HBP# HK1253
XU LI
RAMÉE LIU
WEWORK’S PRE-IPO VALUE:
USD47BN OR USD8BN?
The We Company (WeWork) rented office spaces for long-term leases, turned them into hip
offices, and then offered them for short-term leases. Its charismatic cofounder and CEO Adam
Neumann, explosive growth funded by significant cash injections from SoftBank and its
USD100bn Vision Fund,1 and a pre-IPO valuation of USD47bn ensured the company was one
of the most talked-about unicorns in August 2019. 2
WeWork’s valuation was similar to that of a high-tech stock with high price multiples. From
FY 2016 to FY2018, its losses totaled USD3.3bn, outstripping revenue at USD3.1bn [see
Exhibit 1]. After release of Form S-1 pre-IPO filing documents, numerous financial analysts
and the press scrutinized WeWork. In addition to its lower than expected financial performance,
some questioned WeWork’s business model, its governance model, and its valuation.
On 24 September 2019, six weeks after the release of the S-1 documents, the board of directors
removed Neumann as CEO. 3 SoftBank, the second largest shareholder, led this removal. 4
About one week later, WeWork decided to withdraw its IPO application.5 Without funding from
the planned IPO listing, WeWork no longer had access to conditional loans from JP Morgan.
Cash flow problems surfaced.
To cut costs, WeWork announced plans to lay off 2,000 staff in October 2019. To keep the
company going, SoftBank doubled down and became the largest shareholder of WeWork by
1 “The Troubled Saga of Masayoshi Son's $100 Billion Fund,” Bloomberg.com, Digital Originals, 9 July 2020,
https://www.bloomberg.com/news/videos/2020-07-08/the-troubled-saga-of-masayoshi-son-s-100-billion-fund-video, 21 August
2020.
2 Peter Eavis and Michael J. de la Merced, “WeWork I.P.O. is Withdrawn as Investors Grow Wary,” New York Times, 30
September 2019, https://www.nytimes.com/2019/09/30/business/wework-ipo.html, accessed 11 November 2019.
3 WeWork’s company website’s newsroom, 24 September 2019, https://www.wework.com/newsroom/posts/weworks-board-ofdirectors-announces-leadership-changes, accessed 24 October 2019.
4 “The Spectacular Rise and Fall of WeWork,” Bloomberg on YouTube, 7 November 2019, https://youtu.be/X2LwIiKhczo,
accessed 18 November 2019.
5 Eric Platt and Andrew Edgecliffe-Johnson, “SoftBank to ‘double down’ on WeWork investment,” Financial Times, 23 October
2019, https://www.ft.com/content/7fb9ffb2-f53d-11e9-b018-3ef8794b17c6, accessed 24 October 2019.
Ramée Liu prepared this case under the supervision of Dr. Xu Li for class discussion. This case is not intended to show effective
or ineffective handling of decision or business processes. The authors might have disguised certain information to protect
confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations, people, places or
fact mentioned in the case no longer occur, exist or apply.
© 2020 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 20/654C
Last edited: 16 September 2020
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20/654C
WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
buying a significant number of Neumann’s shares. This share purchase meant WeWork was
worth approximately USD8bn at the end of October 2019 instead of USD47bn as suggested at
the pre-IPO stage. Without any change in economy or business outlook, why did the valuation
change so drastically within a two-month period? What advice should the Chief Investment
Officer of SoftBank give to Softbank’s Chairman and CEO Masayoshi Son about managing
WeWork as an investment?
WeWork
Neumann, an entrepreneur, and his friend, Miguel McKelvey, an architect, founded WeWork
in 2010.6 They started leasing out shared office spaces in the SoHo neighborhood of New York
City. According to Form S-1, WeWork next opened shared offices in other cities, such as New
York, San Francisco, Los Angeles, Boston, and Seattle.7 In 2014, it expanded internationally to
cities around the world, such as London and Tel Aviv, while continuing to build its brand and
presence in the US. Then in 2016, it opened office spaces in Shanghai and Latin America,
among others.
WeWork emphasized that it employed many tech workers, a total of 1,000 engineers, product
designers, and machine learning scientists, of the company’s approximately 12,500 direct
employees.
Before the IPO, the company was rebranded The We Company. It had expanded in the past
nine years into other ventures, including a co-living subsidiary, WeLive and WeGrow, an
education business for children from 2 to 11. Neumann’s wife, Rebekah Paltrow Neumann,
served as the chief executive of WeGrow. 8 Rebekah was not a director of WeWork, but
reportedly she had the authority to terminate employees of WeWork whom she did not like,
according to Rebecca Aydin of Business Insider. Other Neumann relatives worked as
executives and employees in WeWork as well.
WeWork’s Office Community
WeWork’s described its vision and mission as follows:
We are a community company committed to maximum global impact. Our
mission is to elevate the world’s consciousness. We provide our members with
flexible access to beautiful spaces, a culture of inclusivity and the energy of an
inspired community, all connected by our extensive technology infrastructure.9
WeWork’s business expanded exponentially from 2016 until the first half of 2019. It created
outstanding branding for its user-friendly open-office space, designed with a high proportion
of common area for tenants. The offices were well known for their free beer on tap. Tenants
were called members, and they shared internet access, office equipment, and technical support.
WeWork promoted its spaces as high-tech offices to appeal to the younger generation. Due to
easy entrance and exit for tenants with short-term leases, even sizable organizations like
6
Rebecca Aydin, “The history of WeWork — from its first office in a SoHo building to pushing out CEO and cofounder Adam
Neumann,” Business Insider, 23 October 2019, https://www.businessinsider.com/wework-ipo-we-company-history-founderstory-timeline-adam-neumann-2019-8#wework-founders-adam-neumann-and-miguel-mckelvey-met-where-else-at-the-office-1,
accessed 22 August 2020.
7 WeWork, Form S-1 filed for initial public offering, United States Securities and Exchange Commission, 14 August 2019,
https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm#toc, accessed 27 October 2019.
8 David Trainer, Great Speculations, “WeWork Is the Most Ridiculous IPO of 2019,” Forbes, 29 August 2019,
https://www.forbes.com/sites/greatspeculations/2019/08/27/wework-is-the-most-ridiculous-ipo-of-2019/#1aa38a0c1ad6,
accessed 7 October 2019.
9 WeWork, Form S-1 filed for initial public offering, United States Securities and Exchange Commission, 14 August 2019,
https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm#toc, accessed 27 October 2019.
2
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
Amazon and UBS were members. As of 30 June 2019, WeWork had over 528 locations in 111
cities across 29 countries. It had 527,000 memberships, including the memberships of 38% of
the global Fortune 500 companies.
Business Model
The company leased office premises from landlords on a long-term lease, with an average of
15 years, at a lower than market rental rate. Then WeWork used large sums to refurbish the
offices into large, shared spaces with fancy café décor, partitioned offices, and conference
rooms. The average lease period for WeWork’s tenants was 15 months, which was short
compared to other commercial leases that typically lasted a minimum of two years. This gave
tenants additional flexibility. Tenants did not have to handle renovation and rental leases with
agents when moving into the premises. They also had the convenience of not having to hire
receptionists, cleaners, and office IT staff, all of which WeWork provided.
Relationship with SoftBank and Vision Fund as Investors
In 2015, Benchmark Capital was the first venture capital fund that invested in WeWork to fuel
its growth.10 SoftBank and Vision Fund became WeWork’s second-largest shareholder after
they purchased WeWork stock in 2017 and 2018, for a total of USD8bn. According to “The
Spectacular Rise and Fall of WeWork” by Bloomberg, WeWork’s valuation rose to USD20bn
in 2017. In April 2019, SoftBank and Vision Fund purchased an additional USD2bn worth of
WeWork stock. This transaction provided a market comparable valuation before the IPO of
USD47bn. SoftBank and Vision Fund granted loans of USD2bn to WeWork as well.
SoftBank was a Japanese telecom and technology company, and a venture capitalist. It was
founded and led by Masayoshi Son. SoftBank’s most successful and well-known investment
was Alibaba. In early 2000, Son invested USD20m in Alibaba, then a web portal connecting
Chinese manufacturers with overseas buyers. The investment was worth around USD150bn in
2020. 11 That vast return built Son’s reputation as an investor and helped him raise the
USD100bn for Vision Fund.
Son created the first Vision Fund in 2017. Its largest source of funding of USD45bn was from
the Saudi Arabia Public Investment Fund. 12 Saudi Crown Prince Mohammad bin Salman made
this investment decision after a 45-minute meeting with Son, as Son proudly said in a public
interview.13 SoftBank invested USD33.1bn in Vision Fund, along with other investors, such as
Abu Dhabi Mubadala and Apple. Vision Fund invested predominantly in 88 companies, mainly
in technology, a variety of businesses, and sharing economy platforms, such as Didi, Uber, and
Grab. Like the other Vision Fund’s investees, WeWork was packaged as a technology and
sharing economy platform to justify its valuation at the pre-IPO stage [see Exhibit 4].
Financial Summary of WeWork in Form S-1
WeWork expanded rapidly and generated revenue of USD1.8bn in 2018 from USD886m in
FY2017 [see Table 1 and Exhibit 1]. Despite strong annual revenue growth, it incurred net
losses every period from 2016 to the first half of 2019. In the first half of 2019, revenue
10 “The Spectacular Rise and Fall of WeWork,” Bloomberg on YouTube, 7 November 2019, https://youtu.be/X2LwIiKhczo,
accessed 18 November 2019.
11 “SoftBank's Masayoshi Son and Alibaba's Jack Ma part ways,” Bloomberg, 25 June 2020,
https://tech.economictimes.indiatimes.com/news/people/softbanks-masayoshi-son-and-alibabas-jack-ma-part-ways/76624921,
accessed 23 August 2020.
12 “The Troubled Saga of Masayoshi Son's $100 Billion Fund,” Bloomberg.com, Digital Originals, 9 July 2020,
https://www.bloomberg.com/news/videos/2020-07-08/the-troubled-saga-of-masayoshi-son-s-100-billion-fund-video, 21
August 2020.
13 Crown Prince Mohammad bin Salman of Saudi Arabia, https://en.wikipedia.org/wiki/Mohammed_bin_Salman, accessed 25
August 2020.
3
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20/654C
WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
increased to USD1.5bn, while losses totaled USD905m. The expansion of WeWork was funded
by issuing shares and acquiring loans to cover losses from operations [see Exhibit 3].
WeWork’s annual revenue doubled each year from FY2016 to FY2018. At the same time, its
annual net loss went up in similar proportion. For FY2018, the net loss rose to USD1.9bn
compared to USD1.8bn in revenue for the same period. The loss ratio improved in the first half
of 2019 in relation to its revenue. The first half of 2019 also achieved a higher profit margin of
19.7% from 16.5% in 2018.
Table 1: WeWork Profit and Loss Summary
2016
2017
2018
2018 1H
2019 1H
Revenue
Total expenses
436,099
832,373
886,004
1,817,838
1,821,751
3,512,750
763,771
1,441,630
1,535,420
2,904,870
(Loss) from operations
(396,274)
(931,834)
(1,690,999)
(677,859)
(1,369,450)
Net (Loss)
(429,690)
(933,494)
(1,927,419)
(722,892)
(904,652)
0.7%
8.0%
16.5%
16.7%
19.7%
USD in ‘000
Profit margin=
(Revenue-Location
operating expenses)/
Revenue
Source: WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States
Securities and Exchange Commission on 13 September 2019,
https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
Cash Flow
WeWork needed a large amount of cash due to continuous fund losses from operations and
exponential growth. Benchmark Capital invested in the early phase of WeWork but did not
make an additional investment after 2015. In addition to SoftBank, JP Morgan was the largest
lender. They helped to fund WeWork’s business from 2017 to mid-2019. As of 30 June 2019,
WeWork had USD2.5bn in cash and cash equivalents, while total current liabilities were
USD2.6bn [see Exhibits 2 and 3]. The long-term debt outstanding was USD1.3bn on its balance
sheet.
Lease Accounting Standards Adopted by WeWork
WeWork’s consolidated financial statements were prepared using accounting policies under the
US General Accepted Accounting Principles (US GAAP). All privately and publicly held
companies and organizations in the US, including the government, adhered to the US GAAP.
The Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards
Codification (FASB ASC). There were two kinds of leases in the FASB ASC 840 for leases. 14
Under operating leases, the lessor owned the leased items. WeWork’s rented premises (as lessee)
were recorded as operating leases. For capital leases, the lessee owned the leased items. From
FY2016 to FY2018, WeWork recorded items such as leased office equipment and certain leased
fixed assets under capital leases.
14 “Leases guide,” PwC, updated November 2019, https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-lease-
accounting-guide.pdf, accessed 13 November 2019.
4
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
Operating Leases
For a sublease company like WeWork, the biggest component of its expenses in its profit and
loss statement was the operating lease–related expense. “Lease costs” were the amounts payable
to the landlord according to the lease agreement.15
Lease costs = rent + common area maintenance charges+ insurance + real estate taxes
Lease costs were included in the account named “location operating expense” in WeWork’s
profit and loss statement. Location operating expense was incurred once the company finished
renovating a new location and began its sublease business.
Location operating expense = lease cost + utilities + operating staff cost + other operating
and maintenance costs
WeWork typically negotiated a free rent period early in the term of the lease, even if the
landlord did not offer this free rent period as a standard term. At the beginning of the lease,
WeWork as a tenant took possession of the lease space and typically used this free rent period
to renovate the space. US GAAP had an accounting treatment to even out the lease cost over
the term of lease.
Lease Cost Using the Straight-line Method
Under US GAAP, lease cost was recognized on a straight-line basis over the life of the
lease term based on three key components:
(i) Lease cost contractually paid or payable
(ii) Amortization of lease incentives
(iii) Non-cash US GAAP straight-line lease cost.
Under (i) lease cost contractually paid or payable, lease costs payable under the lease
agreements were recorded in accrual basis of accounting, regardless of the timing of
payment made.
For (ii) amortization of lease incentives, it represented the amortization of cash received
from the landlord for tenant improvement allowances and real estate broker
commissions, together as reimbursement. They were amortized on a straight-line basis
over the term of the lease.
As for (iii), non-cash US GAAP straight-line lease cost included the adjustments
required to recognize the impact of free rent periods and lease cost escalation clauses
on a straight-line basis over the term of the lease. WeWork entered long-term leases
with landlords that typically provided an annual base rent, with annual rent and related
expense escalations later in the term of the lease.
To calculate the yearly lease cost using the non-cash US GAAP straight-line method: (Lease cost under lease agreement for whole term of the lease – lease incentives – free
rent periods) / number of years of lease term = yearly lease cost
Overall, under the straight-line method, lessees were required to record the total of
payments due and adjustments under the whole lease term. Then divide the sum evenly
over the period of the lease, regardless of the cash paid and lease cost obligations in a
particular period. As a result, the non-cash US GAAP straight-line lease cost’s net effect
became zero over the life of a lease.
15 WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States Securities and Exchange Commission, 13
September 2019, https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
5
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
WeWork presented the FY2016 to the first half of 2019’s profit and loss statement in the S-1
filing documents using two methods. One set of financial data complied with non-cash US
GAAP straight-line accounting standards. The second method eliminated the non-cash US
GAAP straight-line lease cost effects by using actual lease cost, deducting free rent period and
lease incentives. As most of the long-term leases had lower lease costs at the beginning of the
term, the second set of financial data reflected higher profits as a result.
Update of Accounting Standard on Leases
An updated accounting standard of the FASB on leases, ASU No. 2016-02, Leases, codified as
ASC 842, was issued in February 2016. ASC842 became effective 1 January 2019. According
to PwC’s “Leases guide”:
ASC 842 requires a lessee to classify a lease as either a finance or operating
lease. Interest and amortization expense are recognized for finance leases
while only a single lease expense is recognized for operating leases, typically
on a straight-line basis. 16
First, capital leases were reclassified as finance leases under ASC 842, as adopted by WeWork
once it became effective. For the major difference between the former ASC 840 and ASC842
on operating leases, ASC842 required a lessee to recognize operating leases (lease terms over
12 months) on its balance sheet, in addition to the profit and loss statement. WeWork adopted
the ASC 842 accounting treatment in the first half of 2019 financial statements.
WeWork under Criticism at Pre-IPO Stage
Financial Advisers
After reorganization of WeWork’s corporate structure, WeWork applied for an IPO with the
US Securities and Exchange Commission (SEC) on 14 August 2019. JP Morgan, Goldman
Sachs, and Morgan Stanley led the group of underwriters. They expected to raise USD4bn
giving the company a valuation of USD47bn based on Class A shares to be issued. 17 These
three major investment banks supported the valuation at USD47bn, and at even higher
amounts. 18 According to the Financial Times, Morgan Stanley pitched WeWork’s value at
between USD43bn and USD104bn.
Corporate Governance
WeWork had started as a closely held business and continued to practice as a private company
without public scrutiny for many years. During the expansion and fast development of WeWork,
Neumann, as cofounder, major shareholder, and CEO, had control over key decision making as
a result of his majority shareholding and voting power. There was no balance of power in the
senior management or board of directors, according to the business risks described in the S-1
Amendment No. 2 document.19 There also was no succession plan.
16 “Leases guide,” PwC, updated November 2019, https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-lease-
accounting-guide.pdf, accessed 13 November 2019.
17 Dominic Rushe, “WeWork set to sack 2,000 staff as anger towards founder Adam Neumann grows,” The Guardian, 15
October 2019, https://www.theguardian.com/business/2019/oct/15/wework-sack-staff-workers-adam-neumann?
CMP=Share_AndroidApp_WeChat, accessed 18 October 2019.
18 “Softbank: how the WeWork investor got in trouble,” Financial Times on YouTube, 23 October 2019,
https://www.youtube.com/watch?v=0SWjPfjjLFw, accessed 18 November 2019.
19 WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States Securities and Exchange Commission, 13
September 2019, https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
6
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
WeWork was not well prepared for the management transactions that were exposed in the S-1
filing documents with the SEC at the pre-IPO stage. One of the issues that drew most analysts’
attention was the lack of voting rights with the new share issuance to the public. Other issues
described in the S-1 filing documents on 14 August 2019 surrounded the relationships, loans,
and transactions between WeWork and Neumann. Apparently, these transactions benefited the
financial interests of Neumann more than the company, according to David Trainer in a Forbes
article. For example, Neumann registered the trademark of “We” under his own name and sold
it to the company for USD6m. The perceived lack of corporate governance caused many
financial analysts and reporters to write negative stories about the upcoming IPO and WeWork
in general.20
Business Model and Comparison with IWG
IWG was a real estate company founded in Belgium and listed on the London Stock Exchange.
It was in the shared-office business like WeWork, except its office designs were not as fancy
and it did not provide free alcoholic beverage. [Table 2is a comparison of WeWork and IWG
data].
Table 2: WeWork vs. IWG Operations and Valuation
USD
Global square footage
Members
Locations
Cities
Countries
Workstations
Revenue FY2018
EBITDA
Net profit/loss
Valuation
WeWork
45m
0.5m
528
111
29
604k
1.8bn
–626m
–1.9bn
47bn
IWG
50m
2.5m
3,000+
1,000
120
547k
3.4bn
520m
140.7m
3.7bn
Source: Rani Molla and Shirin Ghaffary, “WeWork’s IPO filings try to justify its massive tech
valuation,” Vox Ecode, 14 August 2019,
https://www.vox.com/recode/2019/8/14/20804029/wework-ipo-tech-company-valuation, accessed
11 November 2019.
Compared to WeWork, IWG had larger coverage in terms of global square footage, members,
locations, cities, and countries. It had higher revenue and recorded a profit. According to IWG’s
2018 annual report, it had net profits of USD140.7m in FY2018 compared to USD152.7m in
FY2017. 21 Its profit margin was 16.1% in FY2018 and 17.1% in FY2017, respectively. The
valuation of IWG was USD3.7bn, compared to the USD47bn valuation for WeWork in August
2019.
Other Competitors in the Market
Other competitors entered the same market and competed with WeWork using similar office
design and concepts. Some of these competitors received funding from outside investors as well.
Knotel, a New York–based company that was in the same business, received funding in 2019
20 Peter Eavis and Michael J. de la Merced, “WeWork I.P.O. is Withdrawn as Investors Grow Wary,” New York Times, 30
September 2019, https://www.nytimes.com/2019/09/30/business/wework-ipo.html, accessed 11 November 2019.
21 IWG, Annual report 2018, http://investors.iwgplc.com/~/media/Files/I/IWG-IR/reports-and-presentations/2019/consolidated-
report-and-accounts-2018.pdf, accessed 13 November 2019.
7
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
at a valuation of approximately USD1bn.22 The Office Group (TOG) operated flexible shared
workspaces, mainly in London and other locations in Britain. In 2017, Blackstone, a capital
fund, invested in TOG and suggested a valuation of around GBP500m.
Business Risk and Valuation as a Tech Company
Short-Term Leases with Tenants versus Long-Term Leases with Landlords
WeWork’s income was based on short-term leases signed with tenants, while major rental
expenditures were in the form of long-term leases. Tenants in high-risk or start-up businesses
could easily choose not to renew or terminate the short-term lease early to reduce their risks.
WeWork, as a global company, had to fully commit to executed long-term leases and fixed
costs spent on rented premises. The company was not profitable under this business model
during its global economic expansion from 2016 to 2019.
Operating Lease Commitment
The lease cost that lessees committed to pay after the current financial year end was recorded
as an operating lease commitment. It was part of the disclosures of audited financial statements.
For example, a new lease for a term of 15 years was signed on 1 January 2016 with an average
yearly lease cost of USD1m. As of 31 December 2016, the financial year-end date, the operating
lease commitment was 15 years -1 year = 14 years, multiplied by USD1m per year = USD14m.
WeWork’s operating lease commitment, with “non-cancellable lease terms in excess of one
year” as of 31 December 2018 was USD33.9bn. This was a significant obligation compared to
the USD3.4bn in short-term leases signed with WeWork’s tenants. In addition, the company
had no reserves to pay these commitments based on a net deficit at USD2.5bn as of 31
December 2018.
WeWork’s Growth Forecast
WeWork’s financials showed some big leaps in terms of revenue from FY2016 to the first half
of 2019, and therefore it used this growth expansion rate to support its valuation. The
company’s valuation was comparable to Uber, Airbnb, and Lyft [see Exhibit 4 for list of IPO
valuations for high-tech and sharing economy platform stocks]. To support the high valuation
amount, WeWork’s business forecast required a 20% to 30% annual growth rate after the IPO
to sustain this valuation. 23 An unreasonable discounted cash flow (DCF) scenario was applied
to support such growth, according to David Trainer in Forbes.
Market Response
After the release of the S-1 document, WeWork faced the scrutiny of investors and the media
regarding its finances, the questionable business model, the business risk, and its corporate
governance.24 There were concerns about WeWork’s path to profitability in order to justify this
valuation amount. In early September 2019, WeWork was considering lowering its valuation
to around USD20bn. By mid-September 2019, it was reported the valuation could be lowered
to USD10bn due to a weak market response, according to Rebecca Aydin of Business Insider.
22 “Why WeWork's Business Model Is Risky,” Wall Street Journal on YouTube, 29 August 2019,
https://www.youtube.com/watch?v=Kd2EVZO3XH8, accessed 18 November 2019.
23 David Trainer, Great Speculations, “WeWork Is the Most Ridiculous IPO of 2019,” Forbes, 29 August 2019,
https://www.forbes.com/sites/greatspeculations/2019/08/27/wework-is-the-most-ridiculous-ipo-of-2019/#1aa38a0c1ad6,
accessed 7 October 2019.
24 Rebecca Aydin, “The history of WeWork — from its first office in a SoHo building to pushing out CEO and cofounder Adam
Neumann,” Business Insider, 23 October 2019, https://www.businessinsider.com/wework-ipo-we-company-history-founderstory-timeline-adam-neumann-2019-8#wework-founders-adam-neumann-and-miguel-mckelvey-met-where-else-at-the-office1, accessed 22 August 2020.
8
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
WeWork and SoftBank’s Responses
WeWork Filed S-1 Amendment
The media’s criticisms and the contents of the S-1 documents also raised Son’s attention to
Neumann’s management of the company. In response to these concerns, Neumann tried to
rescind some of the related parties’ transactions immediately. WeWork filed Amendment No.
2 to S-1 on 13 September 2019 with the SEC.25 First, Neumann would give to WeWork any
profit he received from the real estate transactions he had entered with the company in the past.
WeWork unwound the issuance of partnership interests to Neumann that he received for
transferring “We” family trademarks to WeWork. In addition, Neumann entered into a lock-up
agreement for one year with the underwriters in the IPO offering. He could not sell his shares
within one year after the IPO and limited his ability to sell his shareholdings in the second and
third years. To reduce the concentration of power Neumann held, his voting rights in the Class
B and Class C shares he held were reduced by a significant number of votes per share.
Removal as Director and Withdrawal from IPO
On 18 September 2019, the Wall Street Journal exposed further misconduct by Neumann when
he was on board his private jet during an international flight to Japan. Neumann was found to
be using cannabis. Cannabis was illegal in Japan, and carrying drugs across an international
border demonstrated Neumann’s reckless behavior. This incidence disturbed Son and triggered
SoftBank and the board of directors to remove Neumann as CEO.26 Both Neumann and his wife,
Rebekah Neumann, left WeWork’s office on 24 September 2019.
After the remedial actions and the filing of the S-1 amendment, WeWork could not regain the
confidence of investors. It therefore had to withdraw its IPO application, according to Peter
Eavis and Michael J. de la Merced of the New York Times.
Bailout Package
After these events, some of the landlords in London and New York were worried and would
not sign new leases with WeWork.27 Due to the withdrawal of the IPO, WeWork could not
receive the external funding of around USD4bn. In addition, WeWork failed to obtain the
proposed loan amount of up to USD6bn from JP Morgan that was conditioned on the success
of the IPO listing. As a result, WeWork was short in the cash it needed to support its operations.
Softbank decided to offer a way out by offering a bailout package with a total value of
USD9.5bn, which WeWork accepted. The package included payments of USD1.7bn to
Neumann divided into (i) a purchase of USD1bn of shares held by Neumann, (ii) USD500m as
a loan and (iii) USD185m as a consulting fee.28 The remainder of the bailout package was used
to, among others, purchase additional WeWork shares, assume certain liability of debts owed
to third parties, and provide financing for WeWork.29 According to James Cook and Michael
25 WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States Securities and Exchange Commission, 13
September 2019, https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
Rebecca Aydin, “The history of WeWork — from its first office in a SoHo building to pushing out CEO and cofounder Adam
Neumann,” Business Insider, 23 October 2019, https://www.businessinsider.com/wework-ipo-we-company-history-founderstory-timeline-adam-neumann-2019-8#wework-founders-adam-neumann-and-miguel-mckelvey-met-where-else-at-the-office1, accessed 22 August 2020.
27 Peter Eavis and Michael J. de la Merced, “WeWork I.P.O. is Withdrawn as Investors Grow Wary,” New York Times, 30
September 2019, https://www.nytimes.com/2019/09/30/business/wework-ipo.html, accessed 11 November 2019.
28 James Cook and Michael O'Dwyer, “SoftBank takes control of WeWork as Adam Neumann pockets $1.7bn exit package,”
The Telegraph, 23 October 2019, https://www.telegraph.co.uk/technology/2019/10/22/wework-rescued-biggest-shareholdersoftbank/, accessed 11 November 2019.
29 “SoftBank Is Said to Plan to Abandon WeWork Shareholders Deal,” Bloomberg Markets and Finance on YouTube, 1 April
2020, https://www.youtube.com/watch?v=Tr0l3E2Kaqk, accessed 13 June 2020.
26
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
O'Dwyer of The Telegraph, SoftBank’s shareholding in WeWork increased from
approximately one-third to 80% after the bailout plan.
Valuation Plunging from USD47bn to USD8bn Affected SoftBank’s Performance
SoftBank decided not to gain full control of WeWork as a majority shareholder. Neumann’s
voting rights were passed to an expanded WeWork board, helping SoftBank to avoid
consolidating WeWork’s losses in its own accounts. Without control of the management of
WeWork, SoftBank accounted for WeWork as an associate company rather than a subsidiary
that required consolidation.
In order to turn WeWork into a profitable company, SoftBank instructed WeWork to slow new
building developments, which tended to suffer losses for the first year before occupancy picked
up.30 The next step was to cut expenses, including laying off thousands of staff and disposal of
all unprofitable WeWork businesses. Neumann’s private jet was sold for USD6m.31
The Way Forward
Driven by the funding from SoftBank, Neuman had grown WeWork to become one of the most
anticipated IPOs of 2019. But its business model and the actions of its senior management lost
the confidence of existing and new investors, including financial analysts. Consequently, it
withdrew its IPO application due to insufficient subscription. Without any sudden changes in
business operations or economic outlook, the valuation decreased from USD47bn to USD8bn
within two months in 2019. Both valuations were supported by SoftBank’s purchase of
WeWork’s shares in April and October 2019, respectively.
How should the business model and associated business risk of WeWork, such as the long-term
leases with landlords, be evaluated? How did equity funds affect the operations and value of
the invested companies? How did the lack of effective corporate governance of WeWork affect
investors’ confidence? What considerations should small investors take before investing in
IPOs in the sharing economy platform?
30 Shelly Banjo and Gearoid Reidy, “Here’s How Softbank Says It’ll fix WeWork and Turn It Profitable,” Bloomberg, 6
November 2019, https://www.bloomberg.com/news/articles/2019-11-06/here-s-how-softbank-says-it-ll-fix-wework-and-turnit-profitable, accessed 11 November 2019.
31 “The Spectacular Rise and Fall of WeWork,” Bloomberg on YouTube, 7 November 2019, https://youtu.be/X2LwIiKhczo,
accessed 18 November 2019.
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
EXHIBIT 1: WEWORK CONSOLIDATED STATEMENT OF OPERATIONS
USD in ‘000
Revenue
Expenses:
Location operating expenses
Other operating expenses
Pre-opening location expenses
Sales and marketing expenses
Growth and new market
development expenses
General and administrative
expenses
Depreciation and amortization
Total Expenses
2016
436,099
2017
886,004
2018
1,821,751
2018 1H
763,771
2019 1H
1,535,420
433,167
0
115,749
43,428
814,782
1,677
131,324
143,424
1,521,129
106,788
357,831
378,729
635,968
42,024
156,983
139,889
1,232,941
81,189
255,133
320,046
35,731
109,719
477,273
174,091
369,727
115,346
454,020
357,486
155,257
389,910
88,952
832,373
162,892
1,817,838
313,514
3,512,750
137,418
1,441,630
255,924
2,904,870
(Loss) from operations
(396,274)
(931,834)
(1,690,999)
(677,859)
(1,369,450)
Interest and other income
(expense), net
Pre-tax (loss)
(33,400)
(7,387)
(237,270)
(46,406)
469,915
(429,674)
(939,221)
(1,928,269)
(724,265)
(899,535)
Income tax benefit (provision)
Net (Loss)
(16)
(429,690)
5,727
(933,494)
850
(1,927,419)
1,373
(722,892)
(5,117)
(904,652)
Profit margin= (RevenueLocation operating expenses)/
Revenue
0.7%
8.0%
16.5%
16.7%
19.7%
Source: WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States
Securities and Exchange Commission on 13 September 2019,
https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
11
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
EXHIBIT 2: WEWORK CONSOLIDATED BALANCE SHEET
31 December
2017
31 December
2018
Current assets
Cash and cash equivalents
Other current assets
Total current assets
2,020,805
406,291
2,427,096
1,744,209
719,869
2,464,078
2,473,070
559,253
3,032,323
Property and equipment, net
Other long-term assets
Total assets
2,337,092
559,884
5,364,072
4,368,772
1,812,066
8,644,916
6,729,427
17,285,485
27,047,235
Total current liabilities
Total non-current liabilities
Total liabilities
650,587
1,755,924
2,406,511
1,609,088
4,675,071
6,284,159
2,603,149
22,038,597
24,641,746
Total shareholders’ equity (deficit)
(1,302,451)
(2,458,576)
(2,299,404)
USD in ‘000
30 June
2019
Sources: 2017 to 2018 data from WeWork, Form S-1 filed for initial public offering, United
States Securities and Exchange Commission, 14 August 2019,
https://www.sec.gov/Archives/edgar/data/1533523/000119312519220499/d781982ds1.htm#toc,
accessed 27 October 2019.
2019 data from WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United
States Securities and Exchange Commission, 13 September 2019,
https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
EXHIBIT 3: WEWORK CONSOLIDATED CASH FLOW
USD in ‘000
Net cash provided (used
in) operating activities
Net cash used in investing
activities
Net cash provided by
financing activities
Effects of exchange rate
changes
Net increase (decrease) in
cash, cash equivalents, and
restricted cash
2016
2017
2018
2018 1H
2019 1H
176,905
243,992
(176,729)
(84,363)
(198,711)
(818,525)
(1,376,767)
(2,475,798)
(888,173)
(2,362,773)
727,908
2,724,315
2,658,469
745,794
3,430,258
(2,261)
(763)
(13,119)
2,726
15,956
84,027
1,590,777
(7,177)
(224,016)
884,730
Source: WeWork, Form S-1 Amendment No. 2 filed for initial public offering, United States
Securities and Exchange Commission on 13 September 2019,
https://sec.report/Document/0001193125-19-244329/, accessed 27 October 2019.
12
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WeWork’s Pre-IPO Value: USD47bn Or USD8bn?
EXHIBIT 4: HIGH-PROFILE TECH VALUATIONS AT TIME OF IPO (in USD bn)
08/08/1995
Netscape
04/11/1996
Yahoo
14/05/1997
Amazon
23/09/1998
eBay
17/05/2012
Facebook
11/06/2013
Twitter
18/09/2014
Alibaba
01/03/2017
Snap
29/03/2019
Lyft
Apr-19 Pinterest (est)
Apr-19
Uber (est)
2019 1H
Slack (est)
2019 2H Palantir (est)
2019 2H/2020 1H
Airbnb (est)
$1.5
$0.5
$0.7
$1.1
$115.1
$15.4
$179.1
$24.9
$24.7
$12.3
$120.0
$10.0
$41.0
$31.0
Note: Pre-IPO values were estimates in April 2019. Historical IPO values prior to April 2019 were
adjusted for inflation using February 2019 Consumer Price Index.
Source: Rebecca Ungarino, “Lyft went public at a $24 billion valuation. Here's how that
compares to other high-profile tech companies dating back to the dotcom bubble,” Business
Insider, 7 April 2019, accessed 14 June 2020.
13
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