Having last week been forced to shelf its IPO plans due to a lack of investor interest despite reportedly being prepared to take the hit of a public float representing a ‘down round’ of over 50% on its last private valuation of $47 billion, coworking space operator WeWork’s board is said to be considering dumping its CEO and founder Adam Neumann. Mr Neumann’s approach to running the company, and especially a number of business deals worth millions involving assets he privately owned, was reported as the focus of investor concerns around the IPO.
It now appears that the company’s board may seek to remedy that ill by usurping Mr Neumann and replacing him with an experienced operator – a condition several high profile investors are said to have demanded in return for their potential investment in an IPO. The Wall Street Journal reported yesterday that major directors and shareholders, including Softbank whose Vision Fund owns around 29% of WeWork, want to push through a demotion that would see Neumann removed from the CEO position and reduced to non-executive chairman. The newspaper said that the board of We Company, the holding behind the WeWork brand, were yesterday meeting to decide their founder’s fate.
In addition to investor concerns around the WeWork business model, which is based on taking long term leases on prime office space before expensively refitting it and sub-letting it on flexible, short-term contracts to freelancers and companies, corporate governance worries are the main sticking point for public markets. Time magazine’s Shira Ovide recently wrote “the list of transactions involving a company’s CEO or other insiders is astonishing for WeWork”.
These include Neumann selling the company the “We” trademark rights which he owned for $5.9 million, hundreds of millions in loans taken out against the company used by Neumann to buy office buildings he then rented back to the company and taking sweeping company-wide decisions including banning meat without consulting the board. He is also rumoured to smuggled marijuana into Israel on a private jet.
Softbank and the We Company board will hope that removing Neumann will allow the IPO to be revived towards the end of this year or in early 2020, market conditions permitting. However, pushing the demotion through may prove easier said than done if Neumann decides to dig his heels in. Despite only now owning a minority of the company’s equity, and not a particularly big minority at that, his shares come with ‘supervoting’ rights which give him 10 votes to each share. It was until earlier this month 20 votes per share but was reduced for the failed IPO.
However, if investors play hardball with an ultimatum that Neumann either accepts the decision or further investment is withdrawn, pitching WeWork into a potential cash flow crisis a few months down the line, he could be left with little choice. A further option would be to leverage the $380 million in outstanding loans tied to his We Company stock against him.
The move, if it transpires, marks a sharp reverse of approach by Softbank. The Vision Fund manager has until now been happy to turn a blind eye to Mr Neumann’s excesses and controversial way of managing the company as long as it was a rapidly growing ‘unicorn’. However, with that indulgence now proving a barrier to realising a return on the billions it has poured into the company, a sharp change of policy already seems to have been set in motion.Risk Warning:
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