WeWork: This Little Piggy Goes Weee Weee Weee All the Way to Zero

You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.

Abraham Lincoln

Adam Neumann, the now ex-CEO of WeWork, is finding out just how true that old saying is.

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In the 30 August 2019 edition of The Rum Rebellion we wrote…

And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard earned.

WeWork is a company that rents space long term and sub-lets it short term.

Full Stop. End of story.

But WeWork is different…it’s a ‘growth’ story. And like all other stories in this land of fantasy, it’s written in large in RED ink.

So how much do you reckon WeWork is worth?

Me…I put it at $0. But you can’t really do an IPO for $0.

In ‘growth’ story land, there’s an odd relationship between losses and (dare I say) value.

The greater the losses, the greater the value.

Apparently, big losses means the company is building the foundations for growth.

Personally, I think they are just digging a big hole into which investor funds will be buried.

Anyway, back to the ‘growth’ story.

WeWork’s IPO valuation is…US$47 billion.

Is it worth it?

Well, the market seems to be moving closer to my valuation.

As reported in Vanity Fair on 17 September 2019…

Apparently, the office-rental startup wasn’t worth $47 billion. Or $20 billion. Now, as its potential valuation plummets toward $10 billion…

Due to the collapsing valuation, the WeWork board is desperately trying to put enough lipstick on this pig to get it back into the IPO beauty pageant.

The once-touted guru CEO has been shown the door.

CBS News 24 September 2019…

CBS News 24 September 2019 - WeWork CEO Adam Neumann ousted as company runs low on cash - 26-09-19

Source: CBS News

[Click to open in a new window]

The question you have to ask is why did it take so long for this to happen?

Here’s just a snippet of what young Adam has been up to…

In January 2019, Business Insider reported:

WeWork CEO Adam Neumann reportedly made millions of dollars by renting office space in buildings that he partially owns to his company…

Talk about a conflict of interest.

Neumann — the landlord — decides it’s time to increase WeWork’s rent.

Neumann — the CEO — what does he do?

Act in the interest of shareholders OR self-interest?

Based on his other actions, you can draw your own conclusion on that question.

To help in your deliberations (emphasis is mine)…

In January [2019] Neumann raked in a [US] $5.9 million stake from WeWork as part of a complicated restructuring of the company, in which the We Company acquired the trademarked “We” from the investment company run by Neumann and Miguel McKelvey.

Vanity Fair 4 September 2019

Adam charges the company — the one he has voting control over — almost US$6 million for the ‘We’ trademark.

Is there a pattern here?

Perhaps, this might bring things into clearer focus.

This is from TechCrunch on 19 July 2019 (emphasis is mine):

Adam Neumann,  the co-founder and chief executive of the international real estate co-working startup WeWork has reportedly cashed out of more than [US] $700 million from his company ahead of its initial public offering.

The size and timing of the payouts, made through a mix of stock sales and loans secured by his equity in the company, is unusual, considering that founders typically wait until after a company holds its public offering to liquidate their holdings.

Adam’s reported cash out would have been to the suckers (sorry, investors) who bought in on the pre-IPO valuation of US$47 billion.

WeWork has worked really well in the singular…for Adam.

Not so sure it’s been all that good for the fools who bought into this over-hyped scam.

Is removing the CEO going to make the WeWork pig look more attractive?

Probably not.

According to CBS News (emphasis is mine):

But even without Neumann, WeWork faces a bigger problem that a new CEO alone won’t fix: a significant cash crunch that could jeopardize WeWork’s future in a matter of months

According to CBS MoneyWatch’s calculations, based on WeWork’s latest financials that were released as part of the documents filed for its stalled IPO, WeWork has about five months’ cash on hand — or almost $1.5 billion — before it will either have to raise more money or face questions about its prospects.

The clock is ticking.

The (dumb) investors who have backed this cash-burning scam, need to find (dumber) investors to pony up the cash and/or equity to keep WeWork from turning into ‘We Can’t Make This Work’.

Even if the existing investors find enough people with an investing IQ in the single digits and money to (literally) burn, that’s still only going to be a temporary stay of execution.

As The New York Times stated:

Though the [WeWork] company has grown quickly, it remains deeply unprofitable.

Ain’t that the truth.

WeWork’s business model is flawed.

The more revenue it makes, the more it bleeds cash. This thing is never going to work.

Revenue Growth Leading to Higher Losses - 26-09-19

Source: Forbes

[Click to open in a new window]

Proving that not all the people can be fooled (emphasis is mine)…

WeWork’s troubled offering highlights what can happen when companies that gained stratospheric valuations as private firms try to go public, says Len Sherman, an adjunct professor at Columbia Business School. “WeWork is the most extreme, almost ludicrously funny, example of a trend that’s been building for a while,” he said.

The New York Times
17 September 2019

The reason WeWork and the other high-profile loss-making pigs have been given wings, is due to the Fed’s aggressive stimulus policies.

Ultra-low rates and bucket-loads of liquidity have enabled these flights of pure fantasy to take place.

In a normal world — where risk is appropriately priced and capital is allocated on a prudent basis — the likes of Adam Neumann would have been laughed out of the office.

I imagine the conversation between banker and Neumann would go something like this…

Banker: ‘What? No profits ever?’

Neumann: ‘Yep. That’s right.’

Banker: ‘Are you high on something?’

Quite possibly…

WeWork cofounder and CEO Adam Neumann smoked weed with friends on a Gulfstream G650 private jet to Israel last summer…

The flight crew found a “sizable chunk” of marijuana “stuffed in a cereal box” on board after Neumann’s squad exited the aircraft.

Business Insider
19 September 2019

For now, ours is not a normal world.

While that disconnect remains, the (marginally) less ludicrous loss-making business models will continue to fool investors into funding their (highly unprofitable) grand plans.

But like all cons, they are living on borrowed time and borrowed money.

And when time and money runs out, you can be absolutely certain of one thing…these little piggies will go weee weee weee all the way to zero.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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