As Bad as WeWork Is, It Could Get Even Worse

(Bloomberg Opinion) -- I don’t know what’s left to say about WeWork. It’s a disaster and it’s hard to imagine a happy ending — except, perhaps, for the executives and investors who helped make it a disaster.

WeWork’s board of directors on Tuesday reportedly agreed to a financial rescue from SoftBank — the office leasing startup’s biggest outside investor, which is largely responsible for inflating this company into an unrestrained mess. The bailout consists, in part, of a $5 billion loan that SoftBank is putting together.

SoftBank also plans to purchase billions of dollars of stock held by WeWork’s deposed chief executive officer and others. SoftBank will own the majority of WeWork’s stock, and it appears it plans to clean house and install fresh management, slash costs and try to get WeWork on its feet.

Somehow, WeWork is so strapped that it could not afford severance payments for the employees it plans to lay off, the Wall Street Journal reported. This bears repeating. WeWork needs bailout cash, in part, to fire a bunch of people because it can’t afford to keep them on the payroll, but it also can’t afford to let them go. I cannot fathom how the board let the company get into this position. The board that helped break WeWork also included SoftBank, which is now in charge of fixing WeWork.

This is a much-needed bailout for WeWork. SoftBank is also helping bail out itself and others who deserve blame. Adam Neumann, the company’s svengali-like co-founder and CEO until last month, is allowed to sell slightly less than $1 billion worth of his WeWork stock to SoftBank. It will also extend him $500 million in loans, the Wall Street Journal reported, and pay him an $185 million “consulting fee.” He will no longer control WeWork through a special type of stock, and he will lose his post as chairman to a SoftBank executive. (He can assign two board seats, Bloomberg News said.)

Neumann’s punishment for messing up as a leader is to walk away with a giant pile of money. It’s worth remembering that Neumann had already used his position to take at least hundreds of millions of dollars out of the company in the form of stock sales, loans and other personal enrichments. Presumably he needs the fresh SoftBank financing line to repay loans backed by his WeWork stock, which is suddenly far less valuable. Neumann failed, and still won.

Everything could still get worse for WeWork. It reported $2.5 billion in cash as of June 30, and that should have been enough to last awhile, even if a planned initial public offering went down the tubes. Instead, WeWork has been on track to run out of cash as soon as next month. Given how quickly and surprisingly WeWork’s cash position deteriorated, it’s worth asking how much more time a fresh $5 billion loan buys the company. 

The company grew so quickly that it now has commitments to make $47 billion in lease payments in coming years, even if it never occupies a single new office building. Presumably it can ditch those leases if need be, but not without financial penalty and not without a hit to reputation that will make landlords think twice about leasing buildings to WeWork. They’re probably already wary after months of terrible publicity and questions about the company’s cash supply.

I also hope there are a lot of hard conversations ahead for WeWork’s investors, financiers, executives and enablers. Neumann justifiably has taken much of the blame, but there’s plenty to go around. The board, for one, stocked with some heavy hitters including SoftBank, the tech financing firm Benchmark and the private equity firm Rhone Group LLC. JPMorgan Chase & Co., including CEO Jamie Dimon, was a major proponent of Neumann, put investors’ money into the company and enabled the former CEO with scads of loans. Investors in all those firms deserve answers about how the “smart money” let WeWork get so out of control.

Maybe SoftBank will make money, eventually, from this investment, either from onerous terms on the fresh WeWork loan or the recovery of the share price. This should, however, be a permanent stain on SoftBank and on the reputation of Masa Son, the company’s leader. He imprudently poured money into WeWork, bragged about investing with scant consideration of the company’s business plan, let it run wild and risked more money on WeWork even after investors in Son’s tech fund balked.

People in finance and in Silicon Valley don’t ever learn any lessons. They don’t believe the WeWork disaster has any impact on them or consequences for what they do. And maybe they’re right. But what happened to WeWork is not just a failure of this particular set of individuals. It’s a consequence of the last decade of easy money that has made investors throw money at assets promising to grow fast. It has been peak silly times, and they won’t last forever. 

The question, however, is how much of everything that has been built in the last decade — the cash-burning on-demand transportation industry, streaming-video companies, an office leasing startup on steroids, wildly popular internet companies — can last if and when the silly times are over? 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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