
SoftBank to take control of WeWork: Sources - sikim
https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-wework-sources.html
======
Traster
It's very difficult to see how SoftBank breaks even on this new deal. They're
investing $5bn now, with the hope that it's worth more than that when they
IPO, but several things have killed that idea. Firstly, their brand is
tarnished. Secondly, the growth play will be gone by the time they IPO.
Thirdly, the charismatic leader is gone, so the message of "Disrupting" and
"We're a tech play' is gone. They've put $5bn into a company that's roughly
the same size as a public company that's got a $4Bn market cap, but only got
70% equity as a result.

I think I'm at the point where I think that Softbank is throwing billions into
wework to save face. That is a very bad move.

~~~
asfarley
I took a look to see if Softbank was hiring any vetting-watchdogs to prevent
this in the future.

They had one open position. It required all applications to have an extensive
history at a prestigous VC firm, i.e. they are looking for people from the in-
group.

I think a less-incestuous vetting strategy would give more honest results. Too
bad, I think there's a lot of people on HN who would excel at this position
despite not having worked at a big VC.

~~~
flukus
Considering their current vetting is quite lacking, shouldn't they be looking
to hire someone experienced? You don't hire a junior engineer to build you're
new enterprise system.

~~~
ms4720
Perhaps shouldn't would be more accurate

------
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-...](https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-wework-
sources.html)

~~~
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...](https://www.ibisworld.com/industry-statistics/market-
size/commercial-real-estate-united-states)

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

[2] -
[http://www.annualreports.com/HostedData/AnnualReports/PDF/LS...](http://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_RGU_2017.pdf)

[3] - [https://www.investopedia.com/ask/answers/052815/what-
priceto...](https://www.investopedia.com/ask/answers/052815/what-
pricetoearnings-ratio-average-real-estate-sector.asp)

~~~
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...

~~~
ivalm
you're right, apparently multiplying is hard! I first decided to make my back
of napkin calculation (forgot to include the PE ratio) then wrote the post.
I've amended it now.

------
yashap
I can actually see this working out. Comparing the first half of 2018 to the
first half of 2019, WeWork roughly doubled revenue while keeping losses
constant. Their losses went from ~2x revenue to ~1x revenue, which is still
nuts, but improving quickly. They also had $1.5 billion in revenue through 2
quarters, and are growing at roughly 100% year over year.

If SoftBank can really reign in spending, in 2 years we could be looking at a
company that’s cashflow neutral, growing very quickly, with annual revenue in
the range of $5-10 billion. From the outside looking in, this seems possible
to me, and would result in a company with a valuation much higher than $8
billion.

------
thesausageking
This has to be tough for all of the WeWork employees who were paper
millionaires and now have stock options that likely won't survive all of
SoftBank's preferences when and if WeWork finally IPOs.

~~~
dannykwells
I'll be honest here, cry me a river. Everyone who joins a pre IPO company
should value their stock at 0.

~~~
AbrahamParangi
That seems uncharitable given the CEO looks to be walking away with ~$900M
total from the endeavor while everyone else gets... nothing? Probably?

~~~
icotyl
Evidence why people should value their stock at zero.

------
ww520
Actually SoftBank is getting a good deal, using $5B to get a controlling
interest of WeWork at 70%, wiping out all the commons and other LP's. If they
can cut out the slacks and focus on the core value proposition, WeWork can
work after 4 to 5 years. The WeWork brand is unique and valuable.

They did that to Priceline in the past. Priceline was almost dead at one
point. Got sold at a fire sales. They hunkered down and executed, and look
where they are now.

~~~
skinnymuch
Could you say when this Priceline thing happened?

------
mrnobody_67
Other news sources are reporting that Adam Neuman will be paid $200m to resign
from the board of directors... just, wow.

~~~
luckydata
after a few years in silicon valley I learned that's essentially the right way
to make it here. Building successful companies is for suckers, you just make a
big ball of excrements, package it real well and then hand it to someone else
before it falls apart. The VC system rewards that more than any other
skillset.

~~~
ztratar
WeWork is not a Silicon Valley company.

~~~
luckydata
It is in all the ways that matter.

~~~
ztratar
Incorrect. It is _not_ in all the ways that matter. Have you been to SV
recently?

------
anm89
Serious question: given the monstrous scale of softbank, the not so great
quality of many of its holdings, and it's ties into multiple world economies,
could softbank be a systemic risk to the entire world economy?

If Uber took a big write off at this point, not only would American and
Japanese companies and Saudi Arabia take major losses but I would imagine big
tech stocks in general would start to see a loss in confidence and a reversion
to more normal P/E ratios.

I would imagine at that point softbank would be such a dirty word that it
would have to firesale as well. And certainly no second vision fund.

And then you could go on and on about what would happen to pensions in the
states and the rest of our systemically daisy chained over leveraged economy
or whatever else if that happened.

Do I have an overly active imagination? Does anyone else worry about this kind
of stuff?

~~~
dodobirdlord
> I would imagine big tech stocks in general would start to see a loss in
> confidence and a reversion to more normal P/E ratios.

Most of the big tech companies have not particularly strange P/E ratios.

> I would imagine at that point softbank would be such a dirty word that it
> would have to firesale as well.

What's the mechanism here? Uber takes a large writedown leads to Softbank
declaring bankruptcy? I don't follow the reasoning.

> Do I have an overly active imagination? Does anyone else worry about this
> kind of stuff?

Yes and no.

~~~
anm89
If two of softbanks biggest assets get marked down significantly, and the rest
of their bets are similarly, super leveraged high risk plays, It's not hard
for me to imagine trying to liquidate some assets so they could leave with
their shirts and give (some) money back to investors.

They've probably missed their window for huge VC style growth at that point
anyway.

------
neural_thing
This is your annual reminder that Masa Son once lost $70B

~~~
threeseed
And is now worth $23B.

So I would assume he knows a little about business.

~~~
natrik
I'd argue that assumption, [correlation of: current net worth -> knowledge
about business], is flawed logically.

~~~
threeseed
You do understand how he made that money right ?

Knowledge about business -> Current net worth

------
Danieru
Lots of voices ignoring how Son holds onto stakes. He has yet to liquidate his
Yahoo Japan and Alibaba Holdings, and those were massive wins. An embarrassing
mistake like WeWork is sure to stay on the books for decades. Selling would
force him to mark down the private loss, so more so than winner he will hold I
expect.

Maybe WeWork can turn cash flow positive, in which case Don can easily justify
holding it. So long as he is not forced to mark down then we can continue
doubling down. Son is not a guy with an exit plan, he doubles down until bust
then waits for the next cycle.

------
cookie_monsta
I don't really get the ongoing obsession with We/Softbank. I kind of got the
whole schadenfreude side of it when it all came tumbling down but now it's
just turned into a story of a big company trying to dig itself out of a hole
created by some dumb decisions it made.

Is there some larger relevance that I'm missing?

~~~
rattray
For one thing, I'd argue it's important for startups to understand how
Softbank behaves as an investor, since they are a fund many companies might
consider taking money from. They have an outsize quantity of capital to
invest, so this is more worth watching than other funds' behaviors might be.

~~~
cookie_monsta
Do you think that Neumann feels like he got a raw deal?

~~~
rattray
I bet that he regrets doing business with Softbank, yes.

An anecdote I heard (unsure if true) was that Softbank had strongly encouraged
Adam to focus on growth at the expense of profitability to a much higher
degree, shooting for the stars much more than he otherwise would have done.

If I was Icharus and someone else had given me wings and told me fly much
higher, I'd have myself to blame but I'd still be upset and filled with
regret.

------
kelnos
The thing that's ironic is that the IPO market likely would have valued WeWork
at $10B, maybe even $15B, but since that was so much lower than the $47B
valuation it had during SoftBank's earlier investment, they balked and walked.

SoftBank likely would have made out better in the near term had they just let
the (disappointing, to them) IPO play out. WeWork would have launched with at
least a $10B market cap (though of course that could have dropped on day one),
would have raised a couple billion, and maybe would have even raised enough to
meet the requirements for the loans they were planning on taking out. But now
they've more or less gutted the company, killing anything that was even
slightly interesting, turning it more or less into a bog-standard office real
estate company. Which presumably will be able to turn a profit after a bit of
retooling, but it hardly qualifies as "Vision Fund" material.

This is definitely just Son and SoftBank trying to save face.

------
goatinaboat
So Softbank will have invested nearly $16Bn (10.5 already + 5 now) in
something that even they think is only worth $8Bn? Am I reading this correctly
because that makes no sense whatsoever. Except for Neumann who walks away with
his $700Mn regardless!

~~~
mushufasa
Well, maybe you could think about it like this:

If they don't intervene, they lose all their previous investment guaranteed.
So just consider all of that previous investment gone (sunk cost).

If they invest $5b they may make an $8b valuation. And they may still think
there is upside beyond that.

Not sure if that's what they really think, but a lot of posters here seem to
accuse softbank of sunk cost fallacies without considering that they are
surely aware of investing 101.

~~~
goatinaboat
The sunk cost fallacy has a name because people keep doing it, even knowing
what it is

------
pacetherace
In the last 4-5 years, Softbank basically caused hyperinflation in the startup
world.

------
lasgsf
Does this mean then all the common are wiped out due to the liq preference
that existed before?

~~~
qeternity
Essentially yes. Not wiped out per se, but underwater. If they can grow the
business beyond the high water mark, then there’s a shot at getting paid. But
I’d say in a best case that’s unlikely.

~~~
tempsy
No it doesn’t. Read the deal. SoftBank will buy up to $3B in stock from
existing shareholders, including employees.

They are bailing out employees and investors. People will at least get
something.

------
ChuckMcM
Wow, that might be a record, IPO to cramdown in 3 weeks. I wonder if Softbank
sees some way to convert some of the real estate into assets that it can sell
off before the next recession hits to get its money back. I could not find a
single thing in that article that suggested anything other than a liquidation
that might favor the investors over creditors.

------
bradleyjg
There doesn’t seem to be any original reporting in this article. The link
should probably be: [https://www.cnbc.com/2019/10/21/softbank-to-take-control-
of-...](https://www.cnbc.com/2019/10/21/softbank-to-take-control-of-wework-
sources.html)

------
baby
Let’s be honest.

Wework is good business if they can become cash positive. They have a brand,
more and more people are going remote, there is a bug market for pricey and
google-like coworking spaces.

It doesn’t matter if they had a bad CEO, or if they can’t IPO anymore, there’s
no reason this wouldn’t become massively profitable in the next 10 years.

------
bitflipr
I guess Adam will get those margin calls on his $700m in loans on WeWork
shares after all. Hope he can cover.
[https://www.ft.com/content/a9254a70-f1a8-11e9-bfa4-b25f11f42...](https://www.ft.com/content/a9254a70-f1a8-11e9-bfa4-b25f11f42901)

~~~
H8crilA
This saga will be a great read in a year or three. Hope someone writes a long
article on this. Joining the great American predecessors of corporate failure
like Enron or Lehman Brothers.

------
monkeydust
Does softback have strong financiers that can wrestle control over the
companies expenditure and balance sheet? Given some of its recent investments
at lofty valuations I don't think so. If they can close this gap then I think
a turnaround is possible over time. The brand will recover.

------
moneywoes
Wow, what a fall from grace. Weren't they valued at 72 billion earlier?

~~~
onlyrealcuzzo
If you sell a pig to yourself for $72Bn, does that make it worth $72Bn?

It was valued at $20Bn in 2017 based on a $4.4Bn investment from SoftBank
(where they were the sole investor). It was then valued at $45Bn in 2018 based
on another $3Bn investment from SoftBank (when SoftBank was already the
largest investor -- by far). Then, SoftBank made ANOTHER $1Bn investment later
in 2018 "valuing" WeWork at $47Bn.

WeWork was ever valued at $72Bn. Maybe you're thinking of Uber.

------
choppaface
So is this effectively a triggering of the partial ratchet noted in the S-1
(i.e. SoftBank gets shares if valuation falls)? Or a whole new deal?

------
jamesfisher
Lol at the title. Imagine citing "Sources" in a paper. If you can't state your
sources, just leave out the citation.

------
rmm
how on earth does a company go from getting ready to IPO to being cash-
strapped and needing an infusion in such a short space of time?

Never saw the numbers in the prospectus, but surely there was some indication?

~~~
55555
It's crazy that it's not basically fraud to do what they did. They put out a
100-200 page document saying "Our business is great" so that retail investors
could make an informed investment decision and then 2 months later are like
"actually it's relatively worthless and we have no money left and if we can't
raise money right now, we will die". Did the people involved really believe
that glowing 100+ page report? The difference between this and a pump and dump
is simply intent, and I think it's most likely that the intent was there.

------
tibbydudeza
I wonder what is going to happen to the wavepool company.

------
xenospn
So who exactly came to the conclusion that they were worth >40B just a few
weeks before? How does that math even hold up?

~~~
anm89
Simple, someone gave them money at that valuation (softbank). It doesn't mean
the underlying value exists but it does give them that "valuation"

~~~
xenospn
Obviously - but why did Softbank think it was worth so much more? They were an
investor - they knew that the company was a financial black hole.

~~~
tahdig
Probably to inflate the valuation, do a quick IPO of WeWork for 10x the actual
value it should have, get their shares sold on high price, and wave to the
fools that took the bait and bought an almost worthless stock.

This whole ordeal was the best that could happen for the normal people,
basically fell into the hole they themselves dug, because the economists etc.
called their bullshit out loud.

If you have not already, these are good reads from one of the critics of the
whole scheme:

1\. WeWTF -
[https://www.profgalloway.com/wewtf](https://www.profgalloway.com/wewtf)

2\. WeWTF, Part Deux - [https://www.profgalloway.com/wewtf-part-
deux](https://www.profgalloway.com/wewtf-part-deux)

------
buboard
I keep reading about that real estate company - make up your minds is it a
tech company or not?

~~~
falcor84
That's a false dichotomy. Is Amazon a retail company?

~~~
buboard
amazon is in the tech of retail - and more. what tech does wework make?

~~~
perl4ever
Amazon didn't _start out_ with AWS. That's a side effect at becoming a world-
conqueror in terms of logistics.

