Investments

Why WeWork’s IPO Strategy Could Make Investors Swipe Left

Investing in IPOs is a bit like dating. The firms going public want to make themselves look as attractive as possible.

Typically, that means showing rapidly growing top lines – ideally rapidly growing earnings per share.

The idea is that investors own a piece of growth, getting in on the ground floor of a publicly-traded entity.

Or, then again, there’s the attraction of getting a bargain – in essence, paying a nickel to get a dime’s worth of value. And sometimes, as in dating, it’s the less flashy candidates who make the best pairings.

But also in dating, there’s sometimes … desperation.

Which of the above would apply to We’s IPO strategy?

News came late this week that the parent company of the shared working space firm WeWork is mulling whether to go public at what is being reported as a “significant discount” to valuations seen the last time it raised money through the private markets.

In terms of the numbers, the We company (the parent firm) may value itself at $20 billion to $30 billion, as The New York Times reported – which would be a significant leg down from the $47 billion valuation that had been in place at the beginning of the year. To give an indication of just where things may stand, the unnamed sources quoted by The Times said the valuation could be closer to $20 billion.

“I can’t think of another IPO where they halved the valuation,” said Reena Aggarwal, a finance and business professor at Georgetown University. “This certainly shakes up confidence and makes people pause.”

To that sentiment, we add a thought on what would add injury to insult: Let’s say the stock comes public at $20 billion and then drops like a stone. Might that be a referendum on high-growth firms with red ink? Lyft and Uber offer a bit of a cautionary tale here, as do other busted IPOs. And it should be noted that WeWork posted an operating loss of $1.7 billion last year, on revenues of $1.8 billion. In one bit of observation, real estate investment icon Sam Zell has said firms in this space typically go broke.

In what looks like a move to avoid a rocky IPO, WeWork’s CEO Adam Neumann has met with mega-investor SoftBank to see if the Japanese firm might take an even larger stake than the $10.5 billion already on the books – to the tune of a few billion dollars. Or, according to reports, the plan could be that SoftBank invests enough to keep WeWork private.

That last strategy speaks volumes. It may not come to pass, but it hints that a company that was once enthusiastic about coming to market now is less so, and that there is an implicit acknowledgment that investors are, well, fickle. What once seemed a relatively easy conduit to capital may be less easy to tap.

Incidentally, in a nod to models that burn cash, Bloomberg reported on Thursday evening (Sept. 5) that CEO Neumann has told analysts, “I look a little bit around at Uber and Lyft. I think there were growth issues. I think when you grow at any price, there are consequences.”

Perhaps that is a bit of food for thought. Suddenly, it seems – and we are being only a bit tongue-in-cheek here – business models matter. WeWork has 15-year leases in place, and rents out space with leases that are only several months long. In a rough economic climate, there could be a mismatch, where space goes empty or leases for less money than might be ideal – and in the meantime, the company has to keep paying the billions of dollars of in-place (and presumably new leases as it expands) obligations (now at about $47 billion).

None of the above scenarios may be palatable to investors who may opt for a bit of speed dating – as in, quickly moving onto the next candidate.

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