- Doug Chia
Updated: Nov 9, 2019
A lot has been written about the blow-up of the WeWork IPO and subsequent bloodbath that is leaving everyone but the founder high and dry. While the conventional wisdom is that WeWork's IPO went bust because of serious concerns about corporate governance, I don't think that's really what did this deal in. Of course, there were tons of corporate governance concerns here, and it's good that the media and the Street are paying closer attention to corporate governance. There's the "high-vote" stock where the founder's stock had 20x the voting rights of normal stockholders; the conflicts of interest; the related party transactions up the wazoo (like the founder selling the "We" trademark to the company for $5.9 million in stock), etc. But, is that what made this deal too hard for people to swallow? The cynical part of me thinks that if corporate governance were the only serious flaw for this company, the IPO would have been oversubscribed, just like with Facebook and Snap. Nobody wants to miss the next gold rush, and corporate governance is not what is going to stop them from getting to Sutter's Mill first.
What really did this IPO in were the other more obvious flaws. First of all, the business model is terrible. WeWork is renting out space on short terms that they themselves rented from the owners of those buildings on long terms. That's right, WeWork doesn't even own most of the buildings! They are basically one massive subletting business. I'm no business person or real estate guy, but I just don't see how something like that can last. Then, there's the craziness of the founder and CEO. The cereal box full of weed on the private jet feels like a scene from a Netflix original series. Instituting a company policy that nobody can eat meat? And the whole obsession with tequila. Is the board just going to look the other way in the hopes this guy is the second coming of Steve Jobs? Seems risky to say the least.
What amazes me (call me naive) is that people were only shocked about this stuff right before they were going to take the IPO show on the road. "Where was the board?" is a very legitimate question and a discussion for a future blog post. To me, the question that relates directly to the IPO is "What were the underwriters smoking?" All of the revelations about the business model, conflicts and behavioral issues were in plain sight. Did they not do any due diligence? You didn't have to look very hard to read about employees chugging Don Julio 1942 and listen to interviews where the founder said he wants to eventually be "President of the World" and the first person to become a trillionaire (perhaps a red flag for future executive compensation issues? I'd love to see what the company's first CD&A was going to look like). They all read multiple drafts of the disclosure in the S-1 under the heading "Certain Relationships and Related Party Transactions" (ten whole pages!). And they still recommended the deal go forward at the $47 billion valuation the company wanted. Why? Because if their bank wouldn't underwrite the IPO, their competitors gladly would have taken that coveted seven percent fee!
Maybe the underwriters and their lawyers thought that as long as all of this was disclosed, everyone could say they did their jobs since the investors would be able to read and then decide. As everyone in Corporate Governance Land knows, disclosure cures just about any ill. But, at some point, disclosure has got to pass the straight face test. Otherwise, people could justify appointing an axe murderer to the board because as long as they disclosed in the proxy statement the fact that the director nominee is an axe murderer, the investors could then decide.
For me, this shows that nothing about the IPO underwriting world has changed since the Internet Bubble or the Financial Crisis. This is exactly the same stuff I saw when I was a securities lawyer staffed on deals as issuer's or underwriter's counsel. Well-dressed and educated bankers, lawyers and accountants sat in conference rooms each wondering if anyone else in the room would ever let their grandmother own the securities being offered and who would be the one to kill the deal.
What about the lessons of the Internet Bubble? I guess today's professionals are too young to remember the Pets.com IPO or the AOL-TimeWarner merger back in the days when we all got bombarded in the mail with CD-ROMs from AOL and CompuServe to sign up for dial-up Internet service. And what about all the talk from the financial services industry after 2009 about reducing incentives to take on undue risk? Was all that just a bunch of fluff? The way the WeWork deal was set up, there was going to be an incredible amount of risk to anyone buying WeWork stock. For starters, they would be buying something worth $15 billion (or less) for $47 billion. And, they'd be pinning their hopes on a guy whose primary goals in life were to be the richest and most powerful man in the world. Who came up with the $65 billion and $47 billion valuation figures? Probably some i-bank VP who was asked (told) to build a model that would make the client happy. Even though the IPO was eventually killed, the system failed.