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WeWork's Backers Have Had Enough of Its Eccentric Founder

An awful lot can change in a very short span of time. Just a month or two ago, real estate giant WeWork (or "The We Company," if you so prefer) was being valued at $47 billion ahead of what was supposed to be a blockbuster initial public offering. Today, with the proposed public offering collapsing, it is valued at just $10 billion. WeWork, which has been incinerating investor capital for years (last year, it had a net loss of $1.6 billion), looks like it is headed for a liquidity crunch.


All of this raises an interesting question - were would-be IPO investors aware that if the public offering fell through, the company would flirt with bankruptcy? That seems like a pertinent detail a business should make the public markets aware of, but I do not recall any mention of it in WeWork's S-1 filing. Presumably, if you are considering buying shares of a business, you would like to know whether the business in question is desperately shopping around for cash to keep the lights on.

Softbank to wrest control from founder Adam Neumann

The history books are full of examples of companies that went from hero to zero. Still, the sheer speed of the reversal of public opinion in WeWork's case is notable. Indeed, WeWork's rush to reach the IPO stage was arguably what catalyzed this shift - by opening its books to the press and wider public, it lost the veneer of secrecy that many private companies use to their advantage.

In addition to the questions surrounding the IPO filings, founder and CEO Adam Neumann's erratic behavior has also been the subject of media scrutiny. Over the past 12 months, Neumann has: been found to have acted as a landlord to his own company, charged WeWork several million dollars for the right to use the trademark "We" (which he owns), has received millions of dollars worth of personal loans from the company and has recently engaged in a $90 million real estate buying spree while his business deteriorates.

Additionally, he has cashed out of his personal stake in WeWork to the tune of more than $700 million, further undermining the case for the IPO. While it remains to be seen whether Neumann has broken any actual laws, its pretty clear that there is some unusual play going on here.

Regardless, the IPO fiasco seems to have been the final straw for SoftBank (TSE:9984), the Japanese conglomerate whose Vision Fund is the primary investor in WeWork. Neumann has already been forced to step down as CEO. Now, it appears as if SoftBank is trying to assume full control of WeWork by raising several billion more in debt and equity to assume a controlling stake in the company. In an incredible piece of corporate finance, some of this cash could go toward paying off Neumann's personal loans that are secured with WeWork stock.

So what does this mean for the company? It remains to be seen whether WeWork can operate profitably even if it does scale back its ambitious growth strategy. And even if it does, it is unlikely it will fetch the sky-high valuation as a boring old real estate company that it did as an exciting tech story. Reality can be a hard landing.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.