As WeWork Files For Bankruptcy, Shareholders Will Likely Take The Biggest Hit

Flexible-office-space venture WeWork filed for bankruptcy on November 6. The news raises questions such as: Why? And is WeWork stock a bargain at 84 cents a share?

WeWork went bankrupt due to an awful business model promoted by a world-class salesman and financed by a venture capitalist who shoveled out capital hoping to profit before the company went under.

WeWork projected optimism in the wake of its bankruptcy. In a company statement, CEO David Tolley said, “WeWork has a strong foundation, a dynamic business, and a bright future. Now is the time for us to pull the future forward by aggressively addressing our legacy leases and dramatically improving our balance sheet. We remain committed to investing in our products, services, and world-class team of employees to support our community.”

WeWork co-founder and former CEO Adam Neumann was disappointed by the bankruptcy filing and optimistic about the company’s future. “It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before,” Neumann said in a statement obtained by CNBC. “I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.”

WeWork’s value is far below its January 2019 peak of $47 billion. On Monday, trading in the stock was halted at 84 cents a share. That sent the company’s market value to $43 million, according to the New York Times

NYT
— a 99.91% nosedive from its peak.

Yet in after-hours trading, WeWork shares rose 38% to $1.16 a share. I do not know what will happen to the stock; however, CNBC dubbed its shares “now worthless.”

WeWork declined to comment on the record for this piece.

WeWork’s Bankruptcy Filing

WeWork filed for Chapter 11 bankruptcy protection in New Jersey federal court Monday. Through a restructuring support agreement, the company said it had entered into agreements with 92% of its secured note holders — reducing its existing funded debt by about $3 billion, according to the company.

In bankruptcy, WeWork will reject and renegotiate many of its “non-operational” leases, Tolley said. He added the company will reject “between 50 and 100 leases” and keep renegotiating many others, the Wall Street Journal reported. Other spaces will “continue to operate as usual,” he said.

WeWork leases millions of square feet of office space in 777 worldwide locations and its bankruptcy filing is limited to locations in the U.S. and Canada. On November 6, more than 400 other WeWork entities also filed for bankruptcy — including “many of the individual subsidiaries WeWork has established to run its properties around the world,” the Journal reported.

WeWork has $15 billion worth of assets and carries debts of $18.6 billion. The company owes nearly “$100 million in unpaid rent and lease termination fees to various real-estate companies and property owners,” the Journal wrote.

WeWork shareholders are likely to take the ultimate haircut. SoftBank’s Vision Fund owns 56% of the company’s shares outstanding. WeWork’s 52 million-plus publicly traded shares “may be deemed worthless as the company exits bankruptcy,” the Journal concluded.

How WeWork Stock Nose-Dived 99.91%

Without its near-vertical ascent, WeWork could not have lost so much value.

The office desk renting service could not have risen to $47 billion in value without the astounding sales skills of Neumann or the willingness of SoftBank’s Masayoshi Son to invest more than $10 billion in the company.

Once WeWork filed for an IPO, investor scrutiny of its sub-optimal management and cash immolating business model led to Neumann’s departure. From there, the Covid-19 pandemic reduced demand for WeWork’s short-term desk rentals — without relieving the company of its long-term lease obligations.

WeWork’s Rise

In 2010 Neumann and Miguel McKelvey came up with the idea of leasing — rather than buying — office space and renting desks short-term to freelancers, small businesses and larger corporations, the Times noted. WeWork opened its first such office in lower Manhattan — expanding to locations in San Francisco, Los Angeles, Seattle, Tel Aviv and London.

To its credit, WeWork spearheaded a trend among millennials. “Workers would type away on their laptops in open-floor work spaces or duck into glass conference rooms to take meetings,” wrote the Times. “They were places for people to chat and share ideas all while sipping on the cold brew and kombucha that were on tap.”

WeWork’s Fall

SoftBank’s billions of dollars helped propel WeWork’s valuation to $47 billion at the start of 2019. In August of that year, WeWork — then Manhattan’s largest private tenant — filed for an IPO. The company’s prospectus revealed “governance issues at the company and huge losses.” That September, WeWork shelved its IPO and “Neumann departed as CEO soon thereafter,” the Times reported.

Enormous losses meant the company needed a new source of money. In October 2019, SoftBank “provided a lifeline that valued the company at $7 billion,” the Times wrote.

In February 2020 real estate executive Sandeep Mathrani took over as CEO. Despite the rise of people working from home during the pandemic, Mathrani was able to lead WeWork through an October 2021 merger with a special-purpose acquisition company, according to the Times.

WeWork began the process of closing locations and renegotiating leases with landlords culminating in Monday’s bankruptcy filing. In March 2023, SoftBank recapitalized WeWork by converting $1.5 billion worth of debt — including $1 billion held by SoftBank — into equity, according to Barron’s.

In May 2023, Mathrani left after reportedly growing frustrated with SoftBank. Tolley stepped in as WeWork’s interim CEO and joined as full-time CEO in October, the Times reported.

In mid-August, WeWork announced a 1-for-40 reverse stock split to meet NYSE listing requirements, while disclosing “substantial doubt” about its ability to stay in business, according to the company.

WeWork’s business model did not make sense to me. As I wrote in September, the company took out discounted long-term leases from landlords and subletted desks for short-term leases to entrepreneurs and small businesses.

This timing mismatch between WeWork’s cash outflows (the long-term leases from landlords) and its cash inflows (from the short-term desk rentals) was a fundamental flaw in its business model.

Without additional capital from SoftBank, there would have been little hope for WeWork — which has sustained $15 billion in losses since 2017, according to MarketWatch.

Don’t cry for Neumann. He “collected tens of millions of dollars when he left the company in 2019, saw a further $770 million windfall when WeWork went public via SPAC in October 2021, and retained “now-worthless stock which was once a further $722 million,” CNBC reported.

What’s more, Neumann has since moved on to a new venture called Flow — a version of WeWork for residential renters. With $350 million from venture capital firm Andreessen Horowitz, Flow is valued at $1 billion, CNBC reported.

Will WeWork’s Stock Rise?

I do not know what will happen to WeWork stock.

With the shares up substantially in after-hours trading, opinions on Reddit were divided on November 7. According to trending stocks tracker APE Wisdom, “During the last 24H WE (WeWork) was mentioned 12 times on WallstreetBets by a total of 13 different users. WeWork received 50% positive comments versus 50% negative comments.”

The stock has 125% upside, according to two Wall Street analysts who set a 12-month price target of $2.50, reports TipRanks.

I lean more toward $0.