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October 20, 2019

Why WeWork Should Have Never Been in the IPO Business

WeWork isn’t working for greedy investors who aided and abetted its fake accounting.

It isn’t working for greedy banks who sucked up to WeWork’s founders to get business.

It isn’t working for business partners of the company’s founders who joined forces with them to profit on questionable side deals that would be paid for by WeWork’s public investors, if it was to IPO.

WeWork isn’t working for a lot of people who you shouldn’t feel sorry for, because they deserve what they might end up with: a bankrupt WeWork.

Unfortunately, WeWork isn’t working out for a lot of innocent people either.

Here’s the short version of what really happened at WeWork. It’ll make you cringe…

How WeWork’s Problems All Got Started

WeWork, founded in 2010 by Adam Neumann, his wife Rebekah, and Miguel McKelvey, is nothing more than a commercial real estate company masquerading as a new age, “let’s share workspace” model in the overhyped sharing economy.

What doesn’t work accounting-wise, which I’m giving you the super-short version of a really convoluted and suspect system of accounting, is that the company buys and leases commercial buildings, renovates them, and leases workspace out in its buildings to individuals and companies.
What’s idiotic about the straight-up accounting in the company’s formula is that WeWork’s cost of buildings and leases are all long-term and fixed. They’re not going anywhere and will be more expensive over time based on escalation clauses.

But their revenue from rentals are all short-term, and worse, their leases aren’t fixed, meaning renters are only chipping in for the term of their leases, some of which are only weekly or month-to month.
According to WeWork’s IPO filings, the company has $47 billion in long-term lease obligations. That makes it, according to Bloomberg, one of the world’s largest lessees.

Through 2020 the company expects $4 billion in rent payments. That’s all that’s on the books.
How’s that for a mismatch?

WeWork pulled its August-slated IPO when word got out about the numbers in financials accompanying its pre-IPO S1 filing. Investors ran when they saw how much control founders Adam Neumann and his wife had.

The IPO, which based on the last round of financing the company got from Softbank valued it at $47 billion, had to be cut to attract fast running investors who shook their heads at the S1.

Even after knocking the company’s value in half, then down to $15 billion, the company’s IPO bankers, led by JPMorgan Chase, pulled the deal citing a lack of investor interest.
Serves them all right.

The Failed IPO Damage Is Done, but the Financial and Legal Ruin Is Just Getting Started

SoftBank, which now owns about a third of the company, put in its last round of funding to get the valuation up before it IPO’d, which would be an exit path for SoftBank if the company’s public shares were to hold their value high and long enough.

Now, as WeWork faces an immediate cash crunch to the tune of $3 billion to $5 billion, SoftBank’s looking at ponying up some of that needed cash to save its embedded investment.

Jefferies, the investment bank that bought a .8% interest in WeWork in the private market to supposedly get in on the expected IPO underwriting bonanza, already took a $146 million write-down on its position.

Goldman Sachs is expected to take a $264 million write-down on its 1.4% stake in the would-be fee generating elephant.

And then there’s JPMorgan Chase, headed by Jamie Dimon, who Adam Neumann calls his personal banker.

JPM took a 4% stake in WeWork in the private money game. It’s also lead lender in a $500 million line of credit it set up for the Neumanns. They’ve taken $380 million of that credit line down, which they collateralized with WeWork shares.

Besides paying up to become the company’s lead IPO banker and lending the Neumanns hundreds of millions, no-one knows what other deals JPM has immersed itself in that serve Adam Neumann’s greed.

Neuman himself is guilty of so much self-dealing that he should be investigated by the SEC, if not some other regulatory or criminal crunching bodies.

Some of Neumann’s side-deal partners, like Hudson Bay, who partnered with Neumann on the $850 million deal for WeWork to buy the old 700,000 square foot Lord & Taylor building in Manhattan, at a mere $105 a square foot while other equivalent commercial real estate was selling at $88 a square foot, are already regretting dealing with the two-sided, two-faced Neumann.

He’s two-sided, because he went in on buying control of the Lord & Taylor building so his partnership could sell it to WeWork. In other words, Neumann was on both sides of the transaction. One side he would gain personally from, and the other side he’d have WeWork pay up for. That’s two-faced.

WeWork’s founders and coddling insider buddies are getting what they deserve.

It’s Not Over ’til the Bankruptcy Stings
WeWork could end up bankrupt, which it should.

Or it might get bailed out by SoftBank who would have to throw billions more at the company to save the billions that its already sunk into the sharing economy nightmare.

Or, JPMorgan Chase, banker to the Neumanns and WeWork, could put up more money to save them.

While one side of me would like to see WeWork go belly-up, I’d be mortified by the losses the company’s thousands of workers would suffer, which wouldn’t only be their jobs but the futures they’ve planned and probably financed based on the company’s high flying valuations and their grubstakes in the company.

This story is going to be a book and a movie, it’s that juicy.

It’s also a lesson on greed and how Wall Street both aids and abets a good money-making story, no matter how stupid, fake or fraudulent it is, if they can extract their pound of flesh.

Morgan Stanley just hired an Ivy League computer scientist to head up their new Artificial Intelligence efforts.

Goldman Sachs brought in an AI expert from Amazon, and JPMorgan is getting into it as well. But try as they might, they are likely still years – even decades behind Alpha-9.

It’s an unprecedented combination of raw computing power, blazing processing speed, and other-worldly intelligence… and now, you can become a millionaire in 12 months.

Stay tuned, this story is going to expose a lot more than meets the eye today.

Courtesy of Shah Gilani, Wall Street Insights & Indictments 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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