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SoftBank Unveils $9.5 Billion WeWork Rescue, Gets 80% Stake

WeWork’s biggest investor, SoftBank Group Corp., took over 80 percent of WeWork in a $9.5 billion rescue package in October following the company’s botched initial public offering (“IPO”) attempt. Concerns about the company’s losses and corporate governance forced WeWork to shelve its plans for an IPO in late September leading to the need for an influx of capital to replace what was expected to be raised by WeWork in the IPO. (Eavis and de la Merced, The New York Times). WeWork, valued at $47 billion in January 2019, is valued at the start of 2020 at less than $8 billion. (Hsiao, Top1000funds.com). This $40 billion loss in less than a year is serving as a lesson for investors in high-profile startups with valuations upwards of $1 billion (“unicorns” or “unicorn companies”), and as a warning for growth-stock companies looking to make their public market debuts. (Alpeyev, Tan, Davis and Huet, Bloomberg). This post outlines WeWork’s turbulent 2019 and briefly explores what may become a “unicorn” startup burnout case study business students will study for years to come. 

In January 2019, WeWork was valued at $47 billion after the company raised capital through two cash investments from SoftBank in November 2018 ($3 billion) and January 2019 ($2 billion). (Sherman, CNBC). Seeking to finance the company’s rapid growth, WeWork publicly filed IPO paperwork on August 14, 2019, hoping to sell enough shares to raise $4 billion and execute a $6 billion bank loan contingent on the IPO. (Aydin, Business Insider; Eavis and de la Merced, The New York Times). Investor concerns about founder and CEO Adam Neumann and the company’s plans for profitability delayed the IPO on September 16, 2019. (Aydin, Business Insider). Media and investor attention focused on Neuman’s “inappropriate antics,” such as smoking marijuana on a private jet, discussing layoffs with employees followed by serving them tequila shots, and trademarking the term “We” and forcing WeWork to purchase it for $5.9 million. (Aydin, Business Insider). These activities, among others, forced Neumann to step down from the C-suite on September 24. Id. A week later, on September 30, WeWork pulled out of the botched IPO. (Aydin, Business Insider).  

Neumann’s exit from his role as CEO and Chairman of the Board at WeWork, as a condition of SoftBank’s bailout, was cushioned by a personal credit line in the amount of $500 million from SoftBank, a $185 million fee for consulting for SoftBank, and $1.2 billion in WeWork stock, of which he is allowed to sell nearly $1 billion to SoftBank as a part of the deal allowing him to retain his billionaire status. (Alpeyev, Tan, Davis and Huet, Bloomberg; Tan and Davis, Bloomberg). Neumann was replaced by Marcelo Claure, Softbank executive and newly appointed Executive Chairman, as Chairman of the Board, while Sebastian Gunningham and Artie Minson have filled the vacant CEO seat. (Alpeyev, Tan, Davis and Huet, Bloomberg; Austin and Brown, WSJ).

SoftBank’s rescue package was seen as the better of the two options that the WeWork Board considered following the company’s failed IPO. The alternative option was a risky junk-debt offering by JPMorgan Chase & Co. (“JPMorgan”), the bank which won WeWork’s IPO mandate. JPMorgan’s proposed bailout took the form of a $5 billion debt package that included $2 billion of payment-in-kind notes yielding 15 percent. (Alpeyev, Tan, Davis and Huet, Bloomberg). Payment-in-kind notes (“PIKs”) allow a cash-strapped company to pay interest on debt with more debt, with investors betting that the company will make good on the ballooning debt obligation at maturity. (Boston, Tan and Baker, Bloomberg). While these types of agreements are popular with firms exiting bankruptcy and struggling energy companies, WeWork investors were not so fond of the terms and the company’s existing bonds hit a new low when the details were released. (Boston, Tan and Baker, Bloomberg). 

In addition to Neumann’s lucrative exit package, SoftBank’s deal includes $5 billion in new financing and will also accelerate an existing $1.5 billion cash infusion commitment. (Shieber, TechCrunch). We Company, WeWork’s parent company, needed the influx of cash as it was set to run out of money by the end of November. (Alpeyev, Tan, Davis and Huet, Bloomberg). The deal also included $3 billion to repurchase WeWork shares from existing shareholders, in addition to the purchase of Neumann’s shares. (Stempel, Reuters). An important aspect of the deal is that because SoftBank’s capital infusion does not come with a majority of voting rights, WeWork will be treated as an “associate”, rather than a subsidiary, according to SoftBank. (SoftBank Group Corp., SoftBank Group); Alpeyev, Tan, Davis and Huet, Bloomberg). The benefit of this tradeoff is that SoftBank likely will not have to show all of WeWork’s liabilities on its balance sheet. (Alpeyev, Tan, Davis and Huet, Bloomberg).

Nevertheless, Softbank and its chairman Masayoshi Son may not be able to avoid answering for WeWork’s financial failures. On November 4, Softbank and Son were named along with WeWork’s board of directors in a proposed class action lawsuit in San Francisco Superior Court, in which they were accused of breaching fiduciary duties to minority shareholders. (Stempel, Reuters). The complaint also accuses them and Neumann of self-dealing. (Stempel, Reuters). 

While it is too early to comment on the validity of any of the assertions of this lawsuit, the saga of WeWork’s botched IPO and SoftBank’s “fire-sale” rescue package serve as a lesson and warning for future investors and high-profile “unicorn companies” seeking to make their initial public offering in the coming years. Investor suspicion about actual valuations of “unicorn companies” is one of the most obvious outcomes of the WeWork IPO failure. (Alpeyev, Tan, Davis and Huet,Bloomberg). Mitsushige Akino, an executive officer in Tokyo’s Ichiyoshi Asset Management Co., believes that many investors in SoftBank “think it’s crazy” to become so heavily invested in one company. (Alpeyev, Tan, Davis and Huet, Bloomberg). Akino’s sentiment was echoed when SoftBank’s shares had their biggest drop in three weeks, 2.5 percent the day the deal was announced. (Alpeyev, Tan, Davis and Huet, Bloomberg). 

SoftBank’s investors are not alone in the scrutiny of valuation and significant investment into single companies. Stephen Schwarzman, Blackstone’s CEO, believes that the private tech industry has reached a “crescendo in terms of valuation” where “artificial profit” has been built up in private tech companies, distorting valuations in private markets before IPOs. (Schulze, CNBC). The consequence of the scrutiny on pre-IPO valuations of “unicorns” is that investors across the board are focusing more on profitability forecasts for other high-profile IPOs from loss-making companies like Peloton, Uber, and Lyft. (Schulze, CNBC). Increased scrutiny on both valuation and profitability raises the question whether Silicon Valley, venture capitalists, and other investors are “pivoting to profits?” (Schulze, CNBC). While the answer to that question remains to be seen, for “unicorns,” startups, and other companies seeking to go public, one thing is for sure: “being in the black is the new black.” (Schulze, CNBC).