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WeWork’s IPO plan in doubt as CEO Neumann exits under pressure
We Co. is under a tight deadline to go public. It must do so by the end of the year in order to secure a $6 billion debt financing contingent on a successful stock offering. The company, which is deeply unprofitable, will need to find an alternative source of capital next year if the 2019 IPO falls through.
WeWork’s plan to go public, in one of the largest stock offerings of the year, hit a wall. Now the company will see whether sacrificing its divisive leader can save a crucial fundraising effort.
Adam Neumann, who co-founded WeWork and turned it into one of the world’s most valuable startups, stepped down as chief executive officer Tuesday under pressure from the board. He takes a new role as non-executive chairman and forfeits his control over management decisions.
The move is designed to salvage an IPO, which had been met with immediate scorn from public investors. A litany of apparent conflicts of interest and Neumann’s propensity to burn through capital were chief concerns. “In recent weeks, the scrutiny directed toward me has become a significant distraction,” Neumann, 40, said in a statement Tuesday. “I have decided that it is in the best interest of the company to step down as chief executive.”
Two senior WeWork executives, Sebastian Gunningham and Artie Minson, were appointed as co-CEOs. WeWork’s parent company, We Co., still intends to go public at some point, but people briefed on the deliberations said it’s unlikely to take place as soon as next month, as was planned. The new CEOs said in a statement that they will be “evaluating the optimal timing for an IPO.”
We Co. is under a tight deadline to go public. It must do so by the end of the year in order to secure a $6 billion debt financing contingent on a successful stock offering. The company, which is deeply unprofitable, will need to find an alternative source of capital next year if the 2019 IPO falls through. Gunningham and Minson “anticipate difficult decisions ahead” to protect the company’s “long-term interests and health,” they wrote in an email to staff reviewed by Bloomberg.
After Neumann’s decision to step aside, WeWork’s high-yield bonds initially fell to as low as 92.75 cents on the dollar, their lowest level in more than four months.
Although 2019 will be the busiest of the decade for IPOs, the party has been spoiled by several spectacular flameouts. Two of the largest offerings, Uber Technologies Inc. and Lyft Inc., are trading below their initial prices. Like WeWork, the ride-hailing companies bleed cash. Investors’ reaction to these three stocks could force venture capitalists to rethink the value they place on a grow-at-all-costs approach to business.
Over the last nine years, WeWork raised more than $12 billion and set up co-working spaces around the world, where people rent desks and conference rooms. Neumann and his co-founder, Miguel McKelvey, have long promoted a higher mission for the company than being a commercial real estate landlord. They banned meat from company functions and have opened dorm-style apartment buildings and an elementary school.
Neumann’s We-powered rocket ship hit turbulence early this year. SoftBank Group Corp., the largest investor in WeWork, called off a plan to buy a controlling stake in the business for $16 billion. The Japanese conglomerate put in $2 billion instead, and Neumann embarked on a flight to the stock market for additional capital.
WeWork published its IPO prospectus last month, and investors were aghast. The company had never turned a profit and failed to make a convincing case it could do so. The company had lent Neumann money as it paid him rent on buildings he owned. WeWork paid him about $6 million for a trademark to the name “We.” The board is composed entirely of men.
Neumann, his board and their financial advisers were wholly unprepared for the reaction from public investors. They took steps to address these issues, but some directors decided they’d need to go further. Masayoshi Son, the founder of SoftBank, pushed for Neumann’s resignation as an apparent way to satisfy prospective investors in WeWork and in his own ventures, which are in many ways tied to the fortunes of WeWork.
SoftBank expected that Bruce Dunlevie, a WeWork director and partner at venture capital firm Benchmark, would be on its side. Benchmark had orchestrated the ouster of Travis Kalanick from Uber two years ago. But the dispute at WeWork ended quickly and without much of a fight. Dunlevie heaped praise on Neumann in a statement Tuesday. “He and the WeWork team have redefined the ways in which people and companies approach work and brought innovation to the real estate industry,” Dunlevie said.
Neumann gives WeWork star power, and the new pair of CEOs, investors hope, offer experience and stability. WeWork hired Minson in 2015 from Time Warner Cable after he helped sell the company to Charter Communications Inc. He has served in various roles at WeWork, including president and chief operating officer. Most recently, he ran the finance department and led preparations for the IPO. Gunningham was hired last year from Amazon.com Inc., where he oversaw the company’s marketplace of sellers.
The management changes show would-be investors that WeWork is trying to tackle corporate governance concerns, but they do little to address underlying weaknesses in the business model, according to Jeffrey Langbaum, an analyst at Bloomberg Intelligence. “The delay gives WeWork time to persuade investors and make additional fixes but won’t address operating risks such as the lack of a clear path to profitability and long-term leases that may become an albatross in an economic downturn,” Langbaum wrote.
The new chiefs convened WeWork employees Tuesday for an all-hands meeting to discuss the changes. Although Neumann was notably absent, Gunningham and Minson were joined onstage by two investors and maintained an upbeat tone, according to two people who watched the presentation.
As part of Neumann’s departure, he has agreed to further reduce his sway in board decisions, and his wife, Rebekah, will relinquish her role in the business, said the people briefed on the plans, who asked not to be identified because the details are private. Neumann’s stock now carries three votes per share, down from 20 in the initial plan. Rebekah Neumann, who was listed on the IPO prospectus as a founder and CEO of the WeGrow education arm, will leave. McKelvey, the third founder, retains his title of chief culture officer.
“When Miguel, Rebekah and I founded WeWork in 2010, we set out to create a world where people work to make a life and not just a living,” Adam Neumann wrote in an email to employees. “As we take this next step in our company’s journey, I am equally ready to listen, grow and continue working relentlessly on my commitment to all of you.”
--With assistance from Liana Baker and Natalie Harrison.
To contact the reporters on this story: Michelle F. Davis in New York at mdavis194@bloomberg.net;Ellen Huet in San Francisco at ehuet4@bloomberg.net;Gillian Tan in New York at gtan129@bloomberg.net
To contact the editors responsible for this story: Mark Milian at mmilian@bloomberg.net, Andrew Pollack
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