Getting carded by Wall Street: wework sets sights on public listing through the spac door
Like an underage kid who slipped into the pub through the alley door after he was carded out front by the bouncer and denied entry, shared office space landlord WeWork is getting ready at long last to take its seat on the barstool and draw from the tap of the public markets. However, the company is now shorn of its grandiose ambitions to remodel community living and education as complements to its refined communal work environment, to say nothing of the $40 billion that’s been stripped from its peak valuation in 2019 as it teetered on the precipice of an IPO before pulling back. WeWork will instead now settle for a considerably more modest $8 billion valuation via SPAC sponsor Menlo Park, California-based BowX Acquisition. The publican - and public - might do well to consider whether it can pay its discounted tab, though.
The Wall Street Journal reported in late May a $245 million payout to WeWork founder Adam Neumann, reportedly clearing one of the remaining hurdles before the BowX acquisition results in a public listing for the company. Principal backer SoftBank had previously given Neumann an exit package including $185 million in consulting fees, the right to sell $972 million in stock and generous refinance terms for $500 million in debt, though the fund later made an about face on the stock sale terms and discontinued paying the consulting fee.
The manner in which SPACs report won’t require BowX to disclose much of the information about WeWork that the leasing company was required to do so in its registration statement when it aspired to its IPO. The related parties transaction section in its securities registration alone disclosed, among other troublesome signs for the company and potential investors, that Neumann was frontrunning WeWork leases by investing himself in properties it added to its portfolio; a voting structure that left Neumann in near complete control of the company; a $5.9 million payment to Neumann for his assignment to the company of the We trademarks; generous loans and credit lines to Neumann and a $200,000 payment to an unidentified Neumann family member for event hosting, among other troubling signals. Neumann, of course, is no longer part of the company he created and molded, however.
He is, however, the principal subject of a recent documentary on the company, WeWork: Or the Making and Breaking of a $47 Billion Unicorn. I was fascinated with the WeWork story as it unfolded in real time, and founder Neumann’s ability to sell a straightforward real estate play masquerading as a tech company to both deep-pocketed investors, and a credulous public. So, as the company resurfaced in the news in advance of its BowX transaction, I decided to watch the film.
It paints a picture of Neumann as a charismatic figure whose messianic vision was given focus by an ambitious wife guiding him at his side. WeWork co-founder Miguel McKelvey appears in the film to have been marginalized and nearly written out of the enterprise by Neumann’s assumption of center stage accompanied by his wife who herself ended up with an executive title.
One of the things we do at 221B Partners is help clients solve information-related problems. One way we do that is through the identification of risks, or potential risks, to their interests, assets and operations. For our clients who invest in equity and debt, this usually involves a thorough examination and analysis of the background of key executives or directors vis a vis their prospective investments. Or, it could involve digging under the surface of an asset which seems grossly inflated.
New York University marketing professor and WeWork skeptic Scott Galloway did just this. Dubious of the company’s frothy valuation, Galloway undertook what I like to think of as basic shoe-leather due diligence: he went about New York City cataloging the company’s office space and came to a startling conclusion: WeWork’s leased premises were valued more than the aggregate value of the real estate in which they were leasing space. While the film depicts Wall Street aghast at the first peak behind the curtain of WeWork’s finances and operations offered by its registration statement - WeWork called off its IPO days after the statement was published - what resonates with me as an investigator is the basic enterprise exhibited by Galloway looking under the hood. And to that, I say: pour that man a drink. And, remember: the next time charisma isn’t just the play but the sale, put on your shoes and do a little homework. Is the kid at the bar legitimate, or just pretending to be.
Andrew Keith, Partner