This article first appeared in The Edge Malaysia Weekly on April 5, 2021 - April 11, 2021

WHAT do you do if you try and fail at something grandiose like “elevating the world’s consciousness” through leased office space? You might try again, remake yourself, even don a new garb and pray that the rework works. Just 18 months after it abruptly pulled its initial public offering that would have valued it at over US$47 billion, office-sharing start-up WeWork is back hogging the limelight. It is trying to become a publicly listed firm once again, this time as a merger target for a blank-cheque special purpose acquisition company (SPAC), with a more modest US$9 billion price tag.

SPACs are shell companies that raise funds in an IPO with the objective of merging with an unidentified private company. For the firm being acquired, the merger is an alternative way to go public over a traditional IPO or direct listing, another listing substitute that has become popular in recent years. WeWork is seeking to merge with BowX Acquisition Corp, a SPAC whose sponsors include ­Indian-born Vivek Ranadivé, co-founder of Tibco Software and owner of the National Basketball Association’s Sacramento Kings. BowX is a cash shell that raised US$483 million in an IPO last August. As part of its merger with WeWork, it is now raising US$800 billion of private investment in public equity (PIPE) from billionaire real estate and hotel tycoon Barry Sternlicht of Starwood Capital Group and Deven Parekh, who runs global private equity firm Insight Partners as well as giant mutual fund group Fidelity Management.

A key adviser of BowX is former US basketball giant turned TV sports analyst 7ft 1in Shaquille Rashaun “Shaq” O’Neal. The sports star — who is worth US$400 million and owns restaurants, fitness centres, malls and nightclubs — will get even richer if the listing is a roaring success. SPACs’ celebrity sponsors, who often put up no equity apart from lending their name, are known to have made up to several hundred million dollars in the aftermath of successful mergers.

Those of you who have followed my tech column will recall several pieces I wrote in 2019 chronicling the unravelling of WeWork and its charismatic Israeli-born founder and CEO Adam Neumann. Back then, it was the biggest unicorn or start-up tech company in the US, valued at more than US$47 billion when Japanese conglomerate SoftBank Group participated in a private funding round in early 2019. WeWork operates in more than 850 locations in 150 cities, including Singapore and Kuala Lumpur, and is the largest office tenant in New York, San Francisco, Seattle and London. In its heyday, Neumann had laid out in detail an audacious grand plan for WeWork to be a dominant global force in the co-working space.

WeWork’s business model was simple: It signed long-term leases with landlords, renovated the space, filled it with fancy office furniture and then subleased the sub-divided offices, sometimes whole floors or even entire buildings, to tenants for a month or few months at a time. It was so desperate to sign up tenants that it even allowed them to cancel their lease agreements on a month’s notice.

But as WeWork filed for its IPO, it became clear that it was just weeks away from bankruptcy and its business model was flawed. WeWork’s S-1, the pre-IPO document that it filed with the US Securities and Exchange Commission (SEC), exposed it for what it was: not a tech company that it claimed to be, but a commercial real estate business focused on short-term leases of souped-up offices on which it had obtained long-term leases.

Its IPO prospectus was full of promises to “elevate the world’s consciousness” rather than laying out a clear pathway to profitability. It was apparent that WeWork needed far more capital and lead time before it could break even. Indeed, many saw WeWork as a “house of cards” fuelled by “Silicon Valley pixie dust”. Eventually, investors made it clear that they were unwilling to put up money in WeWork even at a valuation of  around US$10 billion, or less than a quarter of what SoftBank had paid just months earlier.  There were also serious concerns about corporate governance under CEO Neumann. The intense scrutiny forced investment bankers to pull the plug on the IPO of the shared office provider.

In November 2019, SoftBank Group — which by then had poured US$10.5 billion into WeWork — took an US$8.2 billion write-down on its stake, including a US$3.5 billion hit to its venture capital arm, the Vision Fund. SoftBank valued WeWork at US$7.8 billion at end-2019. Neumann, who drew scrutiny from investors after cashing out more than US$700 million in stock options shortly before the planned IPO, agreed to step down, nearly 10,000 employees lost their jobs and the SEC launched an investigation into the fiasco.

SoftBank injected another US$3.5 billion into WeWork after the IPO was cancelled. It had promised to buy a block of Neumann’s stake in WeWork and that of some of the other early shareholders for US$3 billion. A year ago, the Japanese tech-focused conglomerate declared WeWork to be in violation of some provisions of the deal. Neumann promptly sued. As BowX began talking to SoftBank about a SPAC merger in January, SoftBank approached Neumann to settle their cases out of court. SoftBank bought back US$1.5 billion worth of shares from Neumann and early WeWork investors, and the charismatic founder remains a small minority shareholder in WeWork and will swap those shares for those in the merged entity.

How does a failed IPO of a company barely weeks from bankruptcy turn into a successful listing just 18 months later? For starters, WeWork had some work done on itself. It cut jobs and drastically slashed the budget for butter croissants and glazed doughnuts as it turned off the fermented Kombucha tea taps. WeWork spent US$2.2 billion on capital expenditure — mostly things like renovations in 2019. Last year, it cut renovation expenses by 99%. Those savings helped spruce up its balance sheet.

WeWork’s fortunes also changed for the better because the pandemic forced jobs away from office towers to homes. Covid forced all of us to work from home and changed the way companies operate. Instead of keeping employees clustered together on one floor of an office building, more firms are now restructuring their offices and looking at flexible co-working spaces like those leased by WeWork as an alternative. Here is how post-Covid office leasing might work. Instead of leasing a whole floor in an office building to accommodate, say, 200 people, companies may prefer leasing a flexible office space where 80 people work while the rest continue to work from home.

As corporate needs change, flexible space providers such as WeWork can accommodate more or fewer people at the head office. “The pandemic has fundamentally changed the way we work, and WeWork is incredibly well positioned to springboard into a future propelled by digital technology and a new appreciation of the value of a flexible workspace,” said WeWork’s chairman Marcelo Claure recently.

Ironically, as the Covid lockdown began a year ago, WeWork’s prospects looked bleak. Because leases allowed tenants to cancel on a month’s notice, WeWork’s offices around the world started emptying quickly. Occupancy had plunged to 46% at end-2020 from 72% the year before. Things were so bad that WeWork failed to pay rent for properties in some of its locations. But with companies now looking to cut office costs in a post-pandemic world, WeWork’s offices are starting to fill up. It now expects occupancy to surge to 61% by end-September, 70% by year-end and 81% by the end of next year.

WeWork lost US$3.83 billion last year — almost as much as the US$3.78 billion it lost a year earlier. It chalked up revenue of US$3.2 billion, or about the same as it posted in 2019. Its adjusted Ebitda, or earnings before interest, taxes, depreciation and amortisation — a measure of a business’ underlying profitability — was -US$1.8 billion in 2020. WeWork told investors last week that this will be slashed by half to -US$900 million this year. In 2019, Neumann had coined the much-derided term “community-adjusted Ebitda”, a gauge that also measured “building- and community-level operating expenses”, including rent and tenancy expenses, utilities, internet, salaries of building staff, amenities and, presumably, doughnuts.

The shared office operator said it expects to achieve operating profitability of around US$500 million next year. “WeWork has spent the past year transforming the business and refocusing on its core, while simultaneously managing and innovating through a historic downturn,” CEO Sandeep Mathrani wrote in a blog post on its website last week. “As a result, WeWork has emerged as the global leader in flexible space, with a value proposition that is stronger than ever.” Mathrani, who ran the real estate division of giant alternative asset management group Brookfield, noted that WeWork had seen “a path to profitability and we thought it was a good time to raise additional liquidity to de-risk the balance sheet” by merging with its SPAC partner.

But is WeWork really worth US$9 billion? London-listed rival IWG plc, which operates Regus, has about the same amount of revenue and a market capitalisation of US$4.6 billion. Analysts say WeWork may at best command a 20% to 30% premium over Regus’ parent, but it is certainly not worth twice as much.

So, will WeWork’s second attempt at listing succeed? If the reaction of the SPAC investors is anything to go by, the flexible office provider has its work cut out in trying to convince investors that it has done enough work on itself and is now ready to be listed alongside other publicly traded firms. If shareholders of BowX do not like the deal offered to them, they can just vote the deal down and choose to redeem their holdings for cash. BowX investors are not rooting for a phoenix-like resurrection of the workspace firm in the wake of its merger yet but the SPAC’s sponsors are hoping that they will eventually come around to accepting the beleaguered company’s new, more realistic vision.

Assif Shameen is a technology writer based in North America

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