A bailout deal offered by Japanese tech investor Softbank that will save co-working giant WeWork from a potentially fatal cash flow crunch looks like it will go ahead after its board preferred it to a rival offer from investment bank JP Morgan Chase. Softbank, through its Vision Fund, is already WeWork’s biggest investor and owns around 29% of the company. However, controversially, the deal will see founder and former CEO Adam Neumann receive a payment of $1.7 billion to give up his voting rights and leave the board, leaving SoftBank in full control of the company.
The deal with Neumann will see the Israeli-born entrepreneur, whose ‘inconsistent’ management style and questionable business arrangements with his own company, walk away a very rich man. A little under $1 billion of the total will be made in payment for his shares, which account for around 20% of the company’s total issued. The takeover deal will see WeWork shares valued at $20 each, giving the company at total valuation of just $8 billion – almost $40 billion lower than the last private valuation at which Softbank invested and a huge drop off from the market capitalisation the company hoped to achieve through its cancelled IPO. Another $185 million will be paid to Mr Neumann as a consultancy fee and he will be extended $500 million in credit to help him repay loans he personally took out with lenders including UBS and counter-bidder JP Morgan.
Mr Neumann is expected to retain a small ownership stake in the company and to remain a board observer. The amount of cash that he will reportedly walk away with is raising eyebrows. In The Times, Diamond Hill Capital portfolio manager John McClain is quoted as strongly commenting:
“Providing Neumann with any meaningful compensation while gutting the firm’s employees is abhorrent. The package is extreme and distasteful. Wework has become the poster child for Silicon Valley excess. One has to seriously question the judgment of Softbank in continuing to prop up Wework.”
As well as the expense of ushering WeWork’s founder peacefully out of the building, Softbank is said to be committing a $6.5 billion cash injection into Wework. $5 billion of that will be formed as debt and an already arranged $1.5 billion equity investment due in April will be brought forward. The new capital will come from Softbank directly rather than the Vision Fund.
WeWork’s demise from eulogised ‘unicorn’ to bailout patient has been as rapid as it has complete. Barely two months ago a $60 billion IPO target was being pursued and some observers are calling what has happened as a watershed moment for aggressive valuations and investment in cash-burning, loss-making start-ups.