple classes of shares that give its flamboyant founder, Adam Neumann, control with a minority stake.

The final concern is the company’s valuation. When it raised money in January, with funding led by Japan’s SoftBank, the firm was valued at a heady $47bn. Critics point to IWG, which offers shared offices under the Regus and Spaces brands worldwide, and has a market capitalisation of just $4.5bn (see chart). Already WeWork seemed willing to accept a much lower price tag for its flotation, seeking a relatively modest valuation of $15bn or less from its IPO. Even that seems out of reach and the company has, for now, dropped the attempt.

Mr Neumann’s claim that his firm will “elevate the world’s consciousness” is plainly silly. Even so, it is not fair to equate WeWork with the more conventional Regus. CBRE, a property-management firm, estimates that the flexible-work niche experienced “meteoric growth” of 25% in America’s top ten markets in 2018, with similar figures in big cities worldwide. WeWork’s innovations in work-place facilities have dramatically enlarged the size of the market for temporary offices. But investors need more certainty that it knows how to make money from it.

They will also be all too well aware that the shares of some stars of the new economy have disappointed of late.Uber, a ride-hailing firm, listed its shares at $45 in May on the New York Stock Exchange. Today they were trading at about $34.50. In March its rival, Lyft, had sold its shares on the Nasdaq exchange at $72; today they are worth about $48. Slack, a corporate-messaging service whose shares started trading on the NYSE in June at an opening price of $38.50, is now valued at about $26 a share. Unicorns are going a little cheaper these days.

What is going on at WeWork?

By Annie Palmer for CNBC 

WeWork released its much-anticipated S-1 filing to go public earlier this week.

The filing lays the groundwork for what is widely expected to be one of the largest IPOs of the year, but also details the myriad risks WeWork is likely to face once it goes public.

Accelerating losses, expensive lease agreements and CEO Adam Neumann’s complex relationship at the company are among the risks it faces.

WeWork’s parent company, the We Company, made a splash earlier this week with the release of its much-anticipated IPO prospectus.

The company’s S-1 lays the groundwork for what is widely expected to be one of the largest initial public offerings of the year, second only to Uber’s IPO in May.

It’s also filled with unusual items that should scare off all but the hardiest investors with a healthy appetite for risk.

Here’s a rundown:

Mounting losses
WeWork’s revenue for the first half of 2019 may have been more than double that of a year earlier, but its losses are accelerating just as rapidly. The company indicated in its IPO filing that losses ballooned to more than $900 million in the first six months of the year, which follows full-year net losses of $1.9 billion in 2018.

Massive losses have become part and parcel of unicorn IPOs, as demonstrated by the debut of fellow high-flying tech companies Uber and Lyft earlier this year, among many others. But WeWork continues to face tough questions around the sustainability of its business and few of them were answered in its S-1.

“You can say I’m growing faster, but you can’t say that if for every dollar you’re getting, you’re losing a dollar,” said Renaissance Capital principal Kathleen Smith.

Similarly, MKM Partners’ Rohit Kulkarni said in a note Friday that investors would “have to take a big leap of faith in order to believe that WeWork would show signs of a sustainable economic model” given the rising costs across its 528 locations. He said WeWork could soon find itself strapped for cash.

“At an estimated $1500-200mn in cash burn per month, we believe the company has about six months in execution runway ahead before facing a cash crunch,” Kulkarni wrote in a research note.

The company signs long-term leases with landlords that last up to 15 years, which requires it to pay hundreds of millions of dollars in future rent, according to data provider CB Insights. In the S-1 filing, WeWork said future lease payment obligations were $47.2 billion as of June 30, up from roughly $34 billion at the end of 2018.

At the same time, WeWork offers short-term rental contracts to members, in an effort to provide flexibility, collecting rent at an average of a two-year timeframe, Smith said.

This is a boon for its members, but could present a risk to WeWork’s business, as these short-term renters could up and leave at any time, leaving the company on the hook for long-term rentals.

“That mismatch can be deadly in a recession,” Smith said. “It means the company has got to be able to pay the lease costs. If for some reason there’s price pressure, lack of renewals, cancellations and they have a time where they’re not leasing out their space, that could be a very huge risk in a recession.”

The company’s declining revenue per membership also raises some concerns.

WeWork estimates a total addressable market opportunity of $945 billion, when applying its average revenue per WeWork membership to its potential member population, the filing states. However, WeWork also warned that revenues per member will decline in the future as it expands internationally into “lower-priced markets.”

“Investors want to see [average revenue per member] increase, because that can prove this idea of ancillary services,” Smith said.

Services are expected to be a long-term driver of the company’s revenue. CEO Adam Neumann has stated previously that he sees WeWork as a “global platform” for things like “space-as-a-service,” a play on the phrase software-as-a-service.

If WeWork is already having trouble increasing its average revenue per member, it could be challenging to get members to shell out a couple extra dollars on things like software or other services.

Puzzling corporate structure and unpredictable China business
After WeWork rebranded to become The We Company in April, it adopted a complicated corporate structure, called an umbrella partnership corporation, or Up-C.

In effect, this turned WeWork into a limited liability company, with The We Company overseeing it and joint ventures in Asia, as well as other related entities, such as its fund ARK Capital Advisors, which oversees global real estate management and acquisitions. (The acronym stands for Adam, Rebekah and Kids, in reference to his wife — who’s listed as a co-founder and wields significant influence at the company — and their five children.)

This chart from the S-1 shows how complicated it all is:

The Up-C structure has tax benefits for Neumann and other executives, as they’ll be able to pay tax on any profits at an individual income-tax rate, according to the Financial Times. Meanwhile, public shareholders will be subject to double taxation, since the holding company will be taxed on income and investors will pay another tax on dividends.

In its S-1, WeWork said the Up-C structure would give it more flexibility to pursue acquisitions, while keeping debts and obligations of its other businesses separate.

“Such a structure allows us to separate our WeWork space-as-a-service offering from the rest of our existing businesses, and will also allow us to hold separately any future business areas into which we may expand,” the filing states.

Kulkarni said in an interview with CNBC that WeWork’s business in Asia is still in the early stages of development, so the structure allows them to “isolate the losses” associated with it.

In the company’s S-1, WeWork noted that its contribution margin, which is the revenue left from membership and services after subtracting operating expenses of those locations, would have been three percentage points higher if it had excluded the China business.

WeWork faces unique risks with its operations in China. Business in the region is run by groups it can’t control, local laws are different in terms of the length of leases and it falls under the 2017 China Cybersecurity Law, which gives the Chinese government access to enterprise data.

Kulkarni said he believes WeWork hasn’t provided “sufficient disclosures around how the China and Asia assets are held” and that its confusing corporate structure could potentially present significant risks.

“It’s a puzzle that needs to be solved,” Kulkarni said.

An all-male board of directors
The We Company disclosed who will serve on its board of directors in its IPO prospectus. Not a single woman will serve on the company’s seven-member board, which could potentially open it up to criticism later on down the line.

Neumann is chairman of the board and is joined by Bruce Dunlevie, a founding partner of Benchmark Capital, Ronald Fish, a vice chairman of WeWork’s biggest backer, SoftBank. Lewis Frankfort, Steven Langman, Mark Schwartz and John Zhao also serve as directors.

By appointing solely male directors, WeWork is bucking the larger trend toward gender inclusive boards. As of last month, every S&P 500 company had at least one female director on its board. Having a more-diverse board is widely viewed as an avenue toward better shareholder returns.

He controls the majority of the voting rights through the company’s class B and C shares, with both classes carrying 20 votes per share compared to class A shares, which have one vote per share. Neumann’s holdings could further increase as a result of a pre-IPO award option of up about 42.5 million shares, which will vest over the next 10 years.

Complicating things, WeWork leases and pays rent on buildings owned in part by Neumann. He has ownership stakes in four commercial properties leased to WeWork, the S-1 states. Between 2016 and June 2019, the company had paid $20.9 million to the landlords overseeing these leases, which in effect includes Neumann.

Additionally, when WeWork rebranded to become The We Company in April, it acquired the trademark to “We” from We Holdings LLC, an investment vehicle with Neumann and co-founder Miguel McKelvey. As part of the deal, We Holdings LLC got an additional stake in We worth $5.9 billion.

These kinds of transactions are things investors typically don’t like to see, Smith said.

So much of the company is riding on Neumann that he was included among the risks listed in WeWork’s S-1. The company noted that Neumann is “critical” to its operations, yet it has “no employment agreement in place.”

“If Adam does not continue to serve as our Chief Executive Officer, it could have a material adverse effect on our business,” the filing states.

Furthermore, should Neumann ever become permanently disabled or deceased, his wife Rebekah, who serves as the company’s chief brand and impact officer, is one of two other people who will choose his successor. If two preselected directors are no longer serving on the board, Rebekah can also select which board members will assist her in the selection process.

WeWork acknowledges in the S-1 that Neumann has “deep involvement in all aspects of the growth” of the company, adding that he has “proven he can simultaneously wear the hats of visionary, operator and innovator, while thriving as a community and culture creator.”

By Lucinda Shen for Fortune

As of Monday’s market close, those who bought into Uber at its IPO are down roughly $1.4 billion.

But very early investors, and now, the bankers that helped take the company to market are in the green. Uber shelled out $106.2 million to a bevy of underwriters led by Morgan Stanley, per filings with the Securities and Exchange Commission. The group also includes Goldman Sachs, BofA Merrill Lynch, Barclays, Citigroup, and Allen & Company.

That comes as shares of Uber fell another 11% Monday—pulling its valuation down to $62 billion and representing a collective $1.4 billion loss for those who bought in at the company’s $45 IPO price. Assuming that Uber drivers took up all shares offered to them at the IPO price, they are collectively looking at paper losses of about $43.2 million.

On Friday, Uber CEO Dara Khosrowshahi sought to calm his employees regarding Uber’s stock price.

“Like all periods of transition, there are ups and downs,” he wrote in a note to workers.”Remember that the Facebook and Amazon post-IPO trading was incredibly difficult for those companies. And look at how they have delivered since.”

In particular—Facebook’s IPO may echo strongly with that of Uber’s. That IPO too involved Morgan Stanley in the lead role. Following a lackluster first day of trading, the bank’s fees, as well as trades stemming from its role as the lead in the deal, were heavily scrutinized. A Massachusetts regulator later fined Morgan Stanley $5 million over the IPO, arguing the underwriter had selectively disclosed information to certain clients over others.

It remains to be seen whether similar investigations will follow Uber’s IPO. But for now, count the banks as one of the few parties that have profited from this deal.

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