Harvard Case - WeWork's Pre-IPO Value: USD47bn Or USD8bn?
"WeWork's Pre-IPO Value: USD47bn Or USD8bn?" Harvard business case study is written by Xu Li, Ramee Liu. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Sep 16, 2020
At Fern Fort University, we recommend that WeWork reconsider its initial public offering (IPO) strategy and focus on achieving sustainable profitability before pursuing a public listing. WeWork should restructure its business model, improve its financial transparency, and address concerns regarding its governance and valuation before seeking public investment. This approach will enhance its long-term value and attract investors who are seeking a more established and financially sound company.
2. Background
WeWork, a co-working space provider, experienced meteoric growth in the 2010s, attracting significant investment and achieving a valuation of USD47 billion in 2019. However, its pre-IPO valuation faced scrutiny due to its unsustainable business model, high debt levels, and lack of profitability. The case study explores the factors contributing to WeWork's valuation and the challenges it faced in the lead-up to its IPO.
The main protagonists are:
- Adam Neumann: WeWork's charismatic co-founder and CEO, known for his visionary approach and aggressive growth strategy.
- JPMorgan Chase: WeWork's lead underwriter for the IPO, responsible for assessing the company's valuation and market readiness.
- SoftBank: WeWork's largest investor, providing significant funding but also raising concerns about the company's financial performance and governance.
3. Analysis of the Case Study
The case study can be analyzed through the lens of financial analysis, corporate governance, and business model sustainability.
Financial Analysis:
- High Valuation, Low Profitability: WeWork's valuation was based on its rapid growth and market share, but its profitability remained elusive. Its high debt levels and reliance on external funding raised concerns about its long-term financial stability.
- Aggressive Growth Strategy: WeWork's expansion strategy focused on acquiring new locations and expanding into new markets, leading to significant capital expenditures and operating expenses. This strategy, while contributing to its market dominance, also strained its financial resources.
- Lack of Transparency: WeWork's financial statements lacked transparency, making it difficult for investors to assess its true financial health. Its unconventional accounting practices and reliance on non-GAAP metrics further complicated the picture.
Corporate Governance:
- Strong Founder Influence: Adam Neumann's strong influence over the company's governance raised concerns about potential conflicts of interest and lack of accountability. His personal lifestyle and business practices were also scrutinized by investors.
- Board of Directors: The board's composition and effectiveness were questioned, with some members lacking experience in real estate or public company governance.
- Lack of Independent Oversight: WeWork's governance structure lacked independent oversight, which contributed to the company's opaque financial reporting and questionable business practices.
Business Model Sustainability:
- High Operating Costs: WeWork's business model relied on high operating costs, including rent, utilities, and staff. Its reliance on short-term leases and flexible contracts resulted in significant operating expenses.
- Competition: WeWork faced increasing competition from other co-working space providers and traditional office space providers, putting pressure on its pricing and profitability.
- Economic Cycles: WeWork's business model was susceptible to economic downturns, as businesses may reduce their office space requirements during periods of economic uncertainty.
4. Recommendations
To address these challenges, WeWork should:
Restructure its business model: Focus on achieving profitability by optimizing its operating costs, streamlining its expansion strategy, and developing a sustainable pricing model. This could involve:
- Reducing operating expenses: Negotiating better lease terms, automating processes, and optimizing staffing levels.
- Focusing on high-growth markets: Prioritizing expansion in markets with strong demand and high potential for profitability.
- Developing a tiered pricing strategy: Offering different pricing plans based on workspace size, amenities, and membership terms.
Improve its financial transparency: Provide clear and concise financial reporting, adhering to GAAP standards and eliminating the use of non-GAAP metrics. This will build trust with investors and facilitate a more accurate valuation.
Address concerns regarding its governance: Strengthen its board of directors by appointing independent members with relevant expertise. Implement robust corporate governance practices to ensure accountability, transparency, and ethical conduct.
Delay its IPO: Instead of rushing to go public, WeWork should focus on achieving profitability and addressing investor concerns. This will allow the company to build a stronger foundation and attract investors who are seeking a more established and financially sound company.
5. Basis of Recommendations
These recommendations consider the following:
- Core competencies and consistency with mission: WeWork's core competency lies in providing flexible and collaborative workspaces. The recommendations focus on optimizing its operations and achieving profitability while staying true to its mission.
- External customers and internal clients: The recommendations aim to improve the customer experience by providing a more affordable and efficient workspace solution. They also aim to create a more stable and rewarding environment for employees.
- Competitors: The recommendations address the competitive landscape by focusing on profitability and efficiency, allowing WeWork to better compete with other co-working space providers.
- Attractiveness ' quantitative measures: The recommendations are expected to improve WeWork's financial performance, increasing its profitability and reducing its debt levels. This will enhance its attractiveness to investors and create long-term shareholder value.
All assumptions are explicitly stated, including the need for a sustainable business model, the importance of transparency and governance, and the potential impact of economic cycles.
6. Conclusion
WeWork's pre-IPO valuation was based on unrealistic growth expectations and lacked a solid foundation of profitability and transparency. The company needs to address its financial and governance issues before pursuing a public listing. By restructuring its business model, improving transparency, and strengthening its governance, WeWork can build a more sustainable and valuable company that attracts investors seeking long-term growth and stability.
7. Discussion
Alternative options not selected include:
- Continuing with the IPO: This would have allowed WeWork to access capital quickly, but it would have also exposed the company to scrutiny and potential investor backlash.
- Selling the company to a strategic buyer: This would have provided a quick exit for investors but might have resulted in a lower valuation than an IPO.
The risks associated with the recommended approach include:
- Failure to achieve profitability: If WeWork is unable to achieve profitability, it may face financial distress and be forced to make difficult decisions.
- Increased competition: The co-working space market is highly competitive, and WeWork may face challenges in maintaining its market share.
- Economic downturn: A downturn in the economy could negatively impact WeWork's business, as businesses reduce their office space requirements.
8. Next Steps
WeWork should implement the following steps within the next 12 months:
- Develop a detailed restructuring plan: This plan should outline specific steps to optimize operations, improve profitability, and address governance concerns.
- Implement a new financial reporting system: This system should adhere to GAAP standards and provide clear and concise financial information to investors.
- Appoint new independent board members: The board should be composed of individuals with expertise in real estate, finance, and public company governance.
- Conduct a thorough review of its business model: This review should assess the sustainability of its current model and identify areas for improvement.
By taking these steps, WeWork can position itself for long-term success and attract investors who are seeking a more established and financially sound company.
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Case Description
The We Company (WeWork) rented office spaces for long-term leases, turned them into hip offices, and then offered them for short-term leases. Its charismatic cofounder and CEO Adam Neumann, explosive growth funded by significant cash injections from SoftBank and its USD100bn Vision Fund, and a pre-IPO valuation of USD47bn ensured the company was one of the most talked-about unicorns in August 2019. WeWork's valuation was similar to that of a high-tech stock with high price multiples. From FY 2016 to FY2018, its losses totalled USD3.3bn, outstripping revenue at USD3.1bn. After release of Form S-1 pre-IPO filing documents, numerous financial analysts and the press scrutinized WeWork. In addition to its lower than expected financial performance, some questioned WeWork's business model, its governance model, and its valuation. In the weeks that followed, the IPO was withdrawn, WeWork announced plans to lay off 2,000 staff, Neuman was removed as CEO, and Softbank doubled down on its bet in order to keep the company going. This latest share purchase by Softbank valued the company at USD8bn, compared to USD49bn two months earlier.
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