September 5, 2019

Breakingviews: WeWork governance fixes highlight the unfixable

by Breakingviews.

WeWork isn’t entirely unconscious when it comes to its own governance. Adam Neumann, co-founder and chief executive of the shared-office group that is readying an initial public offering, has handed back $5.9 million he was paid by the company for trademarks. And the company has finally hired its first woman director, Frances Frei. Yet such easy repairs only underline its harder-to-reach problems.

The fixes are noted in the latest draft prospectus for the IPO of the business also known as The We Company, filed on Wednesday. They’re steps in the right direction. For potential investors, though, there are far larger concerns – especially since Neumann and his backers will presumably set a valuation higher than the last private-market figure of $47 billion once they indicate a target range.

Start with structurally poor governance. Neumann’s control is entrenched by three classes of stock distributed so that insiders have 20 votes per share while IPO investors get just one. That’s fine until WeWork hits a pothole, or Neumann indulges in a bigger version of the egregious and now-reversed trademark deal, at which point regular shareholders will regret their powerlessness.

Then there is the red ink: In the first half of 2019, WeWork reported an operating loss of $1.4 billion on revenue of $1.5 billion. This is coupled with negative operating cash flow and investments in property, equipment and software that soaked up $1.5 billion in liquid funds in the same period. Even several billions of cash, and more billions of possible IPO proceeds, won’t last long at that pace.

Meanwhile, WeWork had $47 billion of undiscounted obligations under signed leases at the end of June. These run 15 years on average, the company says, equivalent to $3.1 billion a year. Yet in June, the enterprise was only making run-rate annual revenue of $3.3 billion, which doesn’t leave much to cover other costs or cushion a downturn.

That’s simplistic of course – and part of the problem is that The We Company isn’t simple. Its numbers remain too complicated to show a path to sustainable profitability. Neumann says his mission is to elevate the world’s consciousness. He could start by elevating understanding of how he’ll eventually make money.

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