I’m writing this post on a transcontinental flight to London. My habit prior to boarding these flights is to download a bunch of content ranging from Amazon Prime movies to various periodicals including the Financial Times and The New York Times. I also carry a book with me — a real one, not a Kindle version. I try to avoid doing work unless it’s urgent as I find my productivity to be too low relative to working out of my office, and try to stay off the in-flight Wifi which is irritatingly slow anyway.
Scanning through the FT app on my iPad, I’ve noticed that the WeWork saga has taken another turn for the worse. WeWork’s board has agreed to a $6.5 billion bailout package from SoftBank, coming in the form of equity and loans. I predicted in an earlier post that WeWork will end up pursuing a deal with SoftBank rather than with JPMorgan, and that is exactly how it’s playing out.
There are a couple of things I find to be outrageous about this deal. The first is that founder Adam Neumann walks away with a $1.7 billion package on top of what he has already extracted from the company. That package includes a $185 million “consulting fee” in return for Neumann stepping down as Chairman and for getting rid of extra voting rights attached to his shares. SoftBank will also purchase $1 billion worth of his shares in a tender offer, and further give him half a billion dollars worth of loans so he can pay back personal debt he owes to banks. So at the same time that many thousands of WeWork employees will face the axe as the company downsizes, the founder rides off into the sunset as a billionaire. If WeWork were a public company I’m sure this wouldn’t fly but since this is a private business there isn’t much to prevent Neumann and other investors from milking the company for everything it’s got, at the expense of everyone lower down the pyramid. I’m not sure what the severance packages of these employees will look like, or how much any equity they have in the company is worth, or whether they can participate in the tender offer, but I’d imagine anything they get won’t be worth anything close to what they imagined prior to the entire affair blowing up.
The second is that valuations for private equity can be totally out of whack, particularly for Silicon Valley unicorns of late. WeWork was the most egregious among them, having been valued at $47 billion in Softbank’s prior investment round. Softbank’s current proposal values WeWork at $8 billion, which calls into deep question Softbank’s investment acumen. If the value of your investment tanks by more than 80% over a 10 month period, then yeah, you can’t blame people for thinking you’re an idiot. I’m not sure what went into WeWork being assigned a value of $47 billion in the first place. I suspect that a lot of it was driven by Masa’s intuition and appetite for risk. He’s made some very well-timed bets in the past that have paid off in spectacular fashion — Alibaba is the prime example. Perhaps there was some self-delusion going on, and I’m sure that clocking a 40% IRR over multiple decades would instill some level of bravado and a sense of invincibility in even the most modest fellow. But it’s clear that in this particular case, Son did not do his homework properly.
I’m curious about what SoftBank’s end game is going to be. Just because you got rid of the founder and installed new management at the top doesn’t mean everything is all of a sudden going to be A-OK. It’s still the same business! What will happen from here is quite obvious. WeWork will close down many locations, starting with the least profitable or least promising. They will cut overhead and layoff employees. A lot of the employees the company wants to retain (e.g., engineers) will probably end up jumping ship, given there are more enticing opportunities out there. Management might also get rid of side hustles like WeLearn. An IPO is off the table for at least a few years, and probably won’t be feasible until cash flow become positive and sustainability is proven. I would also expect Neumann to eventually step down from his role as board observer, a role that is undoubtedly humiliating for a “visionary” founder who used to have control of the company.
At this point it looks unlikely that SoftBank will be able to raise funds for Vision Fund Part Deux. Reputation has taken a hit. We are 10 years into a bull market. Silicon Valley unicorn valuations are out of whack even with the WeWork reset. A recession is inevitable at some point and I suspect we will get one within a couple of years (the S&P 500 is going to be down at least 30% from highs).
