October 23, 2019
So, SoftBank has ‘rescued’ WeWork in a deal that will cost it at least $10 billion and pretty much guarantee WeWork’s departed Svengali founder $1.7 billion. The rescue was from a proposed $47 billion IPO that was becoming a car crash going over a cliff.
SoftBank is a major shareholder in WeWork – some reports say it has already sunk $13 billion into the business now valued at $8 billion. It will just hope that over the long term the branded ‘lifestyle’ work space business will begin to approach the valuations it did so much to help pump up, not least by backing a CEO with party and private jet habits but turnover and fixed assets that were next door to non-existent when offered up against the proposed valuation. The timing isn’t great for SoftBank, it is trying to raise $108 billion for its second Vision Fund. Should have gone to Specsavers.
How does this happen? How does this keep happening? A company comes to IPO and collapses under the most ordinary of scrutiny, or it get its IPO away (should that read it gets away with its IPO?) then staggers around a while before falling over as the market realises it doesn’t really have a business model, let alone a business. Or it does have a business model so attractive – if it works – that the market keeps it flying with an updraft of sentiment that converts into a share price that converts into massive borrowing, see Uber and Netflix.
It is a modern age phenomenon. Imagine if Henry Ford came to the public markets with a theory you could make cars quickly and cheaply but had never actually done it? Or if Bill Gates showed up with a Power Point (yeah, I know), showing that he could come up with a world dominating operating system if only he could get a couple of billion in an IPO? And it isn’t like the economic Darwinism of the free market has made much difference, there’s no learning through experience: boo.com. bebo, global crossing, friends reunited, aol, etc, make up your own list.
What is going wrong? Two phenomena that are both boosted by the real time speed of global communication and its accompanying hype: FOMO; Fear Of Missing Out and FEE; Fee Earning Envy. Investors – institutional, corporate, private – all live in the fear of being the ones that didn’t back Google or Facebook. And fee earners – corporate financiers, accountants and lawyers – make money from deals, and whether they are good or bad deals is largely immaterial to them. Valued deal-getters are called rain makers. Whether the rain is followed by sunshine or a storm they don’t care, the fees buy a lot of umbrellas.
Recently we reported on a deal between two big US public companies; willing buyer, willing seller, not very complicated, not all that big; $6 billion. The buyer reported it has raised some of the acquisition price and enough to cover fees of $300 million from new borrowing. Now, you can either say “well that’s only 5 per cent of the deal”, or you can say “$300 million WTF?” Which you say probably depends on what you do for a living.