Delaying an initial public offering is demoralizing for employees, frustrating for fee-seeking bankers and lawyers, and disappointing for investors.
It's also probably what WeWork should do.
WeWork — technically known as The We Co. — is talking with its advisors and shareholders, including its largest, the SoftBank Vision Fund, about whether or not to move ahead with its IPO later this month, according to people familiar with the matter.
No decision has been made, said the people, who asked not to be named because the conversations are private. The Wall Street Journal previously reported WeWork has had discussions with SoftBank about an investment that would allow the company to go public in 2020.
The discussions about how to proceed follow the realization that public markets will initially value We at a much lower valuation than the company's last private financing round. Sources told CNBC on Thursday that the company likely won't be able to garner a valuation of $25 billion from an IPO. That's at least $22 billion less than WeWork's $47 billion private valuation.
There are many factors at play here, making a decision to charge ahead or delay complicated. SoftBank and its associated Vision Fund are the company's largest independent holders, with about 114 million Class A shares. SoftBank Group Corp. and its affiliates own about 29% of WeWork in total, Bloomberg reported Thursday. SoftBank has invested about $10 billion in WeWork, including a most recent $1 billion investment that valued the company at $47 billion.
Going public at a significantly lower valuation than $47 billion won't be good optics for SoftBank CEO Masayoshi Son, who is trying to raise money for Vision Fund 2. SoftBank is already underwater with its $7.6 billion investment in Uber, arguably the tech industry's biggest blunder of an IPO before the upcoming WeWork debut (if it happens).
It would also be bad for WeWork employee morale if even a $20 billion or $25 billion IPO immediately slumps, similar to Uber or Slack, another late-stage Vision Fund investment. Gauging the floor — just how low WeWork may trade — is part of the job of financial advisors, which in this case include J.P. Morgan, Goldman Sachs and Bank of America.
Then again, CEO Adam Neumann, the largest holder of WeWork stock, may want to increase his liquidity options now if he feels WeWork's chances of flourishing are only going to get worse. Neumann has already sold more than $700 million of stock and debt ahead of the company's IPO, according to the Journal.
The 'R' word
The fundamental reason to go public is, of course, to access capital. If SoftBank won't provide WeWork with billions more to help sustain its private valuation, WeWork may have no choice but to move forward with its IPO — particularly, as Dan Primack of Axios tweeted, because the company's $4 billion debt raise is contingent on the company going public.
https://twitter.com/danprimack/status/1169665930466643970?s=20
Market timing is another quandary. If the U.S. is headed toward a recession, it might make sense for WeWork to go public now, before the so-called IPO window closes. If it waits, could WeWork be shut out from accessing public capital for years to come.
Despite all that, WeWork should probably wait.
Large institutional buyers have already made a decision on WeWork, with its 12-month trailing $1.7 billion loss as of the end of June, its $47.2 billion in lease payment obligations and its attempt at creating a new financial metric of community adjusted Ebitda. And the verdict from those buyers is "pass."
The "coming recession" argument is as much of an argument for delay as it is for charging forward. If investors aren't willing to give WeWork the same leash as other money-losing technology companies, such as Amazon and Netflix, a recession is only going to hurt the company's prospects in the public markets. While WeWork may argue its business model is recession-proof, it's more likely that public markets will treat the company like most commercial real estate entities, which typically struggle during downturns as companies lay off employees and lower office space costs. Individuals or small businesses that may use WeWork now could also downsize to home offices or other lower-cost spaces.
WeWork could also change its expansion and capital expenditure targets by staying private, allowing it to grow without needing as much extra funding. While this type of steadiness may be healthy for the company, it would probably be met by a public share sell-off once the company goes public.
Neumann has many reasons to support his belief that his company is well suited for a recession. He told Business Insider that WeWork is 50% cheaper than the average office in New York City. He has said WeWork has already survived downturns in other countries. He explained that WeWork offers "flexibility and mobility," both of which are beneficial in a downturn compared with the standard static commercial real estate lease. And he said companies can account for WeWork as a membership agreement and therefore be noted as an off balance sheet expense.
This may all be true, but the public markets will be more convinced if WeWork proves them as factual first, rather than taking a leap of faith.
If Neumann truly believes in his company's ability to weather a downturn, WeWork could be a much more appetizing IPO after a recession happens. That would help Neumann capture the value of the company's upside instead of giving it away to public investors.
Moreover, SoftBank's Vision Fund is supposed to be all about long-term investments. It's the very first line of the fund's investment strategy: "The Fund will target meaningful, long-term investments in companies and foundational platform businesses that seek to enable the next age of innovation."
SoftBank may decide to add billions more as a capital injection to support its own inflated valuation of WeWork, but Son's fund was already originally planning on investing $16 billion in the company. That suggests Son strongly believes WeWork will be one of those "foundational platform businesses."
In the end, a go-or-no-go decision may be made by just how poorly advisors expect an IPO will go. WeWork has expected to begin its roadshow as soon as next week. A 50% cut in valuation isn't a good sign. If bad optics begets more fear, and an even lower valuation, it may kill a 2019 IPO.
Maybe that's for the best.
