Flexible workspace provider WeWork filed for bankruptcy protection on Monday due to high debt and losses from lower demand for office space.
WeWork, once valued at $47 billion, attracted blue-chip investors like SoftBank, Benchmark, and major Wall Street banks, including JPMorgan Chase.
Founded in 2010, WeWork aimed to revolutionise the office market by leasing large properties for longer periods and subletting them to multiple smaller businesses on more flexible, shorter arrangements. It was considered a disruptor in the industry due to its business model that was not hindered by property ownership. WeWork expanded rapidly, leading to an increase in revenue but also resulting in steep losses.
Adam Neumann, along with his wife Rebekah Neumann and Miguel McKelvey, co-founded WeWork, which grew to become the most valuable startup in the US, worth $47 billion. The company was famously associated with Adam Neumann’s flamboyant personality and his vision of “elevating the world’s consciousness.”
Neumann’s pursuit of rapid expansion, at the expense of profits, and his eccentric behaviour led to his removal and the failure of an IPO in 2019.
Just before filing for bankruptcy, Reuters quoted Neumann as saying, “With the right strategy and team, WeWork can successfully reorganise.”
According to Steve Clayton, head of equity funds at Hargreaves Lansdown, the company was born during a boom, a time when investors tend to overlook warning signs. Clayton also pointed out that the term “charismatic CEO” should be a cause for concern among investors. This statement was made on Tuesday.
What led to the downfall of WeWork’s success?
WeWork experienced a significant decline after SoftBank founder Masayoshi Son made extravagant predictions about its future prospects.
In 2019, WeWork attempted to launch an IPO with Neumann as CEO. We Company, its parent, spent several months preparing for the public offering.
However, the proposed share sale failed miserably after investors raised concerns about the company’s large losses and were hesitant due to Neumann’s management style and corporate governance shortcomings.
By October 2021, WeWork’s value had plummeted to $10 billion before going public via a merger with a blank-check acquisition company.
The company’s rise and fall was turned into a TV series called “WeCrashed,” with Jared Leto as Neumann and Anne Hathaway as Rebekah.
Reasons behind WeWork’s decision to file for bankruptcy protection in the U.S.?
The company struggled with costly leases and the cancellation of agreements from corporate clients as a result of the COVID-19 pandemic. The rise of remote work caused a significant number of people to work from home, which further exacerbated the company’s financial woes. Despite efforts to renegotiate leases and restructure debts, the company was unable to avoid bankruptcy.
“Innovative financial metrics are rarely truly innovative, instead being a way of disguising a lack of cash profits, and WeWork played that game for all it was worth,” Reuters quoted Clayton.
As of the end of June, WeWork had $13.3 billion in long-term lease obligations – a crushing burden for the company given the post-COVID drop in demand for office space.
What are the future plans for the company?
WeWork announced on Monday that 92 per cent of its lenders have agreed to convert their secured debt into equity as part of a restructuring support agreement, which will eliminate approximately $3 billion of debt.
WeWork could use the U.S. bankruptcy code to terminate burdensome leases, according to a note from law firm Cadwalader, Wickersham & Taft LLP to landlords in August on its website.
The commercial property lending market may face challenges in 2024 as vacancies are expected to increase due to weak demand and investor reluctance to invest, resulting in a sharp drop in overall real estate values.
(With inputs from Reuters)