This week the new management of WeWork the business space property rental company announced that it was preparing to axe 2,000, or 13%, of its workforce.
It has been calculated that up to 5,000, or a third, of the workforce will ultimately have to go.
This is the latest episode in an increasingly sorry saga, which last month saw its co-founder Adam Neumann step down as chief executive and relinquish control over the company. Mr Neumann also returned $5.9m worth of stock to the firm, which he had controversially received in exchange for his claim over the “We” trademark.
After announcing its intention to launch on the US stock market earlier in the year, the company, which has more than 500 locations in 29 countries, had to postpone its plans when its viability and corporate governance came under closer scrutiny.
The business, which was estimated to be worth some $47bn when the intended float was first unveiled has since had its credit rating downgraded by the ratings company Fitch to CCC+ with a warning that its liquidity position is “precarious”. Earlier in September, Reuters had reported that the We Company could seek a valuation in its initial public offering (IPO) of between $10bn and $12bn, far below the $47bn at the start of the year. This figure is very different to valuations proposed for the IPO work reported in the Financial Times as between $46bn and $63bn by JP Morgan Chase, between $61bn and $96bn by Goldman Sachs and between $43bn and $104bn by Morgan Stanley.
These values were despite WeWork reporting a loss last year of $1.9 billion from revenue of $1.8 billion, these figures almost double those for 2017.
The recent turmoil is no doubt behind the recent announcement by two of its large landlords in London who have said they will not be signing new leases with WeWork for the foreseeable future.
Yet, there are other companies operating similar business models, such as the UK listed IWG group that owns the Regus brand which reported a net profit of £106 million from revenue £2.5bn. Two other similar business would also seem to be doing well: The Office Group and The Argyll Club formerly London Executive Offices.
As for valuations, IWG’s market capitalisation is about £3.5bn which is far lower than those proposed for WeWork but as a listed company might be more realistic.
Another example of value for a similar business model is the sale in October 2018 for £475 of London Executive Offices that had been up for sale for two year sale after an initial valuation in 2016 of £700m.
Hubris eventually catches up
Much has been made of the character and lifestyle of Adam Neumann, not least the mixing of work and pleasure, which was also part of the WeWork culture, one that offered that will offered employees “every millennial-style benefit under the sun”, which may not be right for a property letting company.
He was famous for statements like “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”
Clearly his character initially charmed the company’s Japanese investor SoftBank, which owns 30% of the company and whose reputation arguably contributed to the initial IPO valuation of $47bn.
However, since then, potential investors have questioned its opaque corporate structure, governance and profitability. They have also questioned the links between Mr Neumann’s personal finances and WeWork.
The whole sorry saga, I would argue, is more about the initial credulous nature of the company’s investors and their belief in Mr Neumann, and less about a business model which has worked well for other similar companies. And the investment banks haven’t helped.