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John Engle
John Engle
Articles (306) 

Will WeWork Be Allowed to Go Public?

Questionable corporate governance has investors sweating about IPO risks

March 14, 2019 | About:

WeWork, or the We Company as it now wishes to be known as, is an extremely odd creature. Its principal business consists of providing coworking space for companies and individuals. That sounds mundane enough, yet WeWork claims the far grander (and grandiose) mission to “elevate the world’s consciousness.” What that means exactly is anyone’s guess. That could spell serious trouble for a money-losing company currently valued at a staggering $47 billion.

If anyone were to understand WeWork’s mission, it ought to be CEO Adam Neumann. Unfortunately, his leadership has left much to be desired. Investments and acquisitions driven apparently by his personal whim cast Neumann in a highly suspect light.

Investing in the boss’ passions

WeWork’s strategic drift has intensified in recent years thanks to Neumann’s increasingly strange use of company funds. A host of acquisitions and investments in a number of companies seem to diverge very significantly from WeWork’s core business and value proposition. Indeed, the only thing uniting most the decisions is they align with Neumann’s personal passions:

  • In 2017, WeWork dove into the wave-pool business with a $42 million cash-and-stock buyout of Wavegarden. A wave-pool company seems like a bizarre acquisition for an office space company until one realizes Neumann is an avid surfer. Evidently, the CEO’s whim drove the decision, with no strategic justification ever being offered. Barely a year after the buyout, WeWork had written down the value of its investment to zero.
  • In late 2018, WeWork led a $32 million investment round in Laird Superfoods, an organic food company headed by Laird Hamilton, a renowned professional surfer. Neumann had vacationed with Hamilton in Hawaii mere weeks after the investment was closed. How a niche natural food company can help WeWork’s mission, or its core business, remains a mystery.

Among other questionable investments, WeWork has also founded a high-end private school, dubbed WeGrow. Apparently, this initiative was the product of Neumann’s dissatisfaction with the schooling options available to his own children. The company has suggested WeGrow might evolve into a non-profit one day, but that might be a stretch for a school currently charging $42,000 per student.

Investors getting nervous

A major concern facing WeWork’s shareholders is Neumann’s near absolute power to do as he pleases. Despite being a minority shareholder, WeWork’s corporate structure is designed in such a way as to give the CEO near total control of its decisions.

Neumann’s rigid control is not so unusual, in and of itself. Mark Zuckerberg of Facebook (NASDAQ:FB) and Evan Spiegel of Snap Inc. (NYSE:SNAP) have used similar methods in order to maintain control of their respective companies - even after they went public. What makes Neumann’s case so unusual is just how brazen he has been with his use of company cash to fund his passions.

Of course, Neumann’s behavior has hardly gone unnoticed. A growing number of WeWork investors appear to be getting worried. For example, SoftBank’s Vision Fund, which has poured billions of dollars into WeWork in recent years, has been forced by its Middle Eastern backers to pull back from its commitments.

Cutting off the money-tap

WeWork’s loose corporate governance could present serious issues for the company in the relative near term. It has signaled the desire to eventually go public. That may be the only way it can hope to pull in sufficient capital to sustain operations, let alone fund further growth. The company is a voracious consumer of cash, reporting a $1.2 billion loss for the first nine months of 2018.

Venture capital and private equity investors have proven to be remarkably willing to stump up cash so far. A flood of capital allocations to private assets in recent years has given these alternative investors unprecedented amounts of firepower. But even their deep pockets cannot - and will not - fund WeWork forever. The company’s backers expect to enjoy an eventual exit, probably through an initial public offering. 

A $47 billion valuation at IPO would sound like a heavy lift for the money-losing company under the best of circumstances. Neumann’s penchant for spending WeWork’s money as he pleases makes the prospect even harder to swallow. According to Gene Munster of Loup Ventures, an early backer of WeWork, Neumann’s actions would not be tolerated at a public company:

“It’s concerning because you are mingling personal and company interests and that rarely turns out well. Public investors are less tolerant of this.”

WeWork will have to tap public markets eventually. Unfortunately, Neumann’s behavior may make such a path difficult to navigate.

Verdict

WeWork looks increasingly like a ticking timebomb. A mammoth valuation, gargantuan losses and highly suspect corporate governance do not make for a compelling investment thesis. As we discussed in a prior research note, WeWork’s growth story is already unraveling. The only question now is whether the music stops before it can go public or not.

At present, it looks like WeWork will never make it to the IPO stage; at least, not without first undertaking both a significant governance overhaul and haircut to its rarefied valuation. That is unfortunate, from our perspective anyway. We would be very enthusiastic about any opportunity to short this radically overvalued, structurally unprofitable behemoth.

Hopefully, WeWork can muddle through and go public before things really start to fall apart. If it does, it will likely be one of the most obvious shorting opportunities in years.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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