The We Co., which is gearing up to go public next month, has attracted a whole lot of analyst and media attention. Still known by most people as WeWork, the company aims for an initial public offering valuation of $47 billion, implying radical -- and profitable -- growth for years to come. Unfortunately for those hoping to buy in on a growth opportunity, WeWork shows little sign of making good on its promised profitability. We have made this point previously, determining that the WeWork IPO represents a significant opportunity for the short side.
Even if we were to set aside the inherent red flags pervading the WeWork business model, however, it is hard to come away with anything but a negative impression of the sprawling co-working and office leasing business. Indeed, the company’s distressing and pervasive pattern of poor corporate governance makes it an unattractive investment, even if its core business was not so alarming.
Self-serving behavior
Adam Neumann, WeWork's co-founder and CEO, is a man who loves big visions and grandiose ambitions. This was expressed quite clearly in WeWork’s S-1 filing ahead of its IPO:
“Our mission is to elevate the world’s consciousness. Philosophically, we believe in bringing comfort and happiness to the workplace.”
Yet, there seems to be much more “me” than “we” where WeWork’s boss is concerned. Indeed, Neumann has taken every opportunity to profit personally, often seemingly at the expense of the company he leads. These actions range from the gross to the merely crass.
Most notably, Neumann has taken loans from WeWork directly. He used the proceeds of these loans to buy properties, which he subsequently leased back to WeWork. While efforts have been made to justify at least some of these transactions, and while the company has also lately worked to mitigate some of the troubles that such self-dealing behavior can create, it is still an extremely distressing activity for a leasing company to engage in.
Neumann has milked WeWork in other ways as well. For example, he directed the company to pay him $5.9 million personally in order to use the “We” trademark when it rebranded as the We Co. last year. Apparently, his ownership of a personal holding company, We Holdings LLC, was enough in his mind -- and his company’s -- to justify the payment.
Control issues
WeWork uses multiple classes of shares to ensure its CEO maintains control, even after multiple funding rounds and an IPO. Such setups are not terribly uncommon, especially among tech companies. Mark Zuckerberg, for example, has retained effective control of Facebook Inc. (FB, Financial) thanks to the social media company’s multiclass share structure.
WeWork, however, seems to take every tech company trope to its extreme. Neumann owns three classes of shares, including those needed to maintain an iron grip on the company going forward. These shares do not, however, revert into common stock if sold or given away. As a consequence, Neumann has the ability to sell controlling interest in WeWork at his discretion. Given that he has hundreds of millions of dollars in loans secured against his stake in WeWork, control could become a serious issue down the line.
Thus far, Neumann’s efforts to extract value from WeWork for himself has not diminished his control of the company. Moreover, he has turned the company into something of a family business, putting several relatives in important roles across the business. That control has been so deeply embedded that it may even survive Neumann himself: If the CEO is permanently incapacitated or dies in the next decade, a three-person committee will decide his successor, a committee that includes Neumann’s wife.
Verdict
The problems facing the WeWork IPO are manifold, but its corporate governance issues alone should be enough to give would-be investors serious pause. The sheer scale of the problems were summed up in a recent commentary published by Stratechery:
“The tech industry generally speaking is hardly a model for good corporate governance, but WeWork takes the absurdity [to] an entirely different level...Everything taken together hints at a completely unaccountable executive looting a company that is running as quickly as it can from massive losses that may very well be fatal whenever the next recession hits.”
In sum, even if WeWork’s financials were not so obviously toxic, its corporate governance track record and structure make this IPO virtually uninvestable from the long side.
Like Lyft Inc. (LYFT, Financial), which fell sharply following its IPO, we expect WeWork’s valuation to not long survive contact with public market scrutiny.
Disclosure: No positions.
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