SoftBank to Use WeWork IPO to Increase Stake, Report Says

Japanese holding company SoftBank Group intends to use WeWork’s upcoming initial public offering to buy at least $750 million worth of shares, …

Japanese holding company SoftBank Group intends to use WeWork’s upcoming initial public offering to buy at least $750 million worth of shares, a quarter or more of the shares WeWork intends to offer if it does indeed manage to raise its aimed-for $3 billion, the Wall Street Journal reported Saturday.

Investor hype for the IPO has started cooling down once WeWork published its prospectus, which led many to worry over the company’s risky business model. As a result, WeWork has reportedly cut down its targeted company valuation from $47 billion at the time of its January funding round to as low as between $15 billion to $20 billion. On Friday, Reuters reported it might even be going as low as $10 billion.

WeWork co-founder and CEO Adam Neumann . Photo: Bloomberg WeWork co-founder and CEO Adam Neumann . Photo: Bloomberg

On Tuesday, Reuters reported that SoftBank is pressuring WeWork to shelve its IPO due to its drastically slashed target valuation, but that the co-working giant intends to go through with going public. SoftBank is WeWork’s largest shareholder but co-founder and CEO Adam Neumann is the largest holder of voting rights even after making changes following the criticism that met the prospectus. SoftBank is currently in the midst of raising commitments for its second $107 billion Vision fund, while WeWork is counting on the IPO funding to raise further debt for its quick expansion plans.

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WeWork’s Parent Company Makes Major Changes to Management of Business Operations

We Co., WeWork’s parent company, is planning to make major changes to the management of its business operations after stakeholders expressed …

We Co., WeWork‘s parent company, is planning to make major changes to the management of its business operations after stakeholders expressed their dissatisfaction with the company’s unusual governance model ahead of its upcoming IPO.

The firm’s parent company had initially proposed that 20 votes should be given to WeWork’s founders and early backers for each share of Class A stock. However, the New York-based firm’s management has now decided to give only 10 votes each, according to a filing submitted ahead of the planned IPO.

As reported by CNN, the extra votes might turn into only a single vote, if company co-founder and CEO Adam Neumann passes away or becomes incapacitated.

Neumann currently has 2.4 million of the total shares, however, his stake does not make him a majority shareholder. Approximately 32.6 million are owned by venture capital firm Benchmark Capital Partners and its head and one of WeWork’s directors Bruce Dunlevie.

Collectively, these super voting shares will have majority control of the company.

According to Friday’s filing, there will also be a change in how Neumann’s successor will be appointed.

Before the proposed change, Neumann would have been replaced by a successor (if he died or became incapacitated) that would have been appointed by a committee established by two of the firm’s directors and the CEO’s wife Rebekah Neumann.

However, the updated plan requires that the board of directors choose a successor, which is a common practice among public companies.

As noted in the company’s filing:

“We will not rely on a succession committee. Our board has the ability to remove our chief executive officer.”

The filing also mentioned:

“No member of Adam’s family will sit on our board.”

WeWork’s latest filing comes shortly after several reports suggesting that the company might postpone or decide not to move forward with its public offering.

There were also reports that the company’s valuation might be slashed, however, the updated estimated valuation was not mentioned in the recent filing.

WeWork’s management is seeking a valuation of around $20 billion for its upcoming IPO.

Previously, the company was valued at nearly $47 billion, according to research firm CB Insights.

WeWork has been growing rapidly. During the first half of this year, it generated $1.5 billion in revenue, which is notably double what the company made during the same period in 2018.

Compared to 2016, WeWork’s revenue has grown by 250%. But the company’s losses have also increased significantly, as it recorded a net loss of $904 million during the first half of 2019 and a total loss of $4.2 billion since early 2016.

Last month, when We Work’s parent company filed paperwork to go public, it was criticized for how it conducted its business operations, particularly its huge losses, the unchecked power of its CEO, and also failing to appoint a female board member.

Responding to the complaints, WeWork announced it would appoint its first female board member, Frances Frei, a professor at Harvard Business School (after completing its IPO).

The company also said Neumann had agreed to repay the company $5.9 million in stock, which was received by his WE Holdings LLC, after selling the trademark “We” to The We Company.

In January of this year, WeWork rebranded to The We Company, which serves as an umbrella company to the company’s wide range of businesses.

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WeWork considers dramatic valuation discount in IPO

And it would represent a major blow to its biggest backer, Japan’s SoftBank Group Corp, at a time it is trying to amass $108bn from investors for its …

Reuters/New York

WeWork owner The We Company may seek a valuation in its upcoming initial public offering of between $10bn and $12bn, a dramatic discount to the $47bn valuation it achieved in January, people familiar with the matter said on Friday.

Were the We Company to press on with the IPO at such a low valuation, it would represent a major turning point in the venture capital industry’s growth over the last decade, that has led to the rise of startups such as Uber Technologies Inc, Snap Inc and Airbnb Inc. It would mean that the We Company would be valued less than the $12.8bn in equity it has raised since it was founded in 2010, according to data provider Crunchbase.

And it would represent a major blow to its biggest backer, Japan’s SoftBank Group Corp, at a time it is trying to amass $108bn from investors for its second Vision Fund.

The sources cautioned that no decision has been made and asked not to be identified because the matter is confidential.

WeWork and SoftBank did not immediately respond to requests for comment.

Investors have expressed concerns about the US office-sharing start-up’s business model, which relies on a mix of long-term liabilities and short-term revenue, raising questions about how it would weather an economic downturn.

The We Company’s deliberations indicate it does not feel confident that the corporate governance changes it unveiled on Friday, slightly loosening CEO and co-founder Adam Neumann’s grip on the company, will be enough to woo investors concerned about its lack of a path to profitability.

The WeWork brand is strongly tied to Neumann, a flamboyant, freewheeling 40-year-old Israel-born entrepreneur who has said that the We Company’s mission is “to elevate the world’s consciousness.” His wife Rebecca serves as the We Company’s chief brand officer and is a powerful figure inside the company.

The We Company’s corporate governance changes are largely symbolic, aimed at showing the We Company is listening to investors after being forced to slash its IPO price expectations, corporate governance experts said.

Last month, it was considering an IPO valuation of around $20bn.

“That change is seemingly cosmetic in nature,” said Charles Elson, a professor of corporate governance at the University of Delaware, referring to the We Company’s announcement it will reduce Neumann’s voting power. “He will still control the composition of the board.”

The office space sharing start-up said it was making the changes “in response to market feedback.” It said Neumann’s superior voting shares will decrease to 10 votes per share from 20, though he will still retain majority control of the company. Neumann will also give the company any profits he receives from real estate deals he has entered into with We Company. He will also limit his ability to sell shares in the second and third years after the IPO to no more than 10% of his stock.

No member of Neumann’s family will be on the company’s board and any successor will be selected by the board, scrapping a plan for his wife and co-founder Rebekah Neumann, who is chief brand and impact officer, to help pick the successor.

The We Company also disclosed its will list shares on the Nasdaq Stock Exchange.

It plans to complete the IPO this month, and its IPO investor roadshow could launch as early as next week, Reuters has reported.

This is the second effort to repair damage done to the company’s image among investors.

Earlier this month, it added a new member, Frances Frei, to its all-male board and said Neumann would return a $5.9mn payment for use of the trademarked word “We.”

“For all the attention being given to ‘governance reform’ at the We Company, entrenchment through unequal voting rights remains firmly in place,” said Glenn Davis, director of research at the Council of Institutional Investors.

SoftBank chief Masayoshi Son has been pushing Neumann to delay the We Company’s IPO, but has so far failed to persuade him, Reuters has previously reported.

Were the We Company to delay its IPO, it would have to find debt financing to replace a $6-bn loan package it clinched from banks last month.

This debt deal is contingent on the We Company raising at least $3bn in its IPO.

SoftBank has so far resisted replacing this arrangement by offering the We Company more funding.

The last time SoftBank invested in the We Company was in January at a $47bn valuation, injecting $2bn of cash in the New York-based startup, far less than the $20bn investment that the We Company had hoped for.

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Floating or falling? Tech companies that made stock market debuts in 2019

Lyft has been locked in a price war with Uber and, like its bigger competitor, faces political moves in the US to give drivers paid holiday and other …
Uber share price

Uber

Uber’s shares fell on a humiliating first day of trading in May and have closed above the $45 price of the initial public offering (IPO) on only two days since. The ride-hailing firm reported a $5.2bn loss for the three months to the end of June. Its biggest quarterly loss was weighed down by IPO expenses, but investors worry it might never make money.

In a highly unusual move soon after a stock market debut that valued the company at $82bn, Uber has cut more than 600 jobs to rein in spending. But the big concern is slowing revenue growth. Its core ride-hailing division managed only a 2% increase in the second quarter, and faces fierce competition and pressure, starting in California, to improve workers’ rights. Uber is branching out into food delivery, freight services and self-driving cars but that requires investors to believe chief executive Dara Khosrowshahi and his team can make a success of these businesses.

Lyft share price

Lyft

Shares of Uber’s ride-hailing rival have lost a third of their value since they started trading at $72 in March, and have not returned to that price since falling on the second day of dealing. Lyft has been locked in a price war with Uber and, like its bigger competitor, faces political moves in the US to give drivers paid holiday and other benefits.

Second-quarter results in August were better than expected and it increased its revenue forecast, but it is still burning through cash, reporting a $644m loss for the period. There have been mishaps, including the suspension of an electric bicycle service in San Francisco after bikes caught fire, and the surprise departure of its chief operating officer, Jon McNeill, in July. Some investors are suing Lyft for allegedly overstating its prospects at the IPO.

Slack share price

Slack

The workplace messaging service’s shares jumped to $38.50 on their first day of trading but have since fallen to just below the $26 guide price when it sold shares directly to the public in June. Like most tech growth companies, Slack loses money – its second-quarter loss widened to $360m from $32m a year earlier, mainly due to stock-based pay. But growth is not what it was either. Slack has predicted growth of less than 50% for the current quarter, down from 67% in the first three months of the year. Investors are not convinced it has a snazzy enough product to go against bigger competitors, including Microsoft’s Teams software. Stewart Butterfield, Slack’s founder and chief executive, said it would take time for people to understand that Slack is indispensable. Investors may not have that much patience.

Pinterest share price

Pinterest

The digital pinboard has stood out since floating in April. Shares jumped more than 25% on Pinterest’s first day as a public company and are more than $10 above the $19 IPO price. The big advantage it has over its peers is that it is close to making money. Pinterest’s $1.2bn loss in the second quarter was mainly caused by IPO expenses. Excluding those, the loss shrank to $24.5m from $31.9m a year earlier. Revenue rose 62% to $251m, beating expectations, and user numbers rose 30%. The company has steered clear of the privacy problems that have hit Facebook and others, and chief executive Ben Silbermann is adding features such as “emotional wellbeing” activities and attracting users outside the US.

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The top tech IPOs this year have outperformed the S&P 500, despite Uber and Lyft

The biggest laggard is Lyft, down 36%, followed by Uber, which is off 26% and e-commerce company RealReal, down 15%. Slack has plunged 21% …

Based on the terrible public market performance of Uber and Lyft, you might think it’s been a bad year for tech IPO investors.

But if you treat every offering equally, IPOs have been a lucrative bet.

Looking at a basket of 13 venture-backed tech IPOs this year, including Slack’s direct listing, eight stocks are in the black. If you’d put $1 million into each of them at the IPO price, your $13 million initial investment would be worth $21.7 million — a 67% gain. That calculation follows the debut of cloud security company Cloudflare, which jumped 20% in its first trading day on Friday.

If instead of putting $1 million into every IPO, you’d invested $13 million into the S&P 500 at the beginning of the year, you’d be up 20% at $15.6 million.

All that helps explain why venture capitalist Bill Gurley told CNBC this week that “Silicon Valley has been on the bad end of a bad joke for about four decades now, in terms of the way the traditional IPO process works.” Most of the gains come from the immediate IPO pop, meaning companies are giving away upside to new investors.

There are many caveats to comparing this year’s IPO investments to the S&P 500. Most notably, this methodology doesn’t factor in market cap but just assumes an equal investment in every company. Also, most of the offerings haven’t hit their lock-up expiration yet. In the coming months, a flood of new shares will hit the market, potentially pushing some of these stocks downward.

The biggest qualification, however, is that to beat the S&P 500 with these IPOs, you’d need to have Beyond Meat, a food company backed by venture firms, in your tech portfolio. Shares of the plant-based meat alternative company are up 524% since their market debut in March and on a total dollar basis would account for 60% of the gains.

The next best performer is videoconferencing company Zoom, up 120%, followed by security vendor CrowdStrike, up 91%. The biggest laggard is Lyft, down 36%, followed by Uber, which is off 26% and e-commerce company RealReal, down 15%. Slack has plunged 21% in the past seven trading days, leaving the stock 6% below the reference price for its direct listing in June.

Here’s a list of 13 venture-backed tech IPOs and how they’ve performed since hitting the market:

WATCH:Gurley on IPOs

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