Move over, Theranos, the biggest scandal on investor’s radar these days is WeWork and what happened to their stock. The company has been hogging the headlines in recent months for negative reasons.
Once considered the most valuable U.S. startup, WeWork has not only seen its co-founder Adam Neumann step down as CEO but also shelved plans for an initial public offering (IPO).
This has left many people wondering: What really went wrong?
Ahead, we dive into the story, breaking down how Neumann went from promising business genius to scandal-ridden executive, bringing WeWork stock down with him. If you are not yet familiar with Adam Neumann or WeWork, then buckle up — it’s a wild ride.
What is WeWork?
WeWork is a New York-based startup that runs trendy shared office spaces. The company was founded by Neumann and Miguel McKelvey in 2010. It was originally known as WeWork before rebranding as the We Company earlier this year to make room for its spin-off businesses Rise by We, WeLive, and WeGrow.
The company leases workspaces, refurbishes them and then rents them out to tech firms, entrepreneurs, and startups. It offers a full suite of services, including mail delivery and pickup, technology, communal spaces, fruit and fresh brewed coffee to its customers.
WeWork started as a single space in lower Manhattan and has expanded to 528 locations in 111 cities across 29 countries.
As of June 2019, it had more than 527,000 memberships, half of which were outside the United States. The company’s IPO had been one of the most highly anticipated public offerings of 2019 until it imploded.
But before we go any further, let us first understand what is meant by the term initial public offering (IPO).
IPO explained
An IPO is the initial public offering of shares of a company’s stock for the first time. It is the first time a private company sells shares to the general public on a stock exchange in order to become a public company and to raise equity capital.
Private companies often have few stockholders, typically the founders and institutional investors. The general investing public has no way to own shares in a private company except from asking the owners to sell to them, though the owners are not obliged to do so. After a company goes public, any investor can buy its shares.
WeWork Stock
WeWork wanted to go public this year.
The company released a press release on April 29 saying it had filed confidential paperwork with the U.S. Securities and Exchange Commission (SEC) for an initial public offering. According to the Wall Street Journal, it planned to list its shares under the ticker symbol “WE” on the Nasdaq Global Select Market.
WeWork later publicly filed for an initial public offering in mid-August.
The company sought to make its Wall Street debut at a valuation of $47 billion, thanks to Japanese investment giant Softbank. That figure that would have made it one of biggest U.S. IPO this year.
The company later trimmed that valuation in half to below $25 billion. Then, on Sept. 30, it issued another press release saying it had decided to withdraw its initial public offering filing, delaying IPO indefinitely.
So, what triggered the collapse of its initial public offering?
Why WeWork IPO failed
- Lack of investor appetite
WeWork’s IPO paperwork left behind negative press and a warning to investors. The company is burning cash consistently and its losses grew to $1.9 billion in 2018 from $900 million a year earlier, according to the paperwork.
They had $2 billion in cash (including $692 million of restricted cash) as of Sept. 2019 compared with slightly more than $3 billion in cash as of June, meaning it burned $1 billion of cash within three months. Those numbers raised eyebrows and turned off potential investors.
WeWork’s move to slash its valuation to $25 billion further stoked fears that it real value had been overhyped.
- Neumann’s behavior and apparent conflicts of interest
Neumann’s decision to mix work and pleasure is perhaps one of the gravest mistakes that he ever did as CEO of WeWork. Analysts questioned his judgment after the Wall Street Journal published a damning report detailing his hard-partying ways, and alcohol and drug use.
The Journal said that tequila was a constant presence in his work life and at WeWork events. According to the report, the company’s offices even kept bottles of his beloved Don Julio 1942 tequila, in case he ever showed up.
The publication also said that his Gulfstream G650 private jet was once recalled in Israel after the flight crew found marijuana stuffed in an onboard cereal box.
Worse, the 40-year-old Israeli-born Neumann is said to have leased WeWork his own buildings and that at one point, he charged the company a whopping $5.9 million for the “We” trademark. He also reportedly secured loans from the company. He later paid the money back following widespread criticism.
In addition, it emerged that Neumann’s wife Rebekah Paltrow was listed as one of three persons who would determine WeWork’s next chief executive in case he could no longer lead the company.
Final thoughts
Neumann stepped down as WeWork’s CEO in September. SoftBank took over the company and allowed him to cash out of most of his shares. The Japanese conglomerate paid him up to $1 billion to acquire his shares and $185 million in consulting fees. He is still with WeWork as a non-executive chairman.
As per a recent Reuters report, the New York Attorney General Letitia James is investigating among other things, whether or not Neumann indulged in self-dealing before his resignation. Based on what she finds, subpoenas could potentially be issued against him.
For WeWork stock, more positive changes will still need to be done if it is to succeed and leave behind the bad year that 2019 has been.