By Hasan Chowdhury, James Cook and James Titcomb
In June 2018, the man in control of the giant $US100 billion ($145 billion) Vision Fund run by SoftBank, a Japanese technology conglomerate, excitedly revealed to a London artificial intelligence conference that office space rental firm WeWork was in talks to raise funding at a $US35 billion valuation.
"A year ago, we were told that WeWork was overvalued at $US17 billion for real estate," Rajeev Misra told the packed main auditorium of the conference as the sound of the hand dryer in the nearby men's toilets threatened to drown him out.
WeWork co-founders Adam Neumann and Miguel McKelvey.Credit: Bloomberg
"Guess what, they are looking to raise capital at $US35 billion today. Maybe it's overvalued, but I believe they'll be a $US100 billion company in a few years." Misra's comments seemed to catch both WeWork and SoftBank by surprise. Misra was clearly thrilled to announce the firm's ballooning valuation - SoftBank is WeWork's largest backer and has gambled more than $US10 billion on the business's fate.
Now, just over a year later, Misra's offhand remark about WeWork potentially being overvalued is looking increasingly ominous. The firm's $US47 billion ($69 billion) valuation in its most recent round of funding at the start of 2019 was slashed to about $US20 billion this month as WeWork prepared to go public in New York. Last week, the firm's valuation ahead of the planned float was reportedly as low as $US12 billion.
This week was set to be WeWork's chance to hit the road and meet investors. With an imminent float on the cards, the company was readying itself for a parade through Wall Street that would make it an investor darling by the end of the roadshow.
In reality, quite the opposite has happened as WeWork has slammed the brakes and reportedly delayed its float until next month, raising questions about its long-term prospects and investor confidence. Even SoftBank, its biggest cheerleader, reportedly urged the business to delay its float over concerns around its dropping valuation.
The high-profile drops in valuations and uncertainty about the timeline of the float came after Wall Street investors questioned WeWork's ability to make money. "It's disguised itself as a high-growth company," says William de Gale, portfolio manager at BlueBox Asset Management and ex-technology portfolio manager at BlackRock.
At the heart of WeWork is a business model that depends on leasing property from landlords and then renting it to businesses or individuals in need of workspace. For this reason, analysts have indicated an uncertainty about its status as a tech company.
But in a world where technology firms earn a premium mark-up, De Gale thinks investors have turned a blind eye to a company's realistic potential in the name of growth, even if "the economics make no sense whatsoever". He says: "The problem is this has been massively inflated by SoftBank, which has raised the biggest ever venture capital fund and dumped it all into this sort of company."
Others have noted the opaqueness of WeWork's float prospectus, which begins with the message: "We dedicate this to the energy of we - greater than any one of us but inside each of us." Rett Wallace, chief executive of Triton Research, a data analytics firm, said it is a "masterpiece of obfuscation".
What cannot be obfuscated, of course, is the bottom line. In 2018, WeWork's revenues climbed to $US1.8 billion, from $US866 million the previous year, but net losses doubled to $US1.9 billion. In the first half of 2019, net losses were $US904 million.
The firm's continuing losses are not the kind of rosy results which investors are keen to see on the books of firms going public, but the firm is in a tight spot. To access a $US6 billion credit line secured from banks in August, it must go public before the end of 2019 and raise at least $US3 billion.
Given the giant sum at stake, it is no wonder WeWork has been driving forward with plans for an initial public offering. It has even issued two embarrassing updates to appease financial regulators, rowing back on several key parts of the business.
After the media zeroed in on a deal the firm had carried out with its chief executive, Adam Neumann, WeWork reversed the transaction. WeWork had given Neumann $US5.9 million in extra shares in return for the trademark for the word "We", which Neumann purchased before WeWork rebranded to The We Company earlier this year.
Last week, the business also substantially reduced the power of Neumann and his wife, WeWork co-founder Rebekah Paltrow Neumann. The firm's high-vote stock, held by Neumann, has had its voting power slashed from 20 votes per share to 10 votes per share.
Neumann's wife had also been given a vital role in running a succession committee which would select WeWork's next chief executive. This plan has also been scrapped, with WeWork citing "market feedback" as the reason for the changes.
Analysts at investment banking firm DA Davidson welcome the changes, in a note sent yesterday, but said that the changes "do not go far enough in our opinion." The note reads: "We want to see a more independent board to better protect shareholder interest."
As a young company, WeWork is yet to have weathered the tighter end of harsh macroeconomic conditions such as a recession, leaving others wondering whether it can survive that sort of tumult.
When, and if, WeWork will hit Wall Street remains a mystery.Credit: AP
"It [hasn't] been tested by a hard downturn, the type of recession where big companies retrench, taking work back in-house from outsourcers and small start-ups," says Fraser Thorne, chief executive at Edison Group, a consulting firm. "These are just the type of companies WeWork targets."
In hard times, WeWork may find its valuation more difficult to justify versus competitors such as the Workspace Group and IWG, which Michael Hewson, chief market analyst at CMC Markets UK, points out are "much more modest at £1.7 billion ($3.1 billion) and £3.5 billion respectively".
He adds: "It is certainly true that the shared office space business model is a successful one, given that Workspace Group and IWG here in the UK have both seen significant growth in the last 10 years, but to argue that it is a multibillion-dollar business is stretching credibility. More importantly, both companies are profitable."
Scepticism and mockery is nothing new for WeWork. For years, it has been publicly accused of being a "cult". But the unease of investors and analysts became too much to bear as WeWork faced a public market debut that could have seen its valuation dramatically slashed.
The business insists that it still plans to float by the end of the year, and its amended filing has given analysts a hope that it will rein in some of the quirks that have given them pause in the past.
But the clock is ticking and Neumann's recent efforts to placate investors seem to have done little to endear WeWork to Wall Street so far. He may need more than the "energy of we" to get the year's most controversial flotation back on track.
Telegraph, London