WeWork Warts Have Been Exposed in Its Failed IPO, What's Next?

WeWork parent We Co. misstated the number and cost of the working desks it set up in the first half of the year when it first filed in August to go public. The company also omitted information about its governance, including that its then-Chief Executive Adam Neumann had been on the board’s compensation committee.

“Their whole approach is at best sloppy, because a lot of the important numbers don’t tick and tie, and at worst it could be obfuscation,” said Nori Gerardo Lietz, a senior lecturer at Harvard Business School who recently published an analysis of We. “I prefer to think it’s just sloppy.”

In a crazy few days last month We canceled its IPO and scrambled to keep investor, both current and former, interested. The Founder and CEO stepped down under some questionable loan and share sale decisions. With the IPO canceled and the $9 billion from the offering and a bank lending tied to it, We’s lack of clear and concise financial numbers could be a big problem. The information gaps in the prospectus also mean New York-based We likely faces tougher scrutiny by the Securities and Exchange Commission, should the company try to go public again in the future.

“WeWork would be under a microscope with regulators in its next IPO go-round,” said Erik Gerding, a law professor at the University of Colorado.

Wall Street banks, as well as top-tier law firms Skadden Arps Meagher & Flom LLP and Simpson Thacher & Bartlett LLP, were involved in preparing the prospectus. But Mr. Neumann often rejected the recommendations of bankers—he only selected lead book-runners JPMorgan Chase & Co. and Goldman Sachs Group Inc. in the runup to the planned IPO.

A spokeswoman for Mr. Neumann said the prospectus was “prepared and carefully reviewed by experienced outside counsel … the company hired the best lawyers and bankers in the world to manage the filing.” She added that “as is often the case, Adam, as the CEO, had many comments on particular drafts.”

The document leaves unanswered some basic questions about the company’s finances. For example: How many new workstations did We deliver in the first half of this year? The prospectus filed in August said 273,000. Barely a month later, an amended version said 106,000. What was the total gross cost? In August, We said $1.3 billion. In September: $800 million. The reason for the dramatic changes is that the first version was wrong.

Several metrics that analysts and investors said were crucial to assessing how the company’s breakneck growth is affecting its profitability and cash burn weren’t disclosed in the prospectus. For example: What does it take for an individual location to be profitable? How much future revenue is the company committed to sharing with landlords?

The prospectus makes no mention of the company’s Gulfstream G650ER, a top-of-the-line private jet it bought last year for more than $60 million, now up for sale. There is also “no disclosure to the effect that if the IPO doesn’t go through, the company is in trouble,” said Sandra Peters, head of financial-reporting policy for the CFA Institute. It isn’t only the financial picture that is incomplete in the prospectus. There is no mention that Mr. Neumann sold hundreds of millions of dollars of stock since WeWork was formed in 2010. Under SEC rules, a prospectus doesn’t have to disclose stock sales by executives. “But the market doesn’t respond well to being surprised about these sorts of transactions,” Mr. Gerding said.

The SEC, which oversees company filings, vets every prospectus and often requests changes. A company can’t go public until the final version of its prospectus gets the green light from the regulator. The SEC pushed back on the We prospectus, requesting multiple changes in a months long back-and-forth with company. The SEC never approved a final prospectus because the company pulled its IPO plans. We said in its statement it looks “forward to restarting the IPO process in the future.”

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