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SoftBank Seeking to Take Control of WeWork Through Financing Package (wsj.com)
128 points by bgc 31 days ago | hide | past | web | favorite | 96 comments

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"):


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:


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

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.

> 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.

"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...

So...all tech companies are overvalued as long as you exclude the ones that are correctly valued?

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.

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

Profits reinvested into successful growth is still profit.

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

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

This is due to Amazon purposefully keeping gross profits at $0 for years. The CapEX investment was through the roof; investments such as AWS which were criticized heavily in their infancy. It was widely known Amazon would be able to turn a profit, they decided to ruthlessly expand their enterprise.

Amazon has low margins, I think the theory with the PE is that they can increase margins after achieving market dominance and get better earnings. Walmart is still bigger so Amazon isn't there yet. And then it could also be high because of the cloud/tech bubble.

No comment on whether public stocks are inflated at the moment, but it's odd to spin WeWork / Softbank as an indication we are in a stock market bubble. This whole thing blew up because public investors rejected the inflated valuation of Softbank's portfolio.

I think the jury is still out on whether Nueman comes out ahead on this deal overall. He did some self dealing and got a bloated salary, but it also seems that much of his loans and stock sales were reinvested into wework.

Neumann invested a big chunk of his money in real estate, so he should be good regardless.

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.

> 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.


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.

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... [2] https://www.cnbc.com/2019/01/29/apple-now-has-tk-cash-on-han...

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).

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

It's mostly oil money. They have to park it somewhere. The Vision fund is a nice cover to invest in fancy tech companies but there's no real selection process. Instead they relied on having so much money that they can just buy their way to success.

Now they're realizing it's not that simple to deploy $100 billion without vastly skewing the market and basically creating their own bubble.

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.

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.

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.

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?

"Mature locations" are cash flow positive. But lots of $$ being invested into expansion.

SaaS economics are much easier since marginal costs are $0. WeWork has to commit to very large lease expenses and then find tenants to move in at higher rates.

It’s really easy to be cash flow negative when you do not have to be cash flow positive.

Even with the rates being inline with competitors and cost of real estate, they have an incredible amount of corporate overhead vs a localized management company. Honestly I can’t see this business model ever working out as short of travel locations there’s nothing they’re bring to the table vs the added costs. It’s a shell game and the third shell is being lifted.

They paid their inside sales team insane commissions relative to industry standard, plus overall staff bloat to masquerade as a tech company.

I can't find the piece, but one article said they also paid brokers essentially the entire initial contract cost vs the traditional ~15% (might've missed that number, but it was a very small percentage compared to 100).

Very concrete example of growth over profits - am not sure what the profitability timeframe would be on that model if we even try and look at it logically.

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.

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.

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.

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.

Maybe if you are talking about some random investor. But if we're talking about SoftBank, which already owns ~30% of WeWork, probably not.

Yes but sometimes even for companies in their position they say enough is enough to the losses and choose to let them go into administration instead. I'd say its unlikely SoftBank will choose this but it is an option for them.

They can kinda do something half way in that direction just by waiting. The lower WeWork's cash on hand gets, the harder of a position Neumann is in. Of course, it's not clear if it's a credible bluff since Softbank isn't in a great position either.

Interesting negotiating position!

Or buy Regus for said $3B and combine that with Wework at a much lower valuation. Own the market. Own 51% of the whole shebang. Done.

But in real life things are not quite that easy ;)

What would buying Regus get you besides a slow growth, lousy brand?

A valuable and profitable business.

How much did WeWork's brand help exactly? It just made the crash harder. Nobody cares about a brand, and definitely not when it comes to office space.

Nope. WeWork is clearly the "go to" brand in the flexible office leasing category. Regus' brand is "has been".

I don't see how two massive profitable companies with more members and locations and revenue are somehow worse as a brand than WeWork because of something as silly as a brand name. Perhaps WeWork is meant for those who look at such superficial details when dealing with office space but it's not the majority.

Anyways whatever brand they had has transformed from asset to liability now when 75% of the valuation evaporated in 2 weeks. An overinflated bubble investment with no serious metrics or leadership is not clearly anything of reference.

You should go read up on branding.

On the financial side, yes, there's a tremendous opportunity to be hugely profitable. In 8 years, WeWork is now bigger than IWG after 30 years. Where do you think think the upside lies?

Lots of people who know how to run the WeWork model profitably?

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.

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/

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.

Have you tried the standard Regus offices?

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?

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.

I had a month to month lease with Regus a couple of years ago.

No true. WeWork's business has already moved very firmly into stabler, longer lived tenants.

WeWork buidings are filled with clients that are brought in by other SoftBank money. It's human-centipede equivalent of VC-funds circling back around to each other, in hopes that suckers will invest in it and then they pull out.

The most obvious problem with WeWork is that the company has been run by someone who is some combination of corrupt and insane. Changing that element is an obvious solution to at least try.

Why wouldn't it be easier to rebuild this in the midst of a recession from scratch when rent is cheaper.

Same reason rent would be cheaper - fewer potential renters, especially new small businesses

WeWork collapsing makes raising Vision Fund II impossible. Letting it survive until the fund closes makes the 6B worth it

WeWork dominates the flexible office leasing business any many large and important markets around the world. It would be difficult and perhaps impossible to replicate what WeWork has achieved. And since it can make money at 50-80% occupancy rates, there's a massive profit opportunity.

It would be difficult and perhaps impossible to replicate what WeWork has achieved

Well, apart from that IWG had already achieved it, of course.

Regus has taken 30 years to become much smaller than WeWork.

IWG is bigger than WeWork in every metric (sq footage, members, locations, and revenue) in 2018.

Anyone can grow fast by spending easy money without any need to earn a profit. What does that prove exactly?

It's been done for a century before and has 2 major profitable companies with sound and proven financials.

WeWork is absolutely nothing new, the industry already knows what the optimal numbers need to be and WeWork is nowhere near them to ever be a profitable business in its current form.

>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?

They're not saving his hide. This is the old axiom "when you owe somebody $100k, you have a problem. When you owe somebody $100m, they have a problem".

SoftBank is paying off Adam Neumann's creditors because that's how finance works - JP Morgan and SoftBank have made some deal to make sure they both come out okay, without really caring about the end result for Adam. If it's good for him, that's incidental.

Because they want him gone. Even with financial difficulties, it can be very difficult to remove a person who does not want to leave from governance (depending, of course, on how by-laws are written.) Given the propensity of unicorns to make founders un-impeachable benevolent dictators for life, they likely need his consent.

Though I don't know him personally, given what I've read of Mr. Neumann, I wouldn't put it past him to take the company down with him in pursuit of his ego. By his comments of wanting to become president of the world, solve world hunger, etc., he seems to have a massive God complex. It is probable he remains convinced he is the best person to lead wework.

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.

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?

It maybe be cheaper to pay him out then to fight him in court.

I'd guess he can block attempts to further take control from him, and they'd need to buy out parts of his shares or otherwise compensate him.

He has some type of captive control of SoftBank. Strange.

Not of SoftBank, but of WeWork (looked it up: chairman of the board, holding lots of shares). If SoftBank wants free reign to "fix" WeWork as they think is best, they need to buy him out or otherwise convince him that it's in his best interest to let them.

EDIT: not majority of shares/voting power, he gave that up when stepping down

I thought he already gave up the majority voting power a few weeks ago when trying to salvage the IPO. Does he still have that power?

Indeed, I apparently misread that. So probably still influential, but not majority.

He still has outweighted voting rights on his shares I think, but now at a non-majority level by the seems of it (I think the old model was 10 votes per share vs most other shareholders 1).

Yeah, looks like it is now 3:1.

When you owe someone a lot of money, you can make it their problem.

Because the personal loans were made by JP Morgan and they are probably making SoftBank do this so they help secure the $3 billion in debt. I imagine the that the plan will involve wiping out Neumann. His properties will probably all be liquidated and then SoftBank will pay off what remains.

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.

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

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


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.

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.

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

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

Sure thing -



These results beg the question of just how much weight we should give analysts' earnings forecasts. It turns out, not much, especially in the long run.

Peter Berezin, the chief global strategist at BCA Research, is out with a new report about stock selection and market timing. In it, he asks the following: "How can we distinguish between hidden gems and fool's gold?" The answer, he determines, is not the thousands of analysts Wall Street has bankrolled to do just that

PS - Just to be perfectly clear, I was definitely joking about WSB. Sister comment is right, WSB is the 4chan of "finance".

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:


Interesting times for Vision Fund 1/2 and SB.

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...

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…

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

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.

The numbers can definitely work out. Properties are margin positive on 50-80% occupancy. We Work dominates the flexible office leasing category in many huge important markets around the world.

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

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.

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


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.

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

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.

not-paywalled article reporting about the submitted one: https://www.cnbc.com/2019/10/13/softbank-is-seeking-to-take-...

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