[mdorazio]

Better article in [1]. From the unconfirmed report:

- SoftBank to invest $4-5 billion

- Pre-money valuation at $7.5-8 billion

- SoftBank will end the deal with ~70% control of WeWork

- SoftBank's Marcelo Claure to take over as chairman of We

- No confirmed word on additional job cuts, asset sales, or clawbacks from Neumann

[1] https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-...

[personlurking]

Also, from another article (by Axios):

"SoftBank will pay former WeWork CEO and current non-executive chairman Adam Neumann around $200 million to leave the board of directors, give up his voting shares and support SoftBank's takeover, according to multiple sources familiar with the situation."

https://www.axios.com/adam-neumann-wework-softbank-takeover-...

[TuringNYC]

I'm utterly confused on how Neumann walks away with so much. Given the burn rate and the capital requirements, I cant imagine many other players who can step in at this point. And if no one steps in, the firm is worth zero.

So isnt this a recapitalization of the firm? Why would they need to pay $200M for control if the alternative is some variation of bankruptcy followed by a firesale and cheap buy?

[ksec]

>So isnt this a recapitalization of the firm? Why would they need to pay $200M for control if the alternative is some variation of bankruptcy followed by a firesale and cheap buy?

Because it is obvious if they do Firesale and Cheap buy they would have destroy the company and buy something that everyone knows isn't remotely worth that much. By trying to save it now they could at least get back some of its investment via IPO.

My question is what if Neumann decides to be an ass, and just want to watch everything burn? After all he has the voting shares.

[dodobirdlord]

They could probably sue him. As a member of the board of directors he still has an obligation to act in the interests of the shareholders even if he controls a majority of the votes.

[ksec]

Wow, so it turns there is a difference between Majority of shares (50%+) and Majority of Voting Power.

So hypnotically could he have done it if he had 50%+ vote? Or could he still be sued? And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.

[dodobirdlord]

> So hypnotically could he have done it if he had 50%+ vote? Or could he still be sued?

Could still be sued.

> And by watching everything burn, I mean he could try to spin it as he will take drastic action to improve on the situation and refuse Softbank's offer.

Having a spin can help in court, but a court is likely to see through it.

[newfangle]

4 to 5 billion investment in a company with an 8 billion dollar valuation.

At some point you have to wonder when its better to cut your losses and scrap the entire thing.

[thedudeabides5]

I mean, if you liked 20% ownership at 50bn, you prob love 70% ownership at $8bn.

This is where the value of all that liquidation preference kicks in. At some point it becomes in SoftBanks interest to push for lower valuation, as it means they get to wipe out all the people that came before.

[ivalm]

But the reason they liked 20% ownership at $50bn is presumably because they thought they can cash-out at $80bn+. This cash-out valuation was not value-based but growth/hype-based. It seems that weworks will no longer be valued on growth/hype, which means that the value of weworks is much lower.

Liking 20% ownership at 50bn doesnt mean you like 70% ownership at $8bn. The value of the company had significant future growth/hype component which required other investors to pour additional money in to keep up the growth, that is now gone.

[nihonde]

They basically bought control of the company for ~$15B. Any valuation north of $20B ought to put them in the black.

[ivalm]

Big Edit: multiplying is hard, forgot to multiply by the PE ratio! Actually, potential valuation is 660B.. so 20% would mean 3% of US office real estate business. At a less generous pe of ~10 (perhaps more appropriate given they don't own the buildings), it would be about 10% of real estate market.

------

Sure, but $20B valuation seems hard to achieve.

US commercial real estate market by revenue is ~$1.1T [0]

Office space by value is about 1/8th [1]

Regus gross margin is ~16% [2]

Real estate generally has good PE ratio but partly because they usually own the property [3], so let's be generous at 30x.

So if we value WeWorks as a normal real estate company AND weworks has %100 of US office real estate business we have a valuation of 1100 / 8 x 0.16 x 30 = $660B.

Now, weworks exists outside of the US, but the valuation you propose means they must have ~equivalent of all US office real estate.

[0]- https://www.ibisworld.com/industry-statistics/market-size/co...

[1] - https://www.reit.com/sites/default/files/chartjuly92019.png

[2] - http://www.annualreports.com/HostedData/AnnualReports/PDF/LS...

[3] - https://www.investopedia.com/ask/answers/052815/what-priceto...

[hilbertseries]

Don’t you need to multiply that 22B by 30, or did you get all of those references but you don’t understand the difference between profit and valuation...

[kss238]

What about the 30x earnings multiple? Shouldn't it be $22B*30?

So WeWork "only" needs to capture ~3% of the US market to be worth $20B

[TuringNYC]

>> US commercial real estate market by revenue is ~$1.1T [0] >> Office space by value is about 1/8th [1]

I'm a big fan of the WeWork concept, not commenting on specifics of how the business was run.

The way things worked in the past was just silly -- you signed a multi-year lease with no elasticity. I paid WeWork for personal space before and now my employer pays. It is expensive, but only on a unit basis. The model totally makes sense to me as a purchaser.

I guess the WeWork risk is the buy-long sell-short model which is always risky unless you are earning sufficient spread.

[nihonde]

I think it’s a given that Softbank’s involvement means the target market is global, with expansion in EMEA through acquisitions or mergers with other portfolio companies.

[antaviana]

Probably less if we take into account tax credits.

[bduerst]

Also makes the sale possibility much more likely for the brand and whatever it is they call all that IP that they have.

[OnlineGladiator]

They can also wipe out themselves by throwing good money after bad.

[threeseed]

Same could have been said for AirBnb, Boston Dynamics, SpaceX etc.

Many of the best companies look like risky bets at the start.

[OnlineGladiator]

How do you consider Boston Dynamics successful? They are continually sold to new owners because nobody knows how they can generate a profit.

SpaceX likewise is also in a somewhat murky financial position, although I suspect they will come out doing great in the future. My limited understanding is they are avoiding an IPO because their financials are not up to snuff.

AirBnB was heavily derisked before serious investors took notice - YC loves talking about them as an example because they had so much trouble raising a seed round before they skyrocketed into their A round shortly thereafter. Also I suspect AirBnB is actually going to IPO at a lower valuation than their last round, but I realize I am very much an outlier with that assessment.

I understand high risk high reward, but sometimes investors are just being dumb. I feel like you chose terrible examples to make your point. And since all of your examples are private companies it is impossible for us to analyze their finances.

[nostrademons]

> My limited understanding is they are avoiding an IPO because their financials are not up to snuff.

My understanding is that they're avoiding an IPO because it would jeopardize SpaceX's mission of getting to Mars. When they're privately held, Musk can vet investors to be sure that they're aligned with SpaceX's mission, or ensure that they're powerless enough that they can't make problems if they're not (eg. no board seats). When they're publicly held, things like unveiling Starship when NASA is pissed about Crew Dragon not being ready yet is just inviting a shareholder lawsuit. Wall Street tends to take a dim view of long-term highly risky bets, and going to Mars with privately funded R&D is precisely that.

[wutbrodo]

> They are continually sold to new owners because nobody knows how they can generate a profit.

They were founded in 1992, were bought by Google and then sold to Softbank. I don't think that qualifies as "continually sold", particularly when the buy-and-seller was Google. I'm not as negative on Google's acquisition strategy as many here, but Google selling companies a few years after acquisition is hardly unheard-of.

[hn_throwaway_99]

Furthermore, according to https://craft.co/wework/funding-rounds, WeWork has already received $12 billion plus in equity investments (not counting debt raises). Softbank alone has already put in $9.4 billion in equity + $1 billion in debt.

So it looks like they've already destroyed $4 billion+ in value. I'm curious how the more financially astute than I see this as anything besides throwing good money after bad?

[ian0]

The underlying value of a company can diverge from its valuation. While obviously this happened when they pitched a $50bn valuation, it could also be happening here. IE Softbank thinks the value is way higher than 8Bn but forced a low valuation as to buy up as much stock as possible.

[JohnJamesRambo]

It seems like they haven’t even read the Wikipedia for Sunk Cost Fallacy.

In case any SoftBank homies are reading this, here you go. You are investing in the Concorde.

https://en.wikipedia.org/wiki/Sunk_cost

[dodobirdlord]

I don't think that's really relevant here. The $11B is sunk, the question is whether buying control of WeWork is worth $5B.

[threeseed]

WeWork is the dominant player as the overwhelming trend in business is towards flexible and remote working.

If even a small percentage of companies adopt the Gitlab model, WeWork is going to be extremely successful. And given Softbank's business model is designed for long term, strategic bets there is no way I would be cutting losses just yet.

[bduerst]

Softbanks model isn't proven yet. They overinvest and create unicorns in the expectation that the 10x extra cash will cement market leadership for the startup.

That doesn't mean much if the market does not materialize, which is possible because remote work does not require shared office space. Currently the trend is that connectivity removes the need for an office entirely, not generate more demand for them.

[threeseed]

Softbank's model won't be proven for decades. It invests in brands that they believe will dominant their industry and still be around in 50 years time.

And as Gitlab and others have found many people simply don't like working at home and want to be around other people. And also need infrastructure like meeting rooms on the odd occasion. WeWork provides that in almost every city. And 500,000+ people today currently see it as a useful service.

[bduerst]

Which is still to my point: Softbanks Vision Fund model is not proven yet. It is just as probable it is more a vehicle to find a place for Middle Eastern money to sit than a true 10x fund strategy, which is becoming more evident since they're already working on Vision Fund 2.

Requiring Gitlab doesn't translate into requiring office space either.

[threeseed]

Back of a napkin:

* Growth in remote workers = 9% per year.

* Percentage of remote workers who want an office = 20%.

* WeWork market share = 90%.

= 1.62% of all workers each year will potentially shift to WeWork.