WeWork – one of the great corporate disaster morality tales

The first time I came across WeWork was four years ago when visiting its shiny new brutalist glass-box office at Moor Place, bang in the heart of the City near Moorgate tube.

As I wrote at the time: “If you are not 32 or under, you will feel a century old when you visit; Californian surfer boys and girls dressed like Alice from Wonderland staff the reception area and baristas serve iced cucumber water.”

“Instead of Country Life magazines, there are glossy books such as Sex and Pleasure in Japanese Art and adverts for lectures on how to be productive in an age of ‘digital distraction’.”

(Apparently WeWork also served free cold beer, offered meditation, pilates and cupping classes with Espresso Martinis with Volcano Coffee but I missed out on that.)

The Alice in Wonderland feeling of being in fantasy land intensified the higher I went up the eight storey building. On the fifth floor, my interviewee showed me his company’s working space (the word office was not used). It was a “space”, he said, into which workers could bring with them whatever they liked: bicycles, surf boards or whatever.

I never found out what the whatever was but I did learn that my interviewee’s company would soon be moving on to a new space, the company’s fourth office in 18 months, because he didn’t want his workers to feel “embedded.” Yes, embedded.

They say that hindsight is the only exact science. But even back then I came away deeply suspicious of this giant American co-working office rental company which claimed to be revolutionising the world of work. It smelt and felt bonkers.

What WeWork was actually doing was signing long-term leases on big buildings like Moor Place, dividing them up into smaller offices, hiring expensive designers to do them up with the hippest sofas, coolest chairs and fancy artwork, hiring pretty young girls to dress up like Alice and handsome men in surfer gear, then renting the space on to companies on a short-term, flexible basis. Some very short-term leases if the company I visited was anything to go by.

In other words, old-fashioned serviced offices dressed up in new clothing. Yet from WeWork’s PR hype and the boasts of the flamboyant co-founder and CEO, Adam Neumann, you would have thought they had found a new way to get to the moon. But the hype – the attempt at creating a new intellectual property – worked its magic. For a while.

Figures from CoStar show that over the last decade WeWork became the biggest private tenant of office space in New York City and London, with 7.7 million square feet of office space in the Big Apple and 4.1 million in the City.

Neumann himself was flying to the moon, if not on the moon. He had his own class of shares, which were not available to other investors, with ten times the voting power.

He also received more than $700m from the company by leasing his own buildings to WeWork through loans, share sales and property leases and had employed many of his friends in the business. He even bought the “We” trademark then charged WeWork $5.9m to use the brand.

Like so many other US new world companies, WeWork was being valued at lunar style prices. In January this year, WeWork was valued at $47 billion. This was the price struck following a private valuation after SoftBank took a stake in the business.

Despite that extraordinary valuation, WeWork had yet to make any money. Over the first six months of this year it lost $900m on revenues of $1.54 billion and had long-term debt of $1.3bn and borrowings of $6 billion. Number crunching by the Harvard Business School showed it has a total of lease obligations of $47 billion.

So when WeWork published its prospectus for an IPO offering this summer, investors finally woke up to what was going on in Wonderland.

The prospectus showed that WeWork wanted to raise about $3bn – which would have unlocked another $6bn debt package from banks that were underwriting the process.

Even more devastating was the revelation that the new proposed price for WeWork’s shares had collapsed so the company was worth less than $20 billion: it had more than halved in value in six months. No wonder existing investors demanded to know why the price was so much lower, and started asking questions for the first time over Neumann’s style of governance. They wanted a head on a plate.

As usual, they were asking the right questions but too late in the day. But they got Neumann’s head. He was kicked to one side to become non-executive chairman but he is still the biggest investor.

The two new co-chief executives, Artie Minson and Sebastian Gunningham, immediately scrapped the IPO. They are now in talks with SoftBank, their biggest investor, to renegotiate a $1.5bn injection of new capital to rescue the business. If SoftBank agrees, then JPMorgan Chase and Goldman Sachs, have promised they will put up another $3 billion to $4 billion of loans. They claim they will be back with an IPO. They have much to sort out first. There’s a growing risk that WeWork will not be able to pay its rent if it continues to burn cash at the same rate it did in the first six months of the year.

The price of its debt has also collapsed. Bonds maturing in 2025 have fallen to 85 cents on the dollar against 105 cents in August when the IPO was first announced.

Fitch has ditched WeWork’s credit rating into junk land, to CCC+, and warns that a default is a real possibility.

Now the new CEOs are focusing on a radical restructuring and big job losses if they are to get WeWork back on some sort of track. Up to 5,000 jobs may have to go, up to a third of total workers.

They have suspended all new lease agreements with landlords and are looking to sell parts of the company. Getting rents in on time is going to be a massive task. Charlie Bonham, an equity analyst at Hargreaves Lansdown, explains why he did not touch WeWork with a barge-pole: “A fundamental issue we had with WeWork was that in a downturn its clients could scale back on space requirements faster than it could back out of its long-term lease obligations.”

They also have to decide what to do with Neumann, still hovering in the background. Observers will have fun for years to come working out what went wrong at WeWork. Yet the seeds of destruction were there to see all along. The story has all the classic hallmarks of a Greek tragedy: an over ambitious and aggressively ambitious CEO in Neumann and greedy investors who were willing to believe that he was creating something new. They should have known better.

One of the great doyens of financial journalism, Christopher Fildes, used to say that building a new palace is a well-established danger signal to watch out for when analysing companies. He also used to quote Bill Mackey, the famous receiver, who put fountains on his list of corporate vanities.

In this case, WeWork has turned out to be the palace itself, and an empty one at that. If there ever was a case of the Emperor with no clothes, it’s Emperor Neumann. Strangely enough, though, the company had place in the palace for its own top of the range Gulfstream G650ER, bought last year for $60 million.

With 20:20 hindsight, the name was a give-away: Neumann should have saved time and just called it the Me Company.