
SoftBank Seeking to Take Control of WeWork Through Financing Package - bgc
https://www.wsj.com/articles/softbank-seeking-to-take-control-of-wework-through-financing-package-11571002488?mod=rsswn
======
H8crilA
Adam Neumann is the most brilliant, but perhaps somewhat repulsive, [not
short] seller of the unicorn bubble.

People sometimes incorrectly assume that the proper way to benefit from
overpriced assets is to sell them short. Truth is that any selling will
suffice! Housing bubble? Build more houses, sell. Corporate credit bubble?
Start a corporation, get credit. Tech unicorn valuation bubble? You got it,
create a stupid startup, pay yourself huge salary and sell your stock on
private markets.

Bottom line is that supply follows demand - if there is demand then supply
will materialize. This is the "magic" of capitalism. It's no different with
WeWork, which is a consequence of investors chasing outsized returns in a low
return environment.

Matt Levine's column on the topic (scroll to "We We We"):

[https://www.bloomberg.com/opinion/articles/2019-10-02/the-
tr...](https://www.bloomberg.com/opinion/articles/2019-10-02/the-trades-will-
be-free-now)

And if you don't believe that this is caused by chasing crazy returns see this
interview with Masayoshi Son about how he secured $45B in 45 minutes from the
Saudi prince (1:05). He said he wants to give him a $1T gift:

[https://youtu.be/Sa2_VBu0d7k](https://youtu.be/Sa2_VBu0d7k)

Congratulations, this is a Michael Burry level of play. But not as "pure".

~~~
Gibbon1
My feeling is when you refuse to limit yourself to the one true and golden
measure of inflation (basically cat food, toilet paper, and very sketchy
imputed rents) and look at differential inflation.

Becomes really obvious, there inflation in stock prices that isn't supported
by any real economic growth. Makes sense then that if you can create bullshit
stocks out of thin air and push them onto the market with all the other
bullshit inflated stocks. Then you can make a lot of coin. Especially if you
can get investors to swallow tech company valuations[1].

[1] Go ahead try and value any tech company as if it were a ordinary company.
I dare you.

~~~
thesausageking
> Go ahead try and value any tech company as if it were a ordinary company. I
> dare you.

ok. Let's look at Apple compared with three non-tech F10:

    
    
             PE Yield PEG  EV/EBITDA
      AAPL   19 1.35% 2.0  14
      WMT    23 1.77% 5.3  13
      BRK    19 0.00% 0.86 10
      MCK     9 1.23% 1.27  8
    

Looks like it's priced right; if anything it's cheap.

~~~
vtange
"Any tech company" was probably an overstatement, companies like Apple and
Google are much more grounded in valuation compared to companies like Amazon,
which had a PE ratio of 85.99 in 2018 [0].

[0] [https://www.nasdaq.com/market-activity/stocks/amzn/price-
ear...](https://www.nasdaq.com/market-activity/stocks/amzn/price-earnings-peg-
ratios)

~~~
pbreit
But PE is obviously the wrong metric for Amazon since we know it reinvests all
its earnings and has proven ability to convert investment into cash flow.

~~~
throwaway2048
Or maybe it isn't? And the plan of theirs isn't going to result in huge
profits, ever.

~~~
dodobirdlord
Seems unlikely, it's not as though their core business lines are unprofitable.

~~~
s1artibartfast
Do you think their core business lines have room to grow 400%? Alternatively,
can they cut costs 75% with their R&D investments?

------
tytso
My theory about what is going on, and why it's not _totally_ insane that
Softbank is throwing bad money after bad: By throwing in $3 billion more
(after already having throwing $11 Billion into WeWork) this gives Masayoshi
Son the following three things:

(1) WeWork is able to secure the $6 billion loan commitment.

(2) Softbank gains 51% voting control over WeWork, getting Adam Neumann
totally out of the picture.

(3) It avoids WeWork going bankrupt (and setting its value to zero), while
Masayoshi Son is in the middle of raising money for Vision Fund 2.

If it goes bankrupt a year from now, Softbank will have already raised money
for their next VC fund, and like startup founders of failed companies,
Masayoshi Son is probably hoping that people will forget about his prior
mistakes / trash fires, and if Vision Fund 2 is at least halfway successful,
he'll be able to continue to play his VC games. Being able to play the part of
the visionary VC is probably well worth pouring another $3B into the WeWork
firepit.

~~~
Judgmentality
> while Masayoshi Son is in the middle of raising money for Vision Fund 2

I just can't imagine why anyone would put money into the Vision Fund 2 after
watching what happened with the Vision Fund 1. I don't have billions of
dollars to invest though, so I guess I'm not his target audience. The man is
even famous for losing the most money in history, and yet people seem to be
rallying for him to do it again.

[https://arstechnica.com/information-
technology/2012/10/how-s...](https://arstechnica.com/information-
technology/2012/10/how-sprints-new-boss-lost-70-billion-of-his-own-cash-and-
still-stayed-rich/)

Apple and Microsoft signing up as LP's for the new fund seems weird to me. I
realize they are sitting on enormous piles of cash and want to find new ways
to invest it, and they can comfortably put billions behind extremely risky
assets, but even then it makes no sense to me.

I just don't get it, but maybe that's why I'm not a billionaire.

~~~
freewilly1040
Do we know how much Apple and Microsoft are actually putting in? I can't find
anything about it.

To put numbers on "enormous piles of cash", Apple books $20 billion in profits
a quarter [1] and $245 billion cash on hand [2].

My guess is that if they are looking for risky plays, there just aren't a lot
of options for the amount of cash they have.

[1] [https://www.reuters.com/article/us-softbank-group-vision-
fun...](https://www.reuters.com/article/us-softbank-group-vision-
fund/softbank-groups-108-billion-vision-fund-2-draws-in-microsoft-apple-
idUSKCN1UL01F) [2] [https://www.cnbc.com/2019/01/29/apple-now-has-tk-cash-on-
han...](https://www.cnbc.com/2019/01/29/apple-now-has-tk-cash-on-hand.html)

~~~
adventured
Apple is printing massive profits, however they're not quite $20 billion per
quarter massive.

Their last quarter was $10b in net income, and $11.5b in operating income. The
last four quarters were $55b in net income, $64b in operating income.

Apple's current cash plan is to draw it down to net zero, according to Cook,
through returning cash to shareholders. I would expect them to continue to be
extremely conservative on investments and acquisitions as per their historical
norm. Their net cash is down to about $100 billion now, and total cash was
$210b as of the third quarter results (likely under $200b now).

~~~
notfromhere
Would be nice if they could throw some change at a not-terrible keyboard
design.

------
nopriorarrests
Details including the exact amount of SoftBank’s potential investment couldn’t
be learned, but executives at SoftBank figure We needs at least $3 billion to
get through the next year

This is insane.

~~~
colechristensen
Wait how is We not cashflow positive? Do they have occupancy rate problems?
It's not like their space is cheap or undercutting rivals, where is all of the
revenue going?

Real estate isn't SaaS where you have to pay a lot of developers to build a
usable product and then scale your customers to pay for it, you can make money
owning one unit.

~~~
jjeaff
Ya, it's not like a software startup at all. You have to pay "developers" to
build out all your new physical locations. You need to scout those locations,
then you need to market and advertise those locations locally, furnish them,
staff them, and then run them in the red until you get enough tenants to break
even.

One would think they are profitable on a per location basis. But just losing
lots of money overall due to huge growth.

~~~
throwawaytoday5
Before changing jobs, I was in a WeWork location at DTX in Boston. There were
many rooms that were empty, but Puma was paying for an entire floor so maybe
they were making the difference up with large corporation clients?

------
goatinaboat
_Some of SoftBank’s cash could also be used by Mr. Neumann to repay hundreds
of millions of dollars of personal bank loans_

Neumann’s real genius is his ability to turn investor’s cash into his own,
it’s astonishing that he gets away with it even now.

------
artfulhippo
How is this anything but the sunk-cost fallacy, throwing bad money after bad?

Seriously looking for someone to explain why the WeWork glass is half-full.

~~~
harryh
They rent buildings long term for low prices and then lease them back out in
small pieces at higher prices. If they can keep the buildings full enough,
they could make a lot of money!

Right now most of their buildings are still pretty new, so they are not full
enough, but that should change over time.

~~~
rosege
Yes Regus does this and is profitable - given Regus is valued at $3 bil It
might make sense to buy them instead of pumping another $3 bil into WeWork
that doesn't look like it will ever make a profit.

~~~
SkyPuncher
Regus does something similar, but slightly different.

Regus is geared towards small businesses anticipating a long-term home. WeWork
is geared towards individuals and companies that don't know if they'll be
around in one year.

As a freelancer, Regus is too large of a commitment while WeWork is more
manageable.

~~~
manigandham
Regus offers all the same flexibility as WeWork but without the flashy
decorations and services, and thus offers a lower price premium.

If you still want all that then Regus has a new sub brand called Spaces:
[https://www.spacesworks.com/](https://www.spacesworks.com/)

~~~
mcintyre1994
Working out of a Spaces office - I'd have to disagree. Services not provided
include microwaves, coffee, reliable Wifi, working Ethernet ports, comfortable
office temperature, remotely competent staff, reliablly being able to unlock
your office door, an ability not to throw away personal belongings in the
kitchen, breakout areas (they're turning > half of every kitchen into another
office and they're already tiny compared to WeWork's), clean toilets, clean
kitchens, any events, any sort of help with letting guests into the building.

~~~
manigandham
Have you tried the standard Regus offices?

~~~
mcintyre1994
Nope, I know our Spaces is converted from one but I never worked in it before
that or in any other Regus. Any idea how they compare?

~~~
manigandham
We use Regus in NY and LA. 4 and 10 person offices, changing daily or weekly
depending on where the sales team is meeting. Works great for us. Everything
is clean and it's always quiet. Kitchens are well sized and stocked. We know
the reception staff in each location and they do everything we ask.

WeWork was much more expensive and a much noisier and busy environment,
especially if you don't get your own dedicated office space, and if you're
going to do that then major cities all have tons of subleases which are much
more attractive.

------
ummonk
>Some of SoftBank’s cash could also be used by Mr. Neumann to repay hundreds
of millions of dollars of personal bank loans, one of the people said.

Why would they save his hide when the money could be used to cover more of
We’s enormous unending losses?

~~~
harryh
Because SoftBank wants additional control of the company. In order to get
that, they need more stock. Stock than Neumann owns. So they'll pay him for
it.

~~~
tomatocracy
They could also buy the existing debt from current lenders then wait for the
inevitable restructuring before putting more money in and getting equity out
of that without having to buy it from Neumann. They seem to have rejected that
approach given this news but it would be interesting to know why - is it
because they think it would damage the business (tenants leaving etc in
reaction to a restructuring/insolvency) or because they were worried about the
reputational damage to Softbank/Vision Fund?

------
Traster
It's very interesting to me whether this behaviour is because SoftBank still
believe significant value can be wrung from the corpse of WeWork or whether
this is simply an exercise in hiding losses in order to pave the way for the
other funds SoftBank are work on.

So let's examine the first condition - SoftBank needs to put around $3Bn into
the company to get through the year. Let's say that's right, it's going to
cost them that amount, and over the next year they completely stop the burn
rate. That essentially means you end up with a IWG sized company, with more
debt, arguably a huge hangover of extra over-head, and broken processes. IWG
has a market cap of $3.5Bn. So let's assume neutrally WeWork can get back into
a normal situation for an office rental company- that is a bad investment,
you're better off letting the company go bankrupt..

So the second situation seems more likely. WeWork is trying to hide the scale
of its problems until the next fund has been completed. I can't help but think
that people are going to catch on to that - they caught on to WeWork and now
SoftBank are really going to be subject to way more scrutiny.

------
FartyMcFarter
Will the Vision fund still look like a smart investment if WeWork goes bust?

~~~
jazzkingrt
Maybe not the Vision fund itself. But analysts seem to think that Softbank
stock is really cheap when measured against its paper assets.

[https://www.barrons.com/articles/softbank-stock-wework-
and-u...](https://www.barrons.com/articles/softbank-stock-wework-and-
uber-51569019677)

~~~
ultraluminous
I’m not going to get into the specifics of this particular article, or public
analyst reports in general, but FYI Barrons is possibly the worst source of
financial information on planet earth. You’d be better served following WSB’s
advice than take anything your read there seriously.

~~~
Judgmentality
Can you provide me with a source where I can better learn about the
shortcomings of public analyst reports? I had never even heard of WSB before,
so I guess I'm a bit in the dark here.

~~~
scarejunba
Wall Street Bets /r/wallstreetbets : the #1 argument against the wisdom of the
crowds

~~~
notfromhere
there's an investment thesis to be made to invest in the exact opposite of
whats trending on wsb

------
TheOtherHobbes
As a reminder, WW has gone from a $47bn valuation - higher according to some
interested parties - to skirting bankruptcy in less than two months.

The WGS law firm mentioned are better known for Chapter 11 "restructurings."

The Saudis who were persuaded to put money into Softbank are better known for
this kind of thing:

[https://en.wikipedia.org/wiki/2017%E2%80%9319_Saudi_Arabian_...](https://en.wikipedia.org/wiki/2017%E2%80%9319_Saudi_Arabian_purge)

Interesting times for Vision Fund 1/2 and SB.

------
olingern
It seems like SoftBank has money in so many places and I was surprised when I
read [1] how many 1+ billion dollar investments they have and have made.

1 - [https://www.businessinsider.com/running-list-softbank-
invest...](https://www.businessinsider.com/running-list-softbank-
investments-2017-7#eleme-3-billion-56)

------
joeblau
Is there any way that the numbers could work out? Let’s say SoftBank is able
to trim the company to the bare bones; Does the We Company still make money at
high gross margins? I wonder if it makes more sense to cut losses, as opposed
to pumping more money in? I guess that’s why they pay SoftBank the big bucks…

~~~
MobileVet
Hard to know what is fact, but the info that has come out (including the S-1)
indicate that a majority of their properties are losing money.

If that is the case, then this cannot end well no matter how they trim
operations

~~~
harryh
The majority of their properties are very new so losing money is expected. If
older properties are making money and new properties will eventually turn into
older properties then they are, potentially, fine.

------
gnatman
Is Softbank leveraged enough that a few investments going south at the same
time could trigger a global recession?

~~~
jjeaff
Softbank's funds are a drop in the bucket when compared to Total money in the
market. And given that VC investing is inherently risky, I can't imagine their
failure hurting market sentiment overall. It's not like a traditional bank
failing, in other words.

~~~
Judgmentality
The Vision Fund represents a huge share of the VC market though - at least
10%.

[https://news.crunchbase.com/news/softbank-dealt-in-tenth-
of-...](https://news.crunchbase.com/news/softbank-dealt-in-tenth-of-worldwide-
vc-dollar-volume-so-far-in-2019/)

It could trivially collapse the VC market as companies are largely failing to
IPO, and depending on how it's leveraged (I do not know nearly enough details)
it could absolutely have _serious_ economic shockwaves throughout the world.

> I can't imagine their failure hurting market sentiment overall.

I don't see why it would be any different than 20 years ago and the dot com
bubble. Everybody says this time it's different, yet the overwhelming majority
of tech companies IPOing are hemorrhaging money. Look at Uber - losing
billions of dollars per year with no end in sight and their stock continues to
decline. And of course Uber was a Softbank investment.

~~~
freewilly1040
The bubble inflating money coming from private markets rather than public like
20 years ago is a pretty huge difference. Vision Fund’s collapse is bad news
for SV techies but ranks far below other things like trade wars in terms of
reasons for concern

~~~
Judgmentality
I agree with you the trade war is likely to have far more of an impact (at
least an order of magnitude) than any of this, however as companies like Uber
go public it no longer is only affecting private investors. And Softbank
definitely propped up Uber for the IPO like they tried to do with WeWork, but
I guess that was a one trick pony.

Also let's not forget how many pension funds are tied up in VC portfolios, so
while it may not have an immediate crashing impact on everybody it can ruin
people's retirements.

------
detaro
not-paywalled article reporting about the submitted one:
[https://www.cnbc.com/2019/10/13/softbank-is-seeking-to-
take-...](https://www.cnbc.com/2019/10/13/softbank-is-seeking-to-take-control-
of-wework-wsj.html)

