Failed IPO plan shows WeWork can't expect to party like it's 1999

Failed IPO plan shows WeWork can't expect to party like it's 1999
WeWork Dublin

I’ll say this much for the folks at WeWork. They have been pretty good at talking up their product.

Enter the shared office space company's Irish website and you arrive at a land where hype knows no bounds.

Visitors to the site are told that for an outlay of €3,240 you get to rent an office at Central Plaza on Dublin's Dame Street - in the building previously inhabited by the Central Bank - for a month.

Alternatively, one can 'hot desk' at one of their several office complexes in the capital for just €400 over the same time period.

'Amenities' on offer include 'free flowing' coffee and access to a '400,000-strong network of potential collaborators.'

The website helpfully informs us that ‘Guinness has been brewing (in Dublin) since 1759.’ This, of course, is a misspelling of the name of our beloved drink.

WeWork has grown rapidly across the world and this summer, careful preparations were being put in place for an IPO, or initial public offering which, in August, valued the company at $47bn (€43bn).

At some point, the penny dropped. The flotation has been cancelled, the wedding is off. The 'groom' – WeWork CEO, Adam Neumann- has 'left town', having stepped down from his role.

Investors, it would appear, have dodged the proverbial bullet.

The ship is listing and now it is all hands on deck. The company has around 11,000 employees.

One third of the jobs are on the line as management moves to rein in costs and access new forms of finance in the wake of the cancellation of the flotation.

The critics have had a field day pointing to the company’s huge ongoing losses and vulnerable position in the marketplace.

In effect, We Work is a property play seeking to present itself as a technology prospect.

Observers have also begun to home in on the firms’ co-founder and former CEO Mr Neumann, who comes across as a rather unusual individual.

At 40, he has an interesting back story, having grown up in Israel where he spent part of his youth in a kibbutz. A sister won the Miss Teen Israel competition. His wife, Rebekah, is a cousin of the actress, Gwyneth Paltrow.

It has been suggested that his aim is to become the world’s first trillionaire and to establish a WeWork office complex on Mars.

These suggestions could not be verified. He is pretty down on meat and is reluctant to sign off expenses incurred in the consumption of animal products- or so it is said.

No one doubts that he has energy and chutzpah. He has certainly helped to shake up the office market targeting those of us – freelancers, founders of cash-starved start ups – who are not well served by established providers of office space.

WeWork caters to those looking for very short-term leasing arrangements.

Failed IPO plan shows WeWork can't expect to party like it's 1999

It offers flexibility – and therein lies the weakness in the WeWork business model. For, WeWork enters into long-term leasing commitments while relying on short-term income which may or may not be flowing in a year or two down the line.

In other words, as an investment, it is anything but recession-proof at a time when many analysts have been warning about a looming downturn.

Writing in Forbes magazine, last August, economic correspondent Frances Coppola posed the question: why should one buy shares in a firm that made a $1.6bn loss in 2018 and had gone on to lose a further $690m in the first half of the year.

"The company has no idea when it will deliver a profit and no intention of paying a dividend," she wrote.

She wondered how it was that two of the world’s biggest banks, JP Morgan and Goldman Sachs – advisors to the company – expected investors to back the IPO.

"Describing a company as 'tech' appears to short circuit investors’ brains," she said.

It is as if we have been transported back in a time machine to the days of the dotcom bubble in 1999.

True, WeWork’s revenues have been growing fast – up from $436m in 2016 to $1.8bn in 2018 with an outturn of $2.8bn being penciled in for the current year.

The problem is that expansion has come at a big cost.

The cost of operating in existing locations reached almost $1.25bn in the first six months of 2019. Another $400m went on general expenses and almost $200m on 'other operating expenses.'

It all has led to operating losses of $169m before you begin to factor in growth related costs.

As much as $255m has gone towards leases for new work spaces, $320m on sales and marketing and $370m on "other growth and development."

Analysts also question the sustainability of the business. The company does not have any patents. Its model is replicable.

A downturn could hammer revenues at a time when WeWork has entered into long-term leasing commitments.

Much of the initial funds have been put up by the Japanese financial institution Softbank, through its Vision Fund.

The fund invested $20bn in the company in 2017 and has pumped in more since. It has begun to rein in its commitment but must now be pondering how it will get its money back.

Should WeWork return to the market, in the next year or so, it will be at values at a small fraction of those suggested in mid-summer. People are left with egg on their faces.

Analysts are in no doubt that the pulling of the IPO represents a turning point. According to Morgan Stanley, the IPO failure is a "critical signal to the markets."

It signals the end of the days of endless capital for unprofitable businesses.

Cheap money has fueled a number of bubbles across the system. The latest event has been compared to the last days of leveraged buyouts in 1989 and the AOL Time Warner merger which signaled the peak of the dotcom bubble.

So-called tech 'unicorns' – where loss makers have attracted billion dollar valuations based on hope- are going out of fashion.

Nearly one half of all companies to go public in 2019 are trading below their offer price. A week ago, the Hollywood conglomerate Endeavour cancelled its IPO at the last minute.

Investors have been put off by weak margins and by an increasingly uncertain wider economy.

Historians may look back on WeWork with some fondness. This is the company which aimed to "elevate the world’s consciousness."

Investors will continue to dream about the next big thing and Wall Street will continue to serve up the hype.

For the time being, we may be set to return to an era of sobriety after all the gin-fueled excitement.

We can be grateful at least that the flotation process in America is pretty rigorous. But there will always be those who get carried away by hope – that most dangerous of companions.

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