From the day SoftBank placed a jaw-dropping $47bn valuation on WeWork in January, the co-working company’s fate was largely in the hands of two people. Adam Neumann, the guru-like cofounder who wielded outsized control, and Masayoshi Son, the SoftBank founder who became his largest investor, were known for egging each other on to expand ever more aggressively.
On Tuesday, after a failed initial public offering left the business facing the prospect of burning through its cash within weeks, one man displaced the other. Mr Neumann surrendered his high-vote shares and chairmanship in exchange for Mr Son’s tech and telecoms company saving WeWork from an urgent cash crunch.
The dizzying fall that took the valuation of Mr Neumann’s creation from $47bn in January to $8bn swept him from command. Yet it was cushioned by a near-$1.7bn package Mr Son offered his protégé: Mr Neumann can sell SoftBank $970m worth of shares, tap a $500m line of credit and receive a $185m “consulting fee”, according to people familiar with its terms.
The rescue leaves questions hanging over both men’s companies, however, and its fallout has profound implications for several other players in the WeWork drama.
Mr Neumann has lost the special class of shares that just two months ago were supposed to give him 20 times other holders’ voting rights; he has surrendered his chief executive’s role, his chairmanship and his jet; he has seen his wife and other relatives taken off the company payroll; he has abandoned plans to charge the company $5.9m for the “We” brand; and he has seen his fortune plunge from a peak of about $13bn.
But Mr Neumann has emerged a billionaire. He had already sold hundreds of millions of dollars worth of stock before attempting to take WeWork public.
With under 10 per cent of the company’s equity and voting rights and his position downgraded to that of a board observer, Mr Neumann’s sway will be severely limited but he has secured the right to nominate two directors, people briefed on the matter said. What remains unclear is how the man who was the face of WeWork’s mission “to elevate the world’s consciousness” intends to use that remaining influence.
Mr Son had committed more than $10bn to WeWork before its failed public offering, and is pouring in billions more — even though the company’s equity is now worth just $8bn.
SoftBank built its stake at valuations between $20bn and $47bn and concerns that it would need to write it down have contributed to a 27 per cent slide in the Japanese group’s shares over the past six months. This week, Bernstein analyst Chris Lane calculated that a revaluation of WeWork to just $8bn would crystallise losses on SoftBank’s interests of about $3.6bn, of which $2.2bn would be from its direct investment.
On Tuesday, Mr Son suggested that his confidence in WeWork was undimmed, brushing aside its crisis of recent weeks as just “growth challenges” that were common among “the world’s leading technology disrupters”.
Installing Marcelo Claure, SoftBank’s chief operating officer, as WeWork’s executive chairman echoes a strategy Mr Son has deployed before when other investments soured. Mr Claure, as chief executive of Sprint, played a critical role in improving conditions at the SoftBank-backed US carrier before its sale to rival T-Mobile.
“WeWork is in crisis and Marcelo Claure will be instrumental in getting the company back on the right track,” said Pierre Ferragu, an analyst at New Street Research.
Pointedly, though, SoftBank has decided not to treat WeWork as a subsidiary, even though it will own 80 per cent of its stock. By not taking official control it will avoid having to consolidate WeWork’s losses on its own balance sheet.
SoftBank Vision Fund
Mr Son has also had another goal in mind in bailing out WeWork: its plunge in value threatened returns on the SoftBank Vision Fund, the $97bn pool of capital backed by Saudi Arabia and Abu Dhabi that invested in WeWork alongside SoftBank itself.
The deal is a face-saving measure for Mr Son, who pitched the Vision Fund to SoftBank’s investors as a way to own minority stakes in promising technology companies without the Japanese group having to take on too much debt.
Control over WeWork would have conflicted with Mr Son’s strategy to influence multiple industries without SoftBank having to manage the individual companies it backed. SoftBank is offering shares in WeWork in exchange for the Vision Fund’s interests in certain international joint ventures, at a lower price than its tender offer for WeWork equity.
People close to the company said Mr Son was determined not to allow WeWork to taint the fund’s performance at a time when he is hoping to raise a second, even larger, Vision Fund.
SoftBank is offering to spend up to $3bn buying out other WeWork investors. Mr Neumann can tender almost $1bn of his shares, but that will still allow other investors to get more than $2bn out of the company. And it was unclear how much of his stake Mr Neumann would tender, leaving the possibility open that investors and employees might be able to cash out a larger stake.
The paperwork WeWork filed for its abortive IPO named Benchmark Capital as its largest shareholder after Mr Neumann and SoftBank, with 32.6m shares. The group fared better than most, leading an investment round in WeWork in 2012 when the company was valued at just under $100m. Now, at a tender price of $19.19 per share, the initial Benchmark stake is worth $626m, more than 40 times that investment.
No investor other than SoftBank invested at WeWork’s peak valuation of $47bn, but others who bought in after Benchmark are likely to have suffered losses.
Some have taken a reputational hit too: Nori Gerardo Lietz, senior lecturer of business administration at Harvard Business School, questioned how investor representatives on WeWork’s board could have let it get so close to crisis.
“Bruce Dunlevie, the cofounder of Benchmark Capital, and his partners have centre court seats in Uber. They saw Travis Kalanick’s bad behaviour and all the consequences of it,” she said, arguing that investors in Benchmark and other WeWork backers including the Vision Fund and Hony Capital “should be livid [because] they entrusted the general partners to be prudent stewards of their capital and they were not.”
Having missed out on the lucrative payday it would have collected for leading a successful WeWork IPO, JPMorgan Chase has had to settle for “tens of millions of dollars” for its work in recent weeks assembling a rival $5bn debt package.
Led by Jamie Dimon, the Wall Street lender had developed close ties to WeWork as it attempted to woo the company as a client. Mr Dimon was among the senior bankers to whom Mr Neumann would often turn for advice, and Mary Erdoes, head of JPMorgan’s asset management unit, was closely involved in the planned listing.
But the WeWork board’s decision to use the SoftBank financing package — one that multiple people briefed on the matter said was the deal the company had always planned on choosing — nonetheless proved favourable for JPMorgan and two other lenders that had hundreds of millions of dollars in personal loans out to Mr Neumann.
WeWork employed more than 12,500 people as of June this year, but staff have been bracing for job losses in the thousands, amid reports that WeWork has only been delaying the cuts until it had enough cash to make severance payments.
Employees who were given the chance to tender some of their shares at a price of $54 per share in January are now being offered just $19.19 per share — a significant hit for many who had accepted stock as part of their compensation and whose options are now underwater. Some staff who took out personal loans to exercise their stock options early are grappling with potential losses as they debate the cut-price deal.
Several insiders contrasted the likely fallout for WeWork’s staff with the sums Mr Neumann stands to get even after overseeing a collapse in its value. One person who left in recent months described the money the cofounder would receive in the deal as “utterly objectionable”.
“I wasn’t angry — until today,” he said.
The two men who replaced Mr Neumann as chief executive, Artie Minson and Sebastian Gunningham, have also drawn the ire of employees. Morale at the company’s Chelsea headquarters in Manhattan has sunk since the IPO was pulled, with several employees pointing to the response from management as lacking. One current employee said staff were taken aback when Mr Minson expressed resentment over the stream of leaks earlier this month, telling employees that they should act like a family, one that fights on the inside but is a united front on the outside.
“Artie was CFO when [the] company lost 83 per cent of its value,” the person said, who characterised Mr Minson as “just as guilty as Adam” for the situation confronting the company.
“The vision remains unchanged,” Mr Son said as he explained his decision to inject still more money into WeWork, and people close to the rescue talks emphasised that there is still demand for the company’s offering.
Now, however, Mr Son and Mr Claure have to prove that a company that has never made a profit can do so, and avert the need to keep raising fresh funds. One rival said that WeWork’s rate of cash burn could make it necessary for the Japanese group to inject further capital, although in its announcement of the rescue deal SoftBank emphasised its belief that it could generate positive free cash flow and profits.
Mr Minson and Mr Gunningham have already sharply cut back WeWork’s plans for opening new premises but some observers believe it may have to reconsider which of its existing sites can make the profits SoftBank will need to see.
Alex Snyder, assistant portfolio manager at CenterSquare Investment Management in Philadelphia, said WeWork’s next step was likely to be “a very lengthy review of its existing sites, given that they grew so fast in such a short time”.