SoftBank, the Japanese conglomerate run by Japanese billionaire Masayoshi Son, announced on April 2 that it was pulling out of a deal to buy US$3 billion worth of WeWork shares, including almost US$1 billion worth of shares owned by WeWork’s founder and former chief executive Adam Neumann.
SoftBank rescue package
In August 2019, WeWork publicly filed its Initial Public Offering (IPO) paperwork. But the filing, one of the most highly anticipated public offerings of the year, didn’t go to plan.
After increased scrutiny led to concerns about the company’s business practices, its path to profitability and its corporate governance, WeWork found itself on the brink of insolvency, according to CNN. The IPO backlash forced Neumann to step down as CEO of the company with an exit package valued at US$1.7 billion.
After the botched IPO, SoftBank, already a WeWork investor to the tune of US$10.3 billion, channeled a further US$9.2 billion into WeWork to save it from collapse. The original rescue package would have given SoftBank 80% ownership of the company and the chance to buy up to US$3 billion of existing shares.
According to reports, the deal would have seen Neumann and venture capital firm Benchmark Capital receiving the most money, with employees, thousands already facing redundancy, receiving little compensation.
Why is SoftBank pulling out?
SoftBank said it would no longer buy US$3 billion worth of shares as previously offered because WeWork had failed to meet several requirements outlined in the initial rescue package.
The Japanese company had “no choice” but to pull out because WeWork had failed to obtain antitrust approvals and complete takeovers of joint ventures in Asia.
SoftBank also terminated the deal, according to The Guardian, over concerns about “multiple, new, and significant pending criminal and civil investigations.”
The New York Times reports that WeWork is under investigation by the Justice Department, the Securities and Exchange Commission and attorney generals in New York and California.
A WeWork committee of two independent directors criticized SoftBank’s decision to back out of the arrangement. They also suggested that WeWork will “evaluate all of its legal options, including litigation.”
Despite withdrawing the offer, “SoftBank remains fully committed to the success of WeWork and has taken significant steps to strengthen the company since October, including newly committed capital, the development of a new strategic plan for WeWork and the hiring of a new, world-class management team,” said Rob Townsend, chief legal officer at the company.
“The tender offer was an offer to buy shares directly from other major stockholders and its termination has no impact on WeWork’s operations or customers,” Townsend added.
According to a press note issued by SoftBank, “Adam Neumann, his family, and certain large institutional stockholders, such as Benchmark Capital, were the parties who stood to benefit most from the tender offer.”
“Together, Mr Neumann’s and Benchmark’s equity constitute more than half of the stock tendered in the offering. In contrast, current WeWork employees tendered less than 10% of the total.”
Once lauded as the next Alibaba and poised for a multi-billion dollar IPO, WeWork has largely imploded. Its valuation plummeted from a peak of US$50 billion to US$8 billion at the time of the rescue package.
In October 2019, the company was reportedly so low on funds that it couldn’t lay off any staff members because it would have been unable to pay their severance packages.
Despite the challenges facing WeWork and SoftBank, Masayoshi Son appeared optimistic at an earnings presentation last month that WeWork would turn profitable in a couple of years.
But, as CNN reports, the coronavirus pandemic is certain to be a massive disruption to any future business plans.
Restrictions on travel and work, alongside social distancing and the shutdown of cities, put WeWork, which Neumann described as “the largest physical social network in the world,” under enormous pressure.
Although major cities with a WeWork presence are under lockdown, the company still has to pay long-term leases, regardless of whether businesses and clients cancel contracts.
If WeWork encounters further misfortune, the effects could spill out to other sectors. In the US alone, the company has signed long-term rental commitments worth $47 billion. It is the biggest renter of office space in Manhattan, and second only to the British government in London.
According to industry experts, if WeWork collapses, landlords would struggle to collect promised payments meaning they couldn’t pay bank loans, leading in turn to bank losses.