Corporate Governance Issues Result in Greatly Reduced Valuation

As a 10-year plus bull market continues to rage on, investors have gotten accustomed to snapping up shares in newly listed companies that have flimsy business models or unsure paths to profitability.

Uber, for instance, is a shining example - it remains to be seen as to when the company will actually turn a profit, and the entire public offering was a pretty blatant cash grab by company insiders and stakeholders. The proof is in the puddling - the company's most recent earnings numbers were a mess, and the stock has gone almost straight down since its initial public offering.

Investors finally seemed to draw a line in the sand with the WeWork initial public offering, which is supposed to hit the market in the second half of September.

The company's original valuation of $47 billion was eye-popping enough, though potential investors in the IPO took exception to the many red flags that the company was showing, especially on the corporate governance side of things. The company's voting structure left all of the power in the hands of company co-founder Adam Neumann, and there were some questionable self-dealings going on as well.

For instance - Neumann had agreed to license the use of his trademarked "We" to the company in exchange for a payment of nearly $6 million.

Also, the company was set up in such a way that WeWork's Class B and C shares would receive 20 votes per share, while the Class A's (which is what would be held by the public) would only have 1 vote per share.

On top of that, investors fretted over who would have the power to name the company's next CEO in the event of Neumann's death, the diversity of the Board of Directors, the real estate deals involving Neumann and the company, and more.

In short - investors finally decided that enough was enough, and they weren't going to be investing in WeWork at a valuation of anything close to $47 billion.

This is bad news to some of the company's biggest investors, namely Softbank, who plunged almost $10 billion into the company since it was founded in 2010. This includes $2 billion in their last fund raise at a much, much higher valuation.

There are now rumors that the company might be valued at as little as $10 billion when it goes public later in September, if it goes public at all.

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WeWork is one of the leading shared workspace companies in the world.

The company leases big chunks of office space, fixes up the spaces and then rents out entire floors, rooms and desks to its "members". At last count, the company had 527,000 members and a total of 528 locations.

WeWork bulls believe that the company is a disruptor that is making life better for potentially millions of workers across the world. The company itself believes that they have a market of potentially $3 trillion to try and tap, which is why they believe that a $47 billion valuation is not ridiculous.

WeWork bears point to the steep losses, large amounts of debt (lease commitments count as debt) and sensitivity to economic conditions as reasons why the company's valuation is a stretch, to put it generously. In addition, the company doesn't seem to have much of a path to profitability, as their numbers rely on some pretty rosy projections.

Add in all of the corporate governance and self-dealing issues that have popped up over the past couple of weeks, and a number of bulls are wanting to pull the IPO for now, as there has been a great deal of damage done to the brand in the investment community. Investors also weren't happy to learn that Neumann has reportedly cashed out $750 million from the company over the past couple of years, in the form of loans and share sales.

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The company announced a number of changes to try and quell the concerns of investors, including reducing the number of votes that Class B and Class C shares receive (20 votes down to 10), limiting the number of shares that Adam Neumann can sell over the first three years after the IPO, breaking the $5.9 million "We" licensing deal and more.

The company is planning a road show, and it appears as though they are pressing ahead with their initial public offering. The chatter now is that the company will be seeking a valuation of $20 billion, though we will have to see what they end up landing on.

One thing is for sure - investors just don't have the same appetite for these types of issues as they did a few years ago. The Uber debacle seems to have soured many investors, and these investors are being much more careful about what they invest in, much to the detriment of WeWork insiders.

Filed under: General Knowledge