The case of WeWork should be a wake up call to bankers and lenders the world over. Too often, we’re taken in by big personalities telling us how great their businesses are and we think that if we’re not lending to them someone else will get all the glory (and the revenue) and we’ll be the ones missing out.
So, we overlook the obvious and turn away from the facts that don’t support what we want to do – which is to lend.
Briefly, in case you’ve been asleep for a few weeks, WeWork is (or was) a global business that provides work spaces, sometimes on a permanent basis, sometimes on temporary basis to its customers. From its beginnings in 2010, the company was really the personification of its founder and CEO, a former Kibbutznik by the name of Adam Neumann. Revenue growth had been exponential and even though the company made a loss of US$1,6bn last year, everyone wanted a piece of it, especially the large banks.
In April 2019 the company announced that it had decided to go public with a listing on the US stock exchange which, if successful, would have valued the company at US$47bn.
Six months later, the IPO never happened, the value of the business is basically zero and the founder and CEO has gone. So what happened there?
The short answer is that the CEO happened. Neumann was, apparently, an incredibly difficult guy to be around – it was always his way or the highway. While that, in itself, isn’t the worst trait for a business leader to have, his ego and his greed probably were the keys to his ultimate failure.
What killed off the IPO only a week or so before it was due to happen, was the disclosure of the way Neumann lived, often at the company’s direct expense. He flew a US$60 corporate jet, had a US$35m property in New York and two homes in the ultra-expensive Hamptons. It also turned out that he personally owned a number of properties that he rented to WeWork which were used to provide the working spaces that were its core business. This came as a shock to outsiders who thought that all the properties were company-owned.
So, in the end, the IPO was cancelled and Neumann was forced out by the shareholders to try to save what was left of the business, which begs the question, “what were the signs that should have alerted people to the problems?”.
Firstly, the existence of an outsized ego in a CEO is always a problem and this has been the subject of an earlier post on this blog. The inability to take counsel from others and the desire to be “king of the castle” means the relationship is never going to end well for a lender.
Secondly, the turnover of executives in the company was excessive as more and more people found it difficult to work with the CEO and the level of chaos that existed in the organisation.
Thirdly, the accumulation of vast personal wealth while the company needs cash flow is a bad sign. It really points to the CEO being in it for himself or herself and not for the long term benefit of stakeholders.
What should a lender do when faced with these kinds of businesses? My advice would be to get as far away as possible but I know that’s not always possible. With a big potential deal there is always big pressure to get it done and to overlook the negatives.
But the role of the lender is to focus on the downside and to raise the issues with those responsible for the relationship with the client. Its hard to ignore the noise but, in the end, if you can’t get comfortable with the risk it’s better to be temporarily unpopular with your colleagues than to have a massive loss against your name.
To read the full story on what happened at WeWork, see The Sun Sets On We