WeEnron pt. deux

big 6-0 days of writing. My favorite company these days is We. Obv heavily influenced by Scott Galloway and Kara Swisher.

#60

Background: Adam fumbled the bag on We and thought he was Jesus (🤡🤡). SoftBank realized the pumped too much money into a Trojan Unicorn (😂😂) and now they’re controlling 80% of the company and Adam is leaving the board (🤑🤑). 4,000 people are about to lose their jobs too (🙁🙁). And Adam is getting a 1.7B payout (😳😳). Whew. 

Anyway, this part below had me in stitches! Too funny for me not to share. I get some newsletters from Bloomberg and the authors are usually (or I think they are) freewriting. This particular one is from Matt Levine and definitely one for the books and it’s long enough to be the only content for today. I hope you enjoy it as much as I did. 😂😂😂😂 (But it’s still no laughing matter…people lost their jobs, Ato). 

— 

IWin 

Well obviously there will be a Harvard Business School case study about WeWork, but what will it say? What is the lesson? It’s a good lesson, right? A lot of kids starting at Harvard Business School next fall will be hanging up posters of Adam Neumann in their dorm rooms. Neumann, the founder of WeWork, will walk away from this corporate bonfire with a billion dollars and a bunch of fancy houses. His great-grandchildren will be prominent philanthropists with their names on museums and universities, the strange origin of their fortunes long forgotten. Neumann did a certain sort of capitalism—one with some cachet at HBS!—as well as anyone has ever done it. It is one thing to build a successful company that creates a lot of value and take some of that value for yourself; Neumann created a company that destroyed value at a blistering pace and nonetheless extracted a billion dollars for himself. He lit $10 billion of SoftBank’s money on fire and then went back to them and demanded a 10% commission. What an absolute legend.

My very favorite part of the Adam Neumann legend might be the story of his first encounter with Masayoshi Son, who runs SoftBank Group Corp. and invests its vast piles of money. (One insane aspect of this encounter is that it happened in 2017. A busy two years!) “Mr. Neumann has told others that Mr. Son appreciated how he was crazy—but thought that he needed to be crazier.”[1] I like to imagine that conversation with the hindsight of the last few months:

Son: What does your company do?

Neumann: We lease office buildings, spruce up the space and sublet it in small chunks.

Son: Hmm I invest in visionary tech stuff, this doesn’t really sound like my thing.

Neumann: Did I mention we are a state of consciousness. A generation of interconnected emotionally intelligent entrepreneurs.

Son: Okay yeah that’s more like—

Neumann: The world’s first physical social network. We encompass all aspects of people’s lives, in both physical and digital worlds.

Son: You’re crazy! I love it! But could you be, say, ten times crazier?

Neumann: You’re going to invest $10 billion in my company, which I will use as kindling to light the whole edifice on fire, and then when we are both standing in the ashes you will pay me another billion dollars to walk away while I laugh at you.

Son: All my life I have dreamed of meeting someone as crazy as you, but I never really believed this day would come. 

Neumann: I’m gonna use your money to buy a mansion with a room shaped like a guitar, where I will play the world’s tiniest violin after all your money is gone. 

Son: YES PUNCH ME IN THE FACE.

Neumann: Also I’ll rename the company “We” and charge it $6 million for the name.

Son: RUN ME OVER WITH A TRUCK.

He got his money; SoftBank ended up investing more than $9 billion in WeWork before its aborted IPO.[2] Now it is doing this:

WeWork, in danger of running out of cash in the coming weeks, chose a rescue offer from SoftBank over a competing proposal from JPMorgan Chase & Co., according to people familiar with the matter. It had asked both parties to submit proposals by a deadline yesterday.

The deal is expected to value the company at about $8 billion, a far cry from what it was aiming for in an initial public offering earlier this year and even less than the $47 billion at which a January investment from SoftBank pegged its worth.

Mr. Neumann, who was forced out as chief executive after pushback from prospective investors scuttled the IPO, has the right to sell $970 million of shares, or roughly one-third of his stake, in a so-called tender offer in which SoftBank will offer to buy up to $3 billion in WeWork stock from employees and investors.

The Japanese conglomerate, which already owns about a third of the company, will also extend Mr. Neumann credit to help him repay a $500 million loan facility led by JPMorgan, the people said. It will also pay him a $185 million consulting fee. ...

As part of the deal, which We was expected to announce as soon as Tuesday, SoftBank would move up a $1.5 billion investment it had been scheduled to make next year and extend the company a $5 billion loan.

That’s nine point five billion dollars that SoftBank is putting into WeWork,[3] on top of the more than nine billion dollars it has already put into WeWork, an astounding total of more than $18.5 billion for a company it values at $8 billion.[4] And while WeWork is desperate for the $1.5 billion equity investment and the $5 billion loan—it is running out of cash and “so strapped that it could not afford severance payments for the employees it plans to lay off,” notes my Bloomberg Opinion colleague Shira Ovide—the $3 billion tender offer seems a little gratuitous? That is not money that is going to keep WeWork afloat; that is just cashing out other investors to leave SoftBank holding more of the bag. (The bailout will give SoftBank about 80% ownership.) Presumably—though who knows!—SoftBank does not have limitless money to pour into WeWork, so it’s strange that such a big chunk of its WeWork rescue investment is not going to fund the company.

Perhaps the motivation is that SoftBank are true believers and don’t want their deep-value bet on SoftBank to be diluted by other shareholders. But my assumption is that the tender offer is the result of Neumann’s holdup power: Prior to the deal, Neumann is still the company’s controlling shareholder, and he could just say no to a deal that he didn’t like. That might completely evaporate his own wealth, but it would evaporate a whole lot more of SoftBank’s, and it kind of looks like SoftBank blinked first: In effect, the price of Neumann allowing SoftBank to rescue WeWork was that SoftBank had to hand Neumann a billion dollars for himself. One version of that Son/Neumann origin myth has Son telling Neumann that “in a fight, being crazy is better than being smart,” and you can see a little of that in this negotiating dynamic. As his company’s value vanished due to his own hubris and weirdness, Neumann went back to his biggest investor for more desperately needed money, and somehow he held all the cards.

Certainly that $185 million consulting fee is a result of his holdup power.[5] But to be fair there is a consulting arrangement, and a four-year noncompete. Do you think they’ll call him up and ask him for advice? Make him earn the money? What will he tell them?

New CEO: Adam, we have some problems with lease renewals, we were hoping to get your advice about what to do.

Neumann: I advise you to put a million $100 bills in a burlap sack with dollar signs printed on it and leave it in a spot I’ll mark in my 60-acre Westchester estate.

New CEO: That will help?

Neumann: I mean it’ll help me.

When WeWork first filed the hilarious paperwork for its IPO, I wrote about some of the governance red flags—not so much Neumann’s absolute lifetime-and-beyond control of the company, but his apparent willingness to enrich himself at the expense of shareholders. It all struck me as ominous. If the founder-CEO-controlling-shareholder is doing all that stuff before the IPO, I wondered, what will he do later when the profits roll in? If WeWork ends up creating a lot of value, how can you be sure that Neumann won’t find ways to appropriate a lot of it for himself rather than sharing it with his investors? In hindsight, this was insufficiently cynical. In the event, WeWork ended up destroying a ton of value between that IPO filing and now, and Neumann found new ways to enrich himself anyway.

It is easy—and basically correct—to say that, you know, that’s bad, he doesn’t deserve the money, it should pay for employee severance instead. (The employees are mad.) But I am sort of an efficient-markets guy, and I am tempted to look for an explanation here that is something other than “capitalism occasionally makes huge mistakes.” (Though that of course is also correct.) There is the simple defense—he created an $8 billion company, so he should get rich—but that founders on the fact that turning more than $10 billion of investor cash into an $8 billion company is not value creation. There is the charitable defense, that business is uncertain and valuation is hard and he took a reasonable risk and trimmed that risk at a prudent time, and that’s fine I guess, but still unsatisfying.

I was up at Harvard on Monday, and I walked past the John A. Paulson School of Engineering. Paulson has done a number of things in his hedge-fund career, but I think it is fair to say that he is famous, and college-endowingly wealthy, mostly because he correctly spotted a bubble in U.S. housing and made a large short bet against that bubble. He did this in sometimes controversial ways, and of course the actual bursting of the bubble that he correctly predicted led to a lot of real human hardship.

Nonetheless the thing he did is a normal and mostly praiseworthy, or at least okay, financial thing. He identified an irrationality in the market and got on the other side of it. He saw prices that were wrong and moved them toward right. By betting against other people’s mistakes, he gave them incentives to correct them. He made the markets more efficient, he improved the allocation of capital, he did his small part to speed humanity’s progress out of ignorance and into enlightenment. I mean, it’s fine, I don’t want to overstate the moral case here or anything, but it’s fine.

I can’t quite say that Neumann improved the allocation of capital, but there are certain parallels. Neumann too … look, here I am speculating, and I don’t mean to speak for Neumann’s subjective experience of his WeWork career, but from the outside, in hindsight, objectively, one could describe it like this: He spotted a bubble in venture-subsidized fast-growing money-losing capital-intensive low-margin tech-adjacent companies, noticed in particular that SoftBank seemed to be on the long side of that bubble, and set himself up to profit on the other side—by raising money for his own ultra-unicorn, by setting up the governance of that unicorn in a maximally self-interested way, and by selling and margining a bunch of his personal shares.[6] When investors like SoftBank were frenziedly buying unicorn stock, he was frenziedly selling it. He set himself up to profit from the collapse of the unicorn bubble, and accelerated that collapse. Lessons were learned, and he taught them. Now he’s rich.

“Capitalism occasionally makes huge mistakes,” is part of the story, but the other part is that there are rich rewards for those who spot the mistakes and bet against them. This is a lesson specifically of financial capitalism: In most businesses you can notice a competitor doing a dumb thing and create value by doing a better thing, but the financial markets are special because you can notice a competitor doing a dumb thing and get rich by taking the other side, without creating value or doing a better thing. If you notice that people are buying dumb unicorn shares for too much money, you don’t have to invent a better way of doing business or of funding companies. You can just sell them as many as possible of the dumbest possible unicorn shares; when the bubble bursts, you collect your winnings. This sort of thing—getting rich by being smarter than your counterparties, making markets more efficient by being on the right side of bets—is a classic path to wealth creation in the financial business. Tech, traditionally, has a different ethos, one of getting rich by changing the world. But sometimes there are crossovers, and anyway maybe WeWork was never really a tech company.

Here’s one more crazy WeWork story, about an all-hands meeting in January where Neumann told employees that he would run the company for the next 300 years:

"WeWork is a controlled company. People don't know that," he tells the audience. "I, Adam, and my family control the company 100% — very rare when you have investors. It's not the truth of any company in the world. Google still has it a little bit. Facebook and Mark [Zuckerberg] already lost it. No other company else has it." …

He said he didn't expect his children to be future WeWork CEOs, as he was before his ouster last month. Neumann added that he worried that his children wouldn't "earn" leadership and that he would prefer a leader who "grew from the bottom." ...

"They don't have to run the company, but they do have to stay the moral compass of the company," he said. "If we do this right, over the years different CEOs will come, but we will keep an eye on these basic values and basic moral standards and not allow them to shift."

Neumann intended this plan to work for the long term.

"It's important that one day, maybe in 100 years, maybe in 300 years, a great-great-granddaughter of mine will walk into that room and say, 'Hey, you don't know me; I actually control the place. The way you're acting is not how we built it,'" he said.

“You’re not gouging SoftBank enough,” she’ll say. “Get Masayoshi Son’s great-great-great-grandson in here and punch him in the face.” Those basic WeWork values, passed down through the centuries.

📱📱Quote of the day 

“Success is the progressive realization of a worthy ideal.” - MA

Remember folks: “Until the lion learns to write, every story will glorify the hunter.”