Neill Collins Notebook – We always knew this wouldn’t Work

As we brace ourselves for another three weeks of confinement, solitary or otherwise, we should turn our sympathies to those less fortunate than ourselves. Spare a thought then for Masayoshi Son and for Adam Neumann, who between them have shown how jolly hard life can be for billionaires. It takes a heart of stone not to laugh.

With his film-star looks, excitingly long hair and charismatic style, Neumann was a natural to go breaking and entering some fuddy-duddy industry. As for Son, the philosophy in his modestly named Vision Fund was built on picking an entrant to disrupt an industry, and flooding it with billions in capital, to attack the incumbents and discourage other disrupters. Before he hit on this, his Softbank had had one fabulous success with Alibaba, which more than than paid for a string of other failures.

Son and Neumann chose: offices. Yep, obviously ripe for disruption. Worldwide industry, billions if not trillions of dollars of value, filled with workers slaving at their desks, yearning to be free. Here was the chance to offer them dynamic cool spaces, the chance to rub shoulders with even cooler cats and get free beer.

Standard commercial property practice looks for long-term, creditworthy tenants, allowing the owner to be confident about the rent. WeWork turned this upside down, committing to the building and hoping that enough of those cool cats would turn up to pay the rental. What on earth could go wrong?

Nothing, of course. In three months to the end of last September, WeWork opened nearly 100 of its expensively equipped offices, taking the total to 625 across the world. It was only later that documents emerged disclosing that each dollar of revenue was costing two dollars to earn. Before that became public Softbank and its advisers at Goldman Sachs had encouraged suggestions that this business was so brilliant that an IPO might value it at $60bn or even more. As an indication of Neumann’s genius, the company proposed paying him $5.9m for the use of his copyright of the word “We”.

The payment was ridiculed until it was scrapped, but still the IPO fantasy ground on, even as the projected valuation shrivelled, to $20bn, or even $15bn. Unfortunately, at that price Softbank would be taking a nasty blow to its last, internal valuation of $47bn and it became clear that the fantasy could not be sustained. Under presssure Neumann gave up more of his overblown rights, but he had to go, that only cash could stop the rot, and that Softbank was the only source with enough of it.

In October, as bankruptcy loomed, Son scrambled to cut a financing deal, eventually agreeing to pay Neumann a $1.7bn golden goodbye while Softbank was to pump in $6.5bn and take control of the company. Thousands of jobs would go. A short while later, documents emerged showing that it would cost $17m to replace his senior lieutenants.

Since then, the coronavirus has made things much worse, as tenants are failing to pay rent or just pulling out altogether. Occupancy rates had already dived to 64 per cent at the start of April. Actual rental payments are much lower.

Son has pulled Softbank out of the $3bn financing, and Neumann and the reworked WeWork board are fighting Softbank, the biggest shareholder, to force it to stick to the deal. So now the fun begins. Lawyers for both sides are limbering up for what promises to be quite a show.

The world is littered with investments that looked like a good idea at the time, but few can match this one, for both scale and the capacity of the participants for self-delusion. Even by the standards of disruptive start-ups, WeWork was an absurd project, as a few minutes’ due diligence would have revealed.

Since everything was measured in multiple billions, from the grandiose plans for world domination, to the funds available to invest, the advisers had no great incentive to look beyond the fees, to see a business which had no substance, just an ability to burn cash at an ever-faster rate. As you contemplate the ruin of your own portfolio after the plague has passed through it, reflect that otherwise intelligent people have made far stupider decisions with much more money.

Besides, after the court cases are finally resolved, there will be nothing left but the film rights – on current form, they will be worth more than the business itself, with the bonus of providing harmless entertainment for the rest of us.