Delaying an initial public offering is demoralizing for employees, frustrating for fee-seeking bankers and lawyers, and disappointing for investors.
It’s also probably what WeWork should do…
WeWork — technically known as The We Co. — is talking with its advisors and shareholders, including its largest, the SoftBank Vision Fund, about whether or not to move ahead with its IPO later this month, according to people familiar with the matter.
No decision has been made, said the people, who asked not to be named because the conversations are private. The Wall Street Journal previously reported WeWork has had discussions with SoftBank about an investment that would allow the company to go public in 2020.
The discussions about how to proceed follow the realization that public markets will initially value We at a much lower valuation than the company’s last private financing round. Sources told CNBC on Thursday that the company likely won’t be able to garner a valuation of $25 billion from an IPO. That’s at least $22 billion less than WeWork’s $47 billion private valuation.
There are many factors at play here, making a decision to charge ahead or delay complicated. SoftBank and its associated Vision Fund are the company’s largest independent holders, with about 114 million Class A shares. SoftBank Group Corp. and its affiliates own about 29% of WeWork in total, Bloomberg reported Thursday. SoftBank has invested about $10 billion in WeWork, including a most recent $1 billion investment that valued the company at $47 billion.
Going public at a significantly lower valuation than $47 billion won’t be good optics for SoftBank CEO Masayoshi Son, who is trying to raise money for Vision Fund 2. SoftBank is already underwater with its $7.6 billion investment in Uber, arguably the tech industry’s biggest blunder of an IPO before the upcoming WeWork debut (if it happens).
It would also be bad for WeWork employee morale if even a $20 billion or $25 billion IPO immediately slumps, similar to Uber or Slack, another late-stage Vision Fund investment. Gauging the floor — just how low WeWork may trade — is part of the job of financial advisors, which in this case include J.P. Morgan, Goldman Sachs and Bank of America.
Then again, CEO Adam Neumann, the largest holder of WeWork stock, may want to increase his liquidity options now if he feels WeWork’s chances of flourishing are only going to get worse. Neumann has already sold more than $700 million of stock and debt ahead of the company’s IPO, according to the Journal.
The ‘R’ word
The fundamental reason to go public is, of course, to access capital. If SoftBank won’t provide WeWork with billions more to help sustain its private valuation, WeWork may have no choice but to move forward with its IPO — particularly, as Dan Primack of Axios tweeted, because the company’s $4 billion debt raise is contingent on the company going public.
Market timing is another quandary. If the U.S. is headed toward a recession, it might make sense for WeWork to go public now, before the so-called IPO window closes. If it waits, could WeWork be shut out from accessing public capital for years to come.
Despite all that, WeWork should probably wait.
Large institutional buyers have already made a decision on WeWork, with its 12-month trailing $1.7 billion loss as of the end of June, its $47.2 billion in lease payment obligations and its attempt at creating a new financial metric of community adjusted Ebitda. And the verdict from those buyers is “pass.”
The “coming recession” argument is as much of an argument for delay as it is for charging forward. If investors aren’t willing to give WeWork the same leash as other money-losing technology companies, such as Amazon and Netflix, a recession is only going to hurt the company’s prospects in the public markets. While WeWork may argue its business model is recession-proof, it’s more likely that public markets will treat the company like most commercial real estate entities, which typically struggle during downturns as companies lay off employees and lower office space costs. Individuals or small businesses that may use WeWork now could also downsize to home offices or other lower-cost spaces.
WeWork could also change its…
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