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Why WeWork Failed, And What Is Next?


The flexible workspace provider WeWork (WE.N), crippled by a massive debt load and skyrocketing losses as a result of decreased demand for office space from budget-conscious clients, filed for bankruptcy protection in the United States on Monday.

At $47 billion, WeWork was once the most valuable startup in the United States. It courted investments from major Wall Street banks like JPMorgan Chase (JPM.N), as well as well-known investors like SoftBank and venture capital firm Benchmark.

WeWork’s sharp ascent and decline, which fundamentally altered the global office market, can be explained as follows:

What is WeWork?

When WeWork was established in 2010, its goal was to completely transform the office space market by taking on long leases on large properties and then leasing the space to several smaller companies on shorter, more flexible terms. With a business model unrestricted by property ownership, it was viewed as a disruptor. It grew quickly, which raised sales but also resulted in significant losses.

Who founded the business?

The company was founded by Adam Neumann, his wife Rebekah Neumann, and Miguel McKelvey. With their assistance, the business grew to become the most valuable U.S. startup, valued at $47 billion. With the flamboyant, free-spirited entrepreneur from Israel at the center of the company’s brand, WeWork claimed to be working to “elevate the world’s consciousness.”

But Neumann’s quest of rapid expansion at the expense of earnings and disclosures regarding his peculiar conduct resulted in his termination and the collapse of an IPO in 2019.

Just before WeWork filed for bankruptcy this week, Neumann said, “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”

“The company was the product of a boom, and during booms, investors ignore the flashing warning lights. ‘Charismatic CEO’ is a term that should strike fear into any investor’s heart,” said Steve Clayton, head of equity funds at Hargreaves Lansdown, on Tuesday.

How did the fortunes of WeWork collapse?

Masayoshi Son, the founder of SoftBank, made extravagant predictions about WeWork’s future, which led to its precipitous decline.

In 2019, WeWork made an attempt to go public with Neumann leading the company, and its parent company, We Company, spent months getting ready for the sale. Investors questioned the company’s significant losses and objected to Neumann’s management style and corporate governance failings, which caused the planned share sale to collapse spectacularly.

WeWork’s value was estimated to have dropped as low as $10 billion by 2021. In October of that year, the company finally went public through a merger with an acquisition company that was given a blank check.

The ascent and decline of the company was adapted into the television series “WeCrashed,” starring Anne Hathaway as Rebekah and Oscar-winner Jared Leto as Neumann.

Why did WeWork file for bankruptcy in the United States?

Following the COVID-19 pandemic, a large number of people began working from home, and the company had to deal with costly leases and corporate clients terminating agreements. Despite the company’s best efforts, it was unable to avoid bankruptcy by restructuring its debts and making changes to its leases.

WeWork had $13.3 billion in long-term lease obligations as of the end of June, which was a crippling burden for the business given the decline in office space demand following the COVID-19 pandemic.

What does the business do next?

WeWork announced on Monday that, as part of a restructuring support agreement, approximately 92% of the company’s lenders had consented to convert their secured debt into equity, eliminating roughly $3 billion in debt.

According to CFRA Research chief investment strategist Sam Stovall, “I would not be surprised if SoftBank is simply trying to get as much of its own investment out of the company before it joins Titanic at the bottom.”

Given that jobless numbers are predicted to rise in the upcoming months, the global commercial real estate lending market may be in for a difficult 2024. Due to low demand and a lack of interest from investors, real estate values have generally fallen precipitously.

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