WeWork Targeting a September IPO

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

The impending IPO of WeWork – a company that provides shared workspaces for enterprises and startups – is currently a hot topic in the financial world as nary a day goes by without a significant development taking place in this saga. Now details have emerged that WeWork’s parent company is planning to curb the sweeping powers enjoyed by Adam Neumann, the co-founder and CEO of WeWork, amid broad changes in the company’s governance model in order to ensure that the IPO of the cash-strapped company is conducted in September 2019.

WeWork’s corporate governance model resembles a slow-motion train wreck. Mr. Neumann is a designated owner of some of the buildings leased by the company as a tenant and, consequently, has collected rent from the company for a number of years constituting a clear conflict of interest. Moreover, the company has loaned funds multiple times to Mr. Neumann at very low interest rates. Furthermore, Rebekah Neumann – Adam neumann’s wife and CEO of the company’s education business called WeGrow – is currently WeWork’s chief brand and impact officer and possesses the privilege of choosing Mr. Neumann’s successor in case of his death or disability should either of the two eventualities occur within 10 years of the IPO. Finally, Adam Neumann possesses super voting rights that accord him 20 times greater voting power as compared to ordinary shareholders.

Arm set to cut hundreds of positions after deal with NVIDIA crashes, estimated 15% employed could be affected

In order to rectify these egregious breaches of corporate governance standards and to reassure investors, WeWork’s parent company is now planning to reduce Adam Neumann’s super voting rights and to strip the power of choosing his successor from his wife. Moreover, WeWork is also planning to transfer those properties that are owned by Mr. Neumann and leased by the company to a separate entity as a part of corporate ring-fencing. Furthermore, the company has already announced the addition of a new director.

Despite these sweeping changes, calls to shelve the IPO are unlikely to die down due to the enhanced vulnerability of the company’s business model to a downturn. The company’s strategy is based on capturing the differential by leasing properties on a long-term basis from landlords at a lower rental cost and then renting these properties to enterprises on a short-term basis at a higher rental cost. In a recession, as companies reduce their workforce, the short-term rents decline to such an extent that the long-term rents are no longer covered. When this factor is combined with the lack of geographic diversification, the shock from a potential recession is only amplified.

When WeWork’s corporate governance issues are combined with the business model vulnerability to a recession, it is hardly surprising that the company’s IPO valuation has declined from $47 Billion in January 2019 to a current low of $15 - $20 Billion. Consequently, Softbank (TYO:9984) – the largest investor in WeWork to the tune of about $10 Billion – has been aggressively lobbying to shelve the IPO (you can read our previous coverage here) as it stands to lose anywhere between 42 percent and 56.5 percent of its original investment in the company at current valuations. Even so, WeWork’s parent company is targeting a listing on NASDAQ in the week of 23rd September 2019 and is planning to actively market the shares to investors beginning next week.