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Issue 48
October 27, 2019
__ __ __ _____ _ __ __ __ _ __ _ __ \ \ / / / // ____| | | \ \\ \ / / | | / / | |\ \ \ \ /\ / /___ | || | __ ___ | |_ | |\ \ /\ / /___ _ __ | | __| | ___ __| | | | \ \/ \/ // _ \| || | |_ | / _ \ | __|| | \ \/ \/ // _ \ | '__|| |/ /| | / _ \ / _` | | | \ /\ /| __/| || |__| || (_) || |_ | | \ /\ /| (_) || | | < | || __/| (_| | | | \/ \/ \___|| | \_____| \___/ \__|| | \/ \/ \___/ |_| |_|\_\| | \___| \__,_| | | \_\ /_/ \_\ /_/

Earlier this week in last-ditch attempt to salvage its original investment, the Japanese conglomerate SoftBank injected $10 billion dollars into WeWork. In exchange for the lifeline that currently values WeWork at $8 billion - less than the sum of Softbank’s total investment ($13 billion) - Softbank will get a controlling stake in the cash strapped startup. Before Softbank leader Masayoshi Son agreed to write a multibillion-dollar check, WeWork was approximately one month away from running out of cash.

Exasperatingly, under the terms of the deal, WeWork’s outlandish co-founder and former CEO Adam Neumann was effectively paid $1.7 billion to go away. Specifically, “Neumann is expected to sell nearly $1 billion worth of stock to SoftBank and receive $500 million in credit as well as a $185 million 'consulting fee'."

Under any circumstance, the size of this overly generous golden parachute would be heavily scrutinized. However, given Mr. Neumann’s history of arrogant, self-centered and tone-deaf behavior, brazen self-dealing and WeWork’s disastrous business performance metrics, it is downright disgraceful.

We (Did Not) Work

In early 2019, WeWork (officially known as “The We Company”) was preparing an initial public offering. Major Wall Street banks including Goldman Sachs and JP Morgan were busy pitching the deal to institutional investors. The bankers were apparently punch drunk from Mr. Neumann’s Kool-Aid spiked tales of what WeWork had to offer, which among other nonsensical things, included a “frictionless office-leasing experience.” In their pitch, bankers argued that WeWork was more akin to an upstart tech company. Somehow, they pegged WeWork’s valuation at $47 billion, despite that it had neither a unique nor remarkable business model, was a user of technology not a creator of it, and managed to hemorrhage investor cash since its inception, including ~$2 billion in the previous year alone.

Thankfully, markets tend to be effective at sniffing out odoriferous behavior. Soon after WeWork was pitched to the public, would be buyers of the shares began to question the firm’s nose bleed valuation and Mr. Neumann’s abhorrent judgement. Demand quickly dried up. On September 30th, WeWork scrapped its IPO.

Our Mission Is To Elevate The Worlds’ Consciousness.

Um, what? One of the more absurd claims made by Mr. Neumann was that his company’s mission was to “elevate the world’s consciousness.” At TQC, we have no idea what this even means. However, it appears that during his tenure at WeWork, Mr. Neumann seemingly lacked a conscience of his own. These are but a few examples of the fantastical claims and tone-deaf behavior that wreak of self-dealing, gross hypocrisy and blatant conflicts of interest which Mr. Neumann engaged in as CEO and whose cost was borne by WeWork’s investors:

• Sold hundreds of millions of dollars of WeWork stock ahead of its botched IPO when the firm was valued at $47 billion. (Those employees that were even authorized to unload shares had to do so at a lower price).

• Purchased a private plane for $60 million and used it for personal vacations.

• Authorized WeWork to purchase the “We” trademark from himself for almost $6 million dollars.

• Purchased real estate with funds partly derived from selling WeWork stock and subsequently leased the space back to WeWork.

• Allowed his wife, Rebekah, to terminate employees because she “did not like their energy.”

• Fired employees himself (perhaps his wife did not “like their energy”?) and moments later watched Run DMC perform their classic hit song “It’s Tricky.”

• Banned employees from expensing meat and serving it at company events then ate a lamb shank in the office.

• Hired the Red Hot Chili Peppers to perform at a company off-site event.

• Told people he needed to “have the biggest valuation I can, because when countries are shooting at each other, I want them to come to me.” (This actually makes sense because he also said he wanted to “become the president of the world.”)

• Told people that “there are 150 million orphans in the world. We want to solve this problem and give them a new family: the WeWork family.”

A Black Eye For Capitalism

Adam Neumann represents a black eye for capitalism at a time when capitalism has already absorbed too many sucker punches from misguided and opportunistic politicians. The narrative: An elitist, pot smoking tequila swilling charlatan, with multiple expensive homes, globetrots on a private plane (private jets are disproportionate contributors to environmental degradation) ranting about saving rain forests in the Amazon, the power of community, the power of “we,” and manages to walk away with a $1 billion. Meanwhile, investors get fleeced and many of WeWork’s hard working employees are terminated and/or stuck with worthless stock options.

The Result: a low hanging piece of corporate malfeasance, ripe to be (cherry) picked by ultra-left-wing lawmakers attempting to convince the general public that capitalism is evil, a rigged system that benefits too few at the expense of too many.

Capitalism has its flaws; it can, and it should be improved upon. Reforms are needed and certain government regulations are reasonable. That said, at The Quintessential Centrist we are staunch supporters of a market driven, capitalistic system. Because despite its flaws, capitalism has proven superior at allocating scare resources that have alternative uses, and improving the livelihoods of the greatest number of people. Communism, Socialism and other alternative systems have consistently proven one thing: while the wealthy will be worse off, the 99% will also be worse off.

Adam Neumann is not indicative of how capitalism functions efficiently. He is an example of how a grandiose individual with a gift for gab and penchant for salesmanship leverages his skillset in nefarious ways to exploit capitalism as well as other human beings to unjustly enrich himself.

History Lessons & Life Lessons

How did Adam Neumann convince some of the most sophisticated investors on Wall Street to commit massive amounts of capital to him? How did he charm the Chairwoman of NASDAQ into offering to create a “We 50" index of sustainable companies? How did a man armed with just a pedestrian amount of real estate knowledge persuade some of the brightest minds in banking and venture capital that WeWork was going to “change the world?” Why did landlords fall under the spell of an “entrepreneur” who tried and failed to create a business selling shoes with collapsible heels? Why were seasoned bankers convinced that WeWork was analogous to a tech company deserving of a stratospheric valuation?

WeWork is an unremarkable real estate leasing firm that simply locks in long term leases, repackages the spaces, and re-leases them with the objective of earning a “spread.”

Psychology & Spreadsheets

Psychology and human emotion can and often do trump rational thinking and logic. Grandiose ideas can be tantalizingly appealing. And when the narrative comes from a gifted storyteller, it often releases endorphins. The fear of missing out on the next “big thing” can evoke anxiety and impulsivity.

Indeed, history is littered with countless examples of sophisticated investors being duped by snake oil salesmen armed with a “cannot miss” story. Another reason financial chicanery often repeats itself is because, in addition to a feel good story from a loquacious pitchman, typically the foundation of a real business actually exists. Here are a few of the countless examples of financial embellishment and/or outright fraud committed by gifted spinsters throughout history:

In the early 1700’s, Scotsman and financial guru John Law convinced a who’s who of sophisticated investors, including the French government, to back his Real Estate company. The pitch was simple and exciting: the unexplored back-country of Louisiana might contain riches in the form of silver and gold. Investors bought the hype and drove up the valuation of Law’s company. When it became apparent that Law’s assets consisted of nothing more than swampland minus the minerals, its value plummeted and investors lost their shirts.

Across the pond in Britain, The South Sea Company (SSC) was incorporated in 1711. The crown granted the SCC exclusive trade agreements with Spain’s South American colonies. Associates of the SCC openly discussed the potential to harvest natural resources, abundant in South America. Promoters of the shares made comparisons with the East India Company, which had successful trade partnerships in India. Speculators accumulated the stock of the SCC with such abandon that in a span of 6 months, the share price rocketed from 128 to 1,050. Adding fuel to the fire, a lot of stock was purchased on margin (with borrowed money). A short time later it became clear that the purported business prospects of the SCC were not all they were chalked up to be. Almost immediately, shares of the SCC went south, lenders demanded more collateral, which in turn drove the stock down even further. A full-blown financial crisis ensued.

In the early 1920’s much of Florida was sparsely populated and consisted of undeveloped swampland. However, the state enjoyed a warm climate throughout the year and benefited from picturesque beaches. Might this tantalizing combination make the Sunshine state a natural destination for America’s nouveau riche and retirees? Investors soon began to snap up property as word quickly spread that Florida’s vast swampland offered a surefire way to get rich. Speculators moved increasing sums of capital from the Northeast into Florida real estate; some borrowed money to fund their purchases. Property prices quickly diverged far above their fundamental value. By the middle of the decade, it became apparent that the expected cash flows derived from Florida property would never support nor justify the prices paid to acquire it. In a matter of months, prices for FL real estate crashed, leverage went in reverse and paper millionaires became penniless. The state’s economy was severely wounded.

The Dot Com boom of the late 1990’s was catalyzed by the idea of a “new economy.” The world-wide-web would revolutionize business and connect people from all over the world. The internet would disintermediate commerce and enable cheap, reliable and frictionless communication. Information would become less asymmetric and more transparent. The hype of the “new economy” was enticing. People with no experience investing or trading stocks bought in. After all, these new digital tools were such powerful change agents that true and tested valuation metrics no longer mattered. The share price of seemingly any publicly listed company with a “.com” after its name went parabolic. The internet did deliver much of what was promised. But when there was no “greater fool” to support share prices trading on nothing but hot air, a “tech wreck” ensued. Most of the targets of investor mania, Pets.com, Webvan, Geek Internet America, etc. went bankrupt. Billions of dollars were lost.

Even Bernard Madoff, the mastermind behind the biggest Ponzi scam in recorded history, had a legitimate (and very profitable) stock market making and brokerage business.

Let us be clear, by highlighting investment bubbles and financial shenanigans of the past, we are not implying that Adam Neumann is a criminal. He probably isn’t. WeWork does have a legitimate, albeit currently money losing business of leasing office space. But WeWould not be surprised if more details of egregious self-dealing, grandiose (broken) promises, godlike proclamations and selfish acts of entitlement and hypocrisy are made public in due time.

(Will) We (Eventually) Work?

In order for Softbank to breakeven on its investment, the value of WeWork will have to triple. Only time will tell if WeWork will ever be able to turn a profit. And if they ever do, most likely they will first need to raise even more capital. According to public filings, “WeWork has committed to lease payments of $10.2 billion between mid-2019 and the end of 2023, and it may have to spend up to $1 billion building out newly leased offices.”

Eric Schiffer, CEO of the Patriarch Organization, a technology and media private-equity firm summed it up succinctly:"SoftBank blinked, and Neumann walks away with one of the biggest hauls in modern history when he should have gotten very little. I think anything over a dollar was more than they needed to pay. What occurred was shameful, for him to have gotten anything."

Be Wary

Fortunately for the Adam Neumann’s of the world, people have short memories. In a few years or sooner, we might find ourselves listening to Mr. Neumann on the talk show circuit, discussing how “humbled” he is, telling anybody who will listen how much he learned, how sorry he is for the harm he caused others and how ready he is for his next act in “raising the world’s consciousness.” WeMust not drink the Kool-Aid.