Softbank and WeWork – No Work

Softbank blinks after two heavy losses.

• With Uber down 28% and Lyft down 38% from their respective IPO prices, it looks like Softbank has finally figured out that fake it till you make it does not work in the stock market.
• Softbank is now urging (see here) WeWork to pull its IPO rather than face having to write down an 8-month old investment by 63%.
• A write-down of this size would be huge black eye for Softbank and could seriously compromise its efforts to raise its latest $108bn fund.
• This makes complete sense as WeWork, like Uber (see here) and Lyft (see here) is in no condition to face the harsh examination of the public market.
• Companies that go public need to have profit and cash flow or at least a clear and visible path to becoming so as well as a reasonably stable outlook.
• I have also long believed that public companies should also have clear, open and fair corporate governance as well as no super-voting distributions.
• Unfortunately, because demand for these shares has been much greater than supply historically, exchanges have compromised on their ethics and allowed these super-voting distributions to persist.
• I believe that super-voting distributions unfairly disadvantage minority investors as despite owning a majority of the economic ownership, they are unable to enact change or remove management.
• I deal with this issue by adding a discount of up to 30% on the fair value of the company to compensate minority investors for the extra risk that they are taking by investing in the company.
• Given the issues at WeWork, it looks to me like it should attract the full 30% in line with Google, Facebook and Baidu and ahead of Alibaba which gets 20%.
• While pulling the IPO is in both WeWork’s and Softbank’s best interest, it is going to cause a funding problem.
• WeWork is growing at 100% YoY because it is offering tenants terms that are too good to be true because after including depreciation, gross margins are below negative 100%.
• Consequently, it is spending like crazy and with $9bn of new funding dependent on the IPO, it is going to have to resort to other sources of capital or stop growing.
• Furthermore, this situation will have put a real blot on what investors think the company is actually worth meaning that the terms that the company gets for new capital will be far harsher than in the past.
• This is a real headache for WeWork because without new funding it has to become a going concern meaning that it needs to substantially raise prices.
• This is the fundamental weakness in WeWork’s business model because it has no barriers that I can see and so big price increases is likely to lead to a tenant exodus.
• Consequently, I continue to struggle to see why WeWork should trade at a huge premium to peers that are profitable, cash generative and pay a dividend (see here).
• Hence, I suspect that WeWork’s advisors are going to struggle to find demand even at the $15bn – $20bn now being touted.
• I am pretty sure that this going result in the IPO being cancelled until such time that the company is more stable, has profits and more transparent corporate governance.
• In the short-term, this will be a painful loss of face for Softbank and agony for the investment banks as their fat fees go up in smoke, but for an orderly and transparent public market, this is a good turn of events.
• This is because this will help to dissuade others from going public too soon thereby increasing the overall quality of public companies.
• This will lead to lower earnings and expectations volatility and lower risk for investing in equities generally.
• I hope that the IPO scene will now be more sensible from here.