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September 24, 2019

Breakingviews: WeWork founder’s strong hand gets rapidly weaker

by Breakingviews.

Supervoting shares don’t create great corporate leaders – and they don’t save weak ones. Consider Adam Neumann’s rapidly eroding grip over The We Company, the office-sharing group he co-founded. When a company is in need of cash, it’s providers of capital that call the shots.

The 40-year-old Neumann’s main financial backer, SoftBank, is exploring ways to oust him as chief executive, Reuters reported on Sunday. The Japanese technology investor and its affiliates including the Vision Fund have poured almost $11 billion into the office sublessor – most recently at a $47 billion valuation. Those investments are underwater, with even a cut-price $10 billion initial public offering failing to entice demand. It might help to remove Neumann, whose tight control over the company and erratic behaviour were a turnoff for investors.

On paper, he has the power to resist. The We Company’s IPO filing shows Neumann owns all of the outstanding Class C shares, which each have 10 votes, and also effectively controls the votes attached to shares held by We Holdings, which also has supervoting shares. SoftBank, along with venture-capital group Benchmark and JPMorgan, owns single-voting Class A shares, according to the filing. Even if they teamed up, the trio would have roughly one-seventh of Neumann’s voting power.

In reality, SoftBank and its boss, Masayoshi Son, hold the whip. The We Company burned through $2.2 billion of cash last year. At that rate, his current $2.5 billion cash pile will need to be replenished by the middle of 2020. Neumann has no obvious alternative to Son, who is one of a few venture capitalists willing to write multibillion-dollar cheques. The We Company’s bankers offered up to $6 billion of bank credit, but made it conditional on it raising $3 billion in an IPO. Its high-yield bonds were trading below their face value on Monday.

The upshot is that Neumann is boxed in: he could fight SoftBank, for example by calling a shareholder vote and dismissing the Japanese group’s appointed director Ron Fisher. Neumann would risk being left at the helm of a company with barely enough resources to last a year. Acquiescing to SoftBank would be humiliating; digging in, if Neumann finds his job is on the line, would be downright counterproductive.

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