Wharton’s David Erickson and Columbia’s Leonard Sherman discuss the We Company IPO.

Since the highly anticipated filing last month for the upcoming We Company (also known as WeWork) IPO, many stories have been written about how to value the enterprise; how the offering will be received by investors; and ultimately how it will perform as a publicly held business. One recent article in Forbes even called it the “most ridiculous IPO of 2019.”

In this opinion piece, David Erickson, a senior fellow and finance lecturer at Wharton, writes that these are important questions. He notes, however, that the analysis should begin by examining the management and governance structure and how that may impact the company.

Before retiring from Wall Street in 2013, Erickson helped take hundreds of companies public. Since joining Wharton’s faculty in 2014, he has co-taught the Strategic Equity Finance course, which explores how private and public companies strategically use equity.

With the We Company’s initial IPO filing in mid-August, there has been lots of speculation that the company will seek to launch its IPO roadshow soon. With two highly profiled and valued private companies – Uber and Lyft – having gone public earlier this year and now trading significantly below their IPO prices, We faces a challenging IPO roadshow process.

However, for We, many of these challenges are self-inflicted … and they start with the CEO, Adam Neumann. Over the last few months, in anticipation of the IPO, many articles have appeared about Neumann’s decision-making and judgment. These include monetizing a portion of his holdings (estimated to be more than $700 million); personally buying real estate which was leased to WeWork; and the company in July changing its corporate structure with one benefit being providing tax benefits to Neumann and other early investors.

While similar issues have been present in other companies that have gone public, the combination of all three issues in a single company, where Neumann is anticipated to control more than 50% of the vote of the public company, is troubling.

‘Related Party’ Transactions

The “Certain Relationships and Related Party Transactions” section in an IPO filing often reviews recent financings as well as any potential relationships that could present conflicts with the company’s “insiders.” In a typical IPO, this section is normally straight-forward, ranging from a few paragraphs to a couple of pages. This isn’t so in We’s case, where the “related-party transactions” section is 10 pages long. As reading through it makes clear, this section should attract a lot of focus from potential investors and raises even more questions about management’s decision-making.

First, 10 pages is a lot for this section; both Uber’s and Lyft’s comparable sections were basically 60% of the size of We Company’s. Roughly, Uber’s and Lyft’s sections are the same size as the disclosures related just to the CEO, Adam Neumann, which run from pages 197 to 201.

Second, as you read the details, more questions arise. Two sentences at the bottom of page 199 are particularly surprising:

“In July 2019, WE Holdings LLC assigned residual rights related to “We” family trademarks to the Company, which we desired to obtain following our rebranding in early 2019. In consideration of this contribution and in lieu of paying cash, the Company issued to WE Holdings LLC partnership interests in the We Company Partnership with a fair market value of approximately $5.9 million, which was determined pursuant to a third-party appraisal.”

According to the “Principal Stockholders” section of the filing, WE Holdings LLC, as detailed in footnote 1:

“Adam Neumann and Miguel McKelvey are the managing members of WE Holdings LLC. Adam Neumann has sole voting power over all of the shares held by WE Holdings LLC. Adam Neumann and Miguel McKelvey have shared dispositive power over all of the shares held by WE Holdings LLC, and Miguel McKelvey may be deemed to be a beneficial owner of such shares on that basis.” 

Putting those two pieces together, it appears that Adam Neumann and his co-founder, Miguel McKelvey, bought the “We” family trademark personally through their LLC (vs. purchasing for the We Company), and then sold it to the company for $5.9 million, so the company could rebrand to the We Company in early 2019. When the two founders decided to obtain the “We” trademark personally, it is possible it was uncorrelated with the eventual rebranding of the company. (In an amended IPO filing on Sept. 4, the company disclosed that Neumann has since returned the payment.)

Unfortunately, the fact pattern just doesn’t look good for the co-founders and the CEO. This example, in combination with previous articles about Neumann, may suggest to investors that the We Company has been run as the Me Company for the founders. This is not the kind of confidence in judgment that potential investors expect from a management team that wants to run a significant public company and going forward will control long-term decision-making through their high vote ownership.

“With two highly profiled and valued private companies – Uber and Lyft – having gone public earlier this year and now trading significantly below their IPO prices, We faces a challenging IPO roadshow process.”

IPO Investor Decision-making

When large institutional investors decide to invest in an IPO (or not), their decision-making usually focuses on several criteria. The most important typically include the following:

  • A Large and Growing “TAM” or Total Addressable Market: How big is the “TAM” the company is targeting? How quickly is it growing? How concentrated (or fragmented) is the competitive landscape?
  • Successful Company Strategy: Has the company executed well? Can it gain (and sustain) a significant share of the market? Does the company have a defensible position (i.e., how big is their moat?) to sustain competitive threats?
  • Strong, Proven Management: Has management executed the strategy well? Are you confident that this is the right management team to lead the public company going forward?
  • Fair Valuation: Is the valuation fair given the expected operating and financial characteristics? Are the comparable companies being used the right ones to help analyze the company’s valuation? Assuming the company performs, can the valuation continue to grow significantly over time?

As potential IPO investors examine the We Company, there is no doubt that there are lots of positives. The TAM is huge, almost $5 trillion (as outlined on page 7 in their initial IPO filing). We Company’s business model has been innovative, and the strategy has been successful to date. The company is the dominant commercial tenant in many major urban markets globally, which makes it critical to many of the most significant commercial property markets.

However, the success of We Company’s strategy over the long-term has been questioned by some of the most prominent commercial property investors, such as Sam Zell and Barry Sternlicht. In addition, while the expected valuation to be marketed for the IPO has not yet been disclosed, given that WeWork last raised money at $47 billion, it is assumed that the company will want to raise money at similar or greater valuation levels.

“Can the We management team create significant equity value for public shareholders going forward, as they have to date for themselves and their private shareholders?”

Given We disclosed, in its initial IPO filing, that in 2018 the company generated almost $1.9 billion in revenue generating a net loss of more than $1.9 billion, it will likely need to be marketed at a valuation that is a significant multiple of future expected 2020 (or 2021) revenue to achieve those levels. This will require We’s management team to convince investors that We deserves a valuation methodology like that of high-growth technology companies rather than real estate companies. All this will be a lot for potential IPO investors to digest at a time when the equity market struggled in August, and Lyft and Uber have not traded well since their IPOs this year.

In the end, it may come down to how much confidence potential investors are willing to place in the We management. As stated in the risk factors of the IPO filing, the CEO has “control over key decision-making as a result of his control over a majority of the total voting power of outstanding capital stock.” Can the We management team create significant equity value for public shareholders going forward, as they have to date for themselves and their private shareholders? In short, can it move from being the Me Company to the We Company?