In recent months, we’ve regularly featured posts discussing the ongoing saga of WeWork’s efforts to initiate their IPO.
As of today’s writing, that effort has been put on hold, with expectations that it will be restarted later in the year. The We Company, parent of office-sharing business WeWork, has postponed its initial public offering “until at least October after cutting its valuation but failing to stoke interest,” (ref. WSJ). Of some concern has been the governance situation that’s far from the norm, but more recently the concern has shifted to the “dilutive triggers” that are built into We’s capital structure and that are expected to pose problems when the company again attempts to tap public markets. According to a recent article in the WSJ, the trouble began when We’s value began to fall. It’s last fundraising effort in the private markets gave it an implied valuation of $47 billion. In recent weeks, the company lowered its sights to an IPO valuation of around $20 billion, and last week that valuation dropped even more, to around $15 billion. We Company is in need of capital to continue its growth path progress. Earlier in the year, the company signed up for a $6 billion credit facility, which included the arrangement that We would raise $3 billion of equity to complement the credit facility. The deal is “all or nothing” – that is, the money will only be available if We can raise the $3 billion. Thus, $9 billion in funding either will, or will not, happen during the IPO. Which leads to a vicious cycle: as We’s market valuation falls, it needs to issue greater number of shares to reach the $3 billion level. At a higher valuation, $3 billion is only a tiny portion of the company; at a $15 billion valuation, it’s a far greater portion and dilutes shareholders far more. And, there are other concerns: Venture capitalists who provide the money often give themselves a “down round” provision, where insiders are given extra stock in the event of a future fundraising that is set below the valuation that was awarded to the company. In this case, the down round protection would be in the form of a $1 billion convertible note that changes into equity on the last day of the year. Elements such as this can cause a downward spiral, and, as the offering gets ever more dilutive, the valuation falls. And, so on. Both the lender and borrower could rewrite the deal if it makes raising cash too difficult. But, there’s one final squeeze on the company: it may not have the time, as it will lose its status as an “emerging company” under the JOBS act by the end of the year. The emerging company status allows We to use more lenient reporting standards about its finances and executive compensation. And, since We is already under high scrutiny for its governance situation, that could be a problem.
So, on to the WeWork Arounds.