The WeWork IPO has gained a lot of attention in the last few weeks—initially as a prospective IPO, later on as a failed IPO. Questions are flying around about the viability of the WeWork business model. Even the privately traded OTC markets were offering approximately $20 for WeWork stock on October 16.
Investor confidence in WeWork stock is at rock bottom. Back in January, WeWork’s valuation was at $47 billion, but now it has tanked to approximately $7 billion. According to a statement from the CIO of a boutique investment bank, WeWork shares have lost their trading value in the private markets. Some of the investors who hold WeWork shares include companies like Benchmark Capital, JP Morgan Chase (JPM), Goldman Sachs (GS) Group, and Fidelity Management
A cash crunch is on the way for WeWork
Some sources claim that WeWork is facing a severe cash crunch. There’s a high probability that the office space rental company could soon see bankruptcy at his rate.
WeWork has two options to come out of the current crisis. Either it could sell a majority stake to the Japanese SoftBank Group Corporation, or it could opt for the $5 billion lifeline from J.P. Morgan. Some sources claim that the company could end up accepting the financing from JPMC instead of selling the controlling interest in the company.
An economic perspective on the WeWork business model is flawed
The WeWork business model relies entirely on economies of scale. Leasing a whole office structure, remodeling it, and handing out shorter-term office rentals to startups and freelancers at a marginally higher price.
But how would these economies of scale fare if there were less demand for the product? The initial outlay or capital expenses for securing the buildings on lease is enormous. This problem eventually leads to a high discounted payback period. Simply put, the costs of remodeling and redesigning adds to the payback period. In other words, reaching breakeven could take a very long time.
According to the Wall Street Journal, WeWork lease obligations in June 2019 stood at $47 billion. WSJ sources cite that the company operated around 35 million square feet of workspace across 528 locations as of 2018. WeWork’s global presence spans across 29 countries. Typically, WeWork leases office structure for approximately 15 years. But it sublets to members for a much shorter period—around 15 months. As per the statistics, WeWork has signed leases with members for less than 10% of the total lease obligations.
To make matters worse, discussions have suggested a conflict of interest connected to WeWork CEO Adam Neumann. Neumann resigned after the IPO launch went kaput.
Adam Neumann: A conflict of interest?
The charismatic CEO Adam Neumann built the office space rental company from the ground up. He also piled on a valuation of $47 billion.
However, the Washington Post describes the conflict of interest surrounding the CEO of the real estate rental company. Neumann has over 50% of voting rights and can influence company decisions. Plus, he pledged high shares for raising millions in financing.
Adam Neumann also has ties to the companies that own the office structures. In a nutshell, Neumann is a party of interest at every point. And that apparent conflict seems to be bad news for WeWork on the OTC markets.