After its failed IPO last month, WeWork has begun to implode and analysts and investors are worried about the company’s future.
Adam Neumann, WeWork’s Co-Founder and Chief Executive Officer was forced to step down as the CEO of the company. Neumann came under fire after the company's prospectus for a planned August IPO revealed heavy losses, a questionable business model, investments that were not core to the business, claims of family nepotism, and a wide discrepancy in the distribution of corporate powers between him and the company's other shareholders.
After the announcement that Neumann would step down, WeWork appointed two new co-CEOs, Artie Minson and Sebastian Gunningham. As soon as Minson and Gunningham assumed their new positions, they acknowledged concerns and flaws with the company’s long-term business model and said that they are going to implement a number of initiatives that will involve the following:
• Management changes
• The sales of non-core assets
• A halt to further expansion in China, Japan, Southeast Asia and Europe
• The elimination of "a few thousand" employees in the coming months
(1) Management Changes
Minson and Gunningham announced that they intend to terminate more than 20 friends and relatives of Adam Neumann who are involved in various roles in the company.
WeWork China, which operates in 100 office buildings in 12 cities of China is said to be adjusting its business plan and will halt further expansion and is expected to begin staff layoffs by the end of this month.
WeWork Japan has appointed a new CEO, Kazuyuki Sasaki, who replaces Chris Hill, WeWork Japan's CEO since the company first entered Japan in 2017. Sasaki has previously served as WeWork Japan's managing director and chief financial officer, and combined both roles in April.
(2) Sales of Assets
The company has also announced that it plans to sell the following assets:
• Conductor is "a marketing services software company that provides search engine optimization and enterprise content marketing solutions. WeWork paid $113.6 million USD for the company.
• Managed by Q is an office-management platform that can be used to hire IT and office support. WeWork paid $220 million USD for the company.
• Meetup is a self-service offering that connects people who share interests, seek to organize events, and desire to learn new things. It lists more than 12,000 events on its website. WeWork paid $200 million USD for the company.
• The Wing is a women’s coworking space. WeWork bought a 23% stake in the company, which was valued at $58.8 million USD in June
• Additionally, the Gulfstream G650 jet that was bought for Adam Neumann in 2018 for $60 million USD will be sold
The sale of these assets, if they’re able to fetch the amounts that WeWork paid for them would provide the company with almost $650 million USD in cash that it can use for its operations.
(3) A halt to further expansion in China, Japan, Southeast Asia and Europe
In order to save additional cash to sustain its operations, a key project in Southeast Asia that is likely to be impacted is the WeWork takeover of the HSBC Bank Building in Singapore. The building at Collyer Quay consists of 21 floors and 200,000 square meters of space.
According to previous reports, HSBC will move from the building in April 2020. After that, WeWork will take over the building and invest $45 million USD on improvements before opening it in 2021. WeWork will have a seven-year lease on the property and it has been estimated that the company will pay $30 million USD per year for the lease.
The 21-story HSBC Building at Collyer Quay, Singapore
Analysts have noted that by cancelling the contract for the HSBC building, WeWork can save more than $100 million USD in expenses through 2021 and another $150 million USD after that.
(4) Staff Layoffs
Immediately after taking over management of the company, Minson and Gunningham said that they would need to lay off staff, the question being how deep. Multiple media have reported that it is expected that the layoffs will affect 3,000 people, approximately 25% of the companies 12,500 employees,.
WeWork’s Fundamental Problem
At the heart of all decisions to sell assets, halt expansion and fire staff is the fundamental reality of WeWork’s business – that it has a business model that is flawed on three points:
Point # 1 – The WeWork business model is investment heavy and commits the company to leasing or buying space in commercial office buildings on a long-term basis. The company pays millions of dollars upfront to lease space, refurbish the space and create WeWork spaces.
However its business models is a Co-Work space model, where customers can use space on daily, weekly or monthly basis. The model doesn’t require long-term commitment from customers or the payment of deposits and other fees as traditional real estate leasing requires, and the average long-term contract for a WeWork customer is for only 15 months.
WeWork says sales more than doubled in 2018, but so did net losses, which increased from a loss of $933 million USD in 2017 to $1.9 billion USD in 2018. The company’s total debt is estimated to be more than $3 billion USD.
Point # 2 – Many companies that own or manage commercial real estate have come to realize that they can create their own “Co-Work Spaces” and don’t need to wait for a company like WeWork to rent their space. They can tie-up with local entrepreneurs who are already in the CWS space or who want to be involved in real estate and they can create their own brands that fit in with the character of their city and neighborhoods and help them to better realize the concept and promise of business communities.
Point # 3 – WeWork over-valued itself tried to position itself as a “Technology Company” in order to justify the company’s proposed IPO value of $47 billion USD. The reality is that WeWork is a real estate company that leases and sub-leases space.
The largest company in the flexible office space area is the International Working Group (IWG). IWG owns the Regus service office brand, among others, has a customer base that is 5x bigger than WeWork’s, has been profitable for many years, and is valued at $3.8 billion USD. Once investors recognized the type of company that WeWork really is and evaluated its finances it was clear that the company’s IPO would be a mistake.
The ability to use biometric scanning to access a building; to use sensors in the building to monitor air conditioning, lights and security systems; and providing tools to tenants to book conference rooms, utilize multi-media software; accept payments and hire staff online are all elements of Property Technology (PropTech). All of these systems have already been invented and are commercially available, so simply weaving them into a real estate business does not justify valuations that are 12x more than its largest global competitor.
One analyst noted that WeWork has a value far less than the $12.8 billion USD that it has already received from investors and that if evaluated solely against its competitors, the company’s maximum value would be $1 - $2 billion USD. WeWork has announced that after it reorganizes, that it will still file for an IPO but whether the company will even be valued above the $12.8 billion USD that it has already raised is an open question.