🔒 WeWork: Malfeasance or fraud? 7 fascinating insights into ‘WeWTF’

WeWork is looking a lot like WeDon’tWork after CEO and co-founder Adam Neumann was forced to step down. This after the company’s valuation plunged at least $30 billion and WeWork pulled its IPO. Before all that happened, Scott Galloway, a professor of marketing at NYU Stern School of Business, dubbed WeWork “WeWTF” on the basis that its $47bn valuation appeared “insane”. The New York Intelligencer caught up with him recently after he wrote an article commenting that the “lines between vision, bullsh*t, and fraud are pretty narrow”. “Something is wrong. Something stinks. Something … Just. Doesn’t. Add. Up.” BizNews highlights the key questions and answers in a fascinating, wide-ranging interview, which can be found on the New York Intelligencer website. – Jackie Cameron

IQ: What are your initial thoughts on WeWork pulling its IPO filing? How does the company rebuild toward another IPO? 

SG: Dude, there is no IPO. I’m taking a bit of a victory lap here. I said in 2017, this was the most overvalued company in the world. I said earlier this year that the IPO was not going to happen. This is now a distressed asset. IPO? It’s comical that people are still using those letters.

___STEADY_PAYWALL___

IQ: How much of the company’s problem was solved when Adam Neumann stepped down? 

SG: At this point, I would say about none. He and SoftBank entered into a suicide pact, and he jumped out of the plane before it hit the ground. He pulled the rip cord. He has exited the suicide pact with $740 million, and everyone else gets to ride this out to its logical end, which will likely be a bankruptcy file.

IQ: What’s next for WeWork?

SG: The company has enough cash to get through Q1. It’s spilling $700 million a quarter. SoftBank — to be clear, SoftBank is the only firm in the world that will put money into this thing right now — has to do one of two things. They either have to go back to their limiteds and say, “We’re probably putting good money after bad,” and create an argument for why there’s still value there, or they have to go [bankrupt]. The interesting thing is whether or not these individual locations are special-purpose entities, meaning they can break the leases by declaring bankruptcy across multiple special-purpose entities. In other words, they may have employed what hotels do: If the Four Seasons New York goes out of business, it’s its own corporation. It just goes out of business. It just declares bankruptcy and gives the building back to the bank, but it’s not guaranteed by the headquarters in Toronto. Some of the reporting I’ve seen is that they have special-purpose entities so they can potentially close a bunch of their properties.

IQ: But that doesn’t rescue the entire idea of WeWork, right? It just scales it back. Is their profitability dependent on the chance that some WeWorks work and some don’t? 

SG: There probably are a minority of WeWorks that are cash-flow positive and could sustain a corporate headquarters with 80 percent fewer staff. They have 15,000 employees; I don’t see any path that doesn’t involve 5,000 to 10,000 layoffs in the next 60 days. Then the question is how to restructure…This is a distressed asset in free fall that is inarguably worth less than zero. Because all we have here is an entity burning $700 million a quarter.”

IQ: You can only blame charismatic CEOs for so much. What is wrong with investors? 

SG: There’s a few things at play here. One is just a function of the marketplace. It’s frothy, and there’s more capital than operators. Any operator who has a vision and can promise the potential and convince people they can be the next Google or Facebook can attract billions of dollars right now. The reality is there’s more money out there. ..Now, there’s always a tension between capital and founders around who has power. Ever since Steve Jobs and Bill Gates, slowly but surely the pendulum has swung back to the founder. In the ’90s, founders didn’t survive. We were seen as crazy, and once the company became real, we were to be shoved to the side and some 55-year-old CEO from PepsiCo was supposed to come in and be the real CEO. Then when Jobs was ousted and a series of gray-hairs came in and almost brought the company to the ground and he came back and took them from $3 billion to $300 billion, that changed everyone’s perception of founders. Then Bill Gates took a company from zero to $500 billion. So Bill Gates and Steve Jobs totally changed the market’s viewpoint on founders and the balance of powers shifted way back to founders. Founders were seen as DNA and visionary. We’ve not seen another peak. It’ll start swinging back. This is a train wreck.

IQ: What is the biggest takeaway from the WeWork story? 

SG: The bigger story here is SoftBank. WeWork is the opportunistic infection that is going to kill the Vision One Fund. It’s beyond repair. Between Uber and WeWork, you have $20 billion of the hundred billion. One is likely going to be a zero — that’s WeWork — of $11 billion. So it’s hard to imagine they’re even going to get their investors their principal back. WeWork is ground zero. If the only way it can survive is a deliberate strategy to make it a shadow of itself — massive layoffs, massive restructuring — there’s only thing they can do. JPMorgan and Goldman Sachs? These guys were about to collect $130 million in fees and then prop up some equity analysts to tell their private-wealth managers in the marketplace that this thing was $40 billion to $60 billion. And according to Goldman, it was worth $60 billion to $90 billion! What does that say about them? What happens to the New York and Chicago commercial-real-estate markets where WeWork was the biggest and the second-biggest tenants? What happens to IPOs? The reverberations here are going to be pretty dramatic. WeWork declined in value more in 30 days — SoftBank and all these smart people had their shares on their books at $47 billion — it went to zero in 30 days. That’s more value destruction than the three biggest losers in the S&P 500 lost all year. Macy’s, Nektar Therapeutics, and Kraft Heinz. The three worst performing stocks in the S&P 500 this year, their value destruction pales in comparison to the value destruction of WeWork.

IQ: What does the WeWork fallout look like? 

SG: There will be some pain at SoftBank, but they’re all billionaires. They’ll be fine. It’s embarrassing for Masayoshi Son, but big deal. MBS’s Saudi Arabia investment fund? Couldn’t happen to a nicer group of people. It’s the latent collateral damage that is the real hurt. It’s the employees. It’s a lot of landlords who are going to incur a lot of pain because in exchange for ten-year leases, they put in huge improvements for these spaces which they won’t be able to recapture if WeWork moves out. And you also have a lot of IPOs that will be affected, but I think that’s a good thing — Peleton’s a great company, but it’s not worth $8 billion. Everyone’s kind of been woken up from their trip.

In terms of human toll, this is where the real damage starts. This has been a really interesting and romantic story about the fall of Adam Neumann and SoftBank…There’s going to be so much anger here.