Everything you need to know about Softbank’s $10 billion WeWork buyout

October 22 – SoftBank has announced a $10 billion buyout deal for WeWork in which the Japanese tech giant would gain control of around 80% of the flailing real estate company. Former Sprint (also a SoftBank company) CEO Marcelo Claure will take over as executive chairman, while Artie Minson and Sebastian Gunningham remain co-CEOs of WeWork.

The company’s founder and former CEO, Adam Neumann, who stepped down earlier in September under pressure from investors, is reportedly getting a $1.7 billion severance package to leave the company.

WeWork is a coworking company that allows people to rent office space with flexible terms, rather than signing a long-term lease with a traditional landlord. Its rapid expansion strategy allows the nine-year-old company to open around 850 spaces in 123 cities around the world. Less than a year ago, WeWork was valued at $47 billion.

The buyout deal will put SoftBank’s stake in WeWork at $13 billion, according to Reuters. Reuters also called this deal a “financial burden” for SoftBank, since WeWork is now valued at only $7 billion. The NYTimes estimates that the deal will only be beneficial if WeWork is sold or goes public at a minimum $15 billion valuation.

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The extent of WeWork’s crisis

On September 30, WeWork postponed its IPO after the S-1 registration statement with the SEC revealed troubling signs of poor profitability as well as a questionable business model and leadership structure

Poor corporate governance

WeWork had a multi-class stock structure, meaning that Neumann’s Class B and Class C shares each had 20 votes, compared to Class A share’s one vote. With this class structure, Neumann’s supervotes would allow him to maintain majority power in his board. As part of the SoftBank bailout, the Wall Street Journal reported that WeWork shares now all have equal votes, and Neumann’s stakes in WeWork have been reduced to less than 10%.

During his time as CEO, Neumann also employed several family members, including his co-founder wife Rebekah as chief brand and impact officer, and his brother in law as head of wellness. Original company filings stated that if he died, his wife would have been charged with appointing a successor. This responsibility was later revised to fall on the board’s shoulders.

The S-1 also revealed financial practices that raised investors’ eyebrows. In January 2019, the Wall Street Journal reported that Neumann was leasing his private property to WeWork. In addition to this, Neumann received personal loans from WeWork with little interest.

Neumann also trademarked the word “We,” which allowed him to charge nearly $6 million to allow WeWork to revise its name to The We Company. However, after facing criticism, he returned the money.

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Struggling finances

WeWork’s balance sheet in the S-1 document revealed that WeWork had been operating at a loss over the past three years. In 2018, the company lost $1.6 billion on $1.8 billion in revenue. For the first six months of 2019, it lost $690 million on $1.5 billion in revenue.

It is unclear how profitable WeWork’s established locations such as New York or London are. However, 65% of its revenue is spent on rent, and the company is reportedly in debt, including a $702 million bond that’s due in 2025.

In recent years, WeWork had acquired and invested in several companies, which included a $13 million investment in an artificial wave pool company. WeWork also established WeGrow, a conscious entrepreneurial school that offered co-living apartments, coding camps, and even a private elementary school for child entrepreneurs. The company recently announced WeGrow was shutting down. According to the Wall Street Journal, these other endeavors outside of WeWork’s coworking business have been struggling.

Troubling corporate culture

WeWork’s company culture was reported to be a “frat boy” culture that “enabled sexual harassment.” In 2018, former WeWork director Ruby Anaya sued the company, alleging that colleagues sexually assaulted her at two mandatory work events where alcohol was served. WeWork has denied these allegations.

In August this year, a Boss Betty article criticized WeWork for having no women on its board. The company appointed its first female board member in September.

SoftBank’s WeWork bailout deal

According to the NYTimes, SoftBank will pledge $5 billion in further funding, accelerate $1.5 billion that they had previously promised, and buy up to $3 billion in shares from other investors in WeWork, including Neumann. Additionally, SoftBank will lend up to $5 billion to WeWork.

The NY Times also said that, although the deal puts around 80% of the company’s financial stake in SoftBank’s hands, SoftBank won’t have a majority of voting rights at any company meeting.

Japanese telecom giant SoftBank’s $100 billion Vision Fund first invested in WeWork in 2017. SoftBank’s CEO and Chairman Masayoshi Son has in the past called WeWork his “next Alibaba.” “It is not unusual for the world’s leading technology disruptors to experience growth challenges as the one WeWork just faced,” Son said in a statement regarding the bailout. “Since the vision remains unchanged, SoftBank has decided to double down on the company by providing a significant capital infusion and operational support.”

SoftBank’s bailout deal also includes a $1.7 billion paycheck for former CEO Neumann, WSJ reported. SoftBank will buy out Neumann’s WeWork stock, which is estimated at $1 billion. In addition, SoftBank will also issue Neumann a $500 million credit line to help him pay his loans with JPMorgan Chase.

Neumann also receives a $185 million consulting fee, although the terms of his consultancy are unclear. The highest-paid CEOs at public companies in 2018 had a median pay of $18.6 million, according to Equilar. Vox pointed out that Neumann’s consulting fee would equal ten years of that median salary.

In recent years, SoftBank’s Vision Fund has become a significant player in Silicon Valley, making huge deals that no-one else was able to match, according to The Verge. The NY Times reported that this was Son’s strategy to allow fast-growing start-ups to “grow faster than their rivals and establish dominant positions in their industries.” However, several SoftBank-backed companies, including Slack and Uber, are also not doing well financially.

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What’s next for WeWork?

According to the NYtimes, WeWork is looking to sell and shut down unprofitable divisions and lay off employees. WeWork currently employs more than 12 500 people around the world.

SoftBank also advises WeWork to leave cities where profit is not foreseeable in the next three years while doubling down on cities where it’s doing well, such as London or New York. In addition, SoftBank could also raise prices for its customers, risking losing business.

It’s unclear how many employees the company plans to lay off, but it is estimated to be as much as 40% of the company’s global workforce. However, layoffs are delayed because the company can’t afford to pay the multiple severance packages.

On October 23, WeWork’s new executive chairman Marcelo Claure confirmed layoffs and addressed WeWork’s staff in his first all-hands meeting.  

“It’s not going to be easy, it’s going to be bumpy roads,” he said. “This was a race that we were winning, and then suddenly, it’s like we’ve lost momentum, and it’s hard to regain that momentum. We gotta regain the trust of those corporate customers who are going to think twice: ‘Do you really have the financial means?’ We gotta make sure that our employees understand that we are never going to go through the existential crisis we just went through.”

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