WeSurrender At some point they should change the name, right? The We Co., formerly known as WeWork, postponed its initial public offering just 11 days ago in the face of emphatic investor pushback, and since then it has been working with really quite astonishing speed to change everything about itself that investors don't like. Controversial co-founder and chief executive officer Adam Neumann is no longer CEO, though he's still non-executive chairman, and his super-voting stock has been cut back from 20 votes per share to 3. His wife and co-founder Rebekah Neumann, who ran We's experimental-school division (WeGrow), is out, and the school might be on the chopping block. Several other businesses are also up for sale; the bankers who thought they'd be closing an IPO by now are instead scrambling to sell an events business and an office-management company. There are plans "to purge nearly 20 friends and family members of Mr. Neumann," including the vice chairman and the chief product officer, and thousands of layoffs are contemplated. To save cash, WeWork won't sign any new leases, meaning that its rapid growth will pause. They're selling the private jet. If you didn't like We two weeks ago, when it was a fast-growing money-burning startup run by a charismatic founder-CEO who had lots of whimsical side projects in a bid to "encompass all aspects of people's lives," maybe you'll like We now that it's a fast-shrinking money-hoarding startup run by two professional co-CEOs who are frantically paring the side projects to focus on the core business of renting out office space for more than they pay for it. Or maybe you won't; maybe you just don't like the business of office-landlord intermediation, or don't think that We can do it sustainably with good margins.[1] But really it seems to me that pretty much every public-investor complaint about We that could be addressed, every problem that was fixable rather than intrinsic, is being addressed. Except the name. Next week they'll probably announce that it's called Coworkr. Deskbook. United Workspaces. Amalgamated Furnished Office Rentals Inc. Also they'll charge Neumann $6 million for changing the name back. Honestly it is sort of a bizarre triumph of corporate governance; I cannot think of a public company that has ever changed so quickly and comprehensively to respond to shareholder concerns. Well, not shareholder concerns. Sort of by definition the people who objected to WeWork are people who don't currently own shares. Potential shareholder concerns. I guess that's an important difference. It turns out you have a lot more leverage before you buy shares than after. Sometimes. My basic model of modern tech-industry corporate governance is that scalable world-dominating ideas are rare and capital is plentiful, so when an entrepreneur invents the next Facebook, or even the next Uber, she has all the leverage: Investors will compete to give her money at high valuations and founder-friendly terms, and she can demand perpetual control of her company even while taking billions of dollars of outside capital. But even if that is the right model as a general matter, there are, you know, some parameters. Capital is plentiful, but it is not infinite, and founders of companies that require tens of billions of dollars to scale in capital-intensive, competitive, high-marginal-cost businesses might not have the same negotiating leverage as their pure-tech counterparts. They really need the money! The people with the money can make some demands. There's a reason that the founders of Uber and WeWork are the ones who were pushed out by their boards before going public, even though both of them controlled their companies through super-voting stock. Super-voting stock is a strong insulator of founder control as long as the company has money, but if you need to go back to investors for more money, those super-votes can always be renegotiated. "So all the agreements and such are only as solid as the performance of the business," comments Fred Wilson. "When WeWork's directors voted on Tuesday to oust Adam Neumann as chief executive after a failed attempt to take the office-sharing startup public, Neumann cast his vote against himself," reports Reuters. Elsewhere in IPOs It is a bloodbath, huh? Exercise-bike startup Peloton Interactive Inc. priced its IPO at the top of its marketing range and cracked immediately: It priced at $29 Wednesday evening, opened yesterday at $27, and closed at $25.76. Endeavor Group Holdings Inc. pulled its IPO just before pricing after seeing how Peloton traded. This comes two weeks after SmileDirectClub Inc. priced its IPO above the marketing range and then fell 28% on its first day of trading, and it is all in the shadow of underwhelming IPOs by Uber Technologies Inc. and Lyft Inc. earlier this year. Also of course WeWork. I don't know what to tell you other than that the "people are worried about unicorns" narrative turned out to be boringly, straightforwardly correct. A lot of big tech and tech-identifying companies were able to raise a lot of money at very high valuations from enthusiastic and often non-traditional private investors, but then it turned out that the public markets did not share the private markets' enthusiasm, or their valuations. There was a localized bubble in private tech valuations, and it bumped against the sharp edge of the public markets, and it popped. This doesn't mean that every highly valued tech company that hasn't gone public yet is doomed, but it does mean that private investors got a little too indiscriminate with their investing and will now have to take losses on the duds. And that fast-growing money-losing capital-intensive businesses probably will not have the same appeal to private investors as they used to: The rejection threatens Silicon Valley's favored approach to building companies. The formula relies on gobs of money from venture capitalists to paper over losses with the expectation that Wall Street investors will eventually buy shares and make everybody rich. If mutual funds and pension funds are no longer willing to buy once the companies go public, fledgling companies are unlikely to find funding in the first place. "When the I.P.O. market is hurting, it has a domino effect on valuations and venture capital deals," said Steven N. Kaplan, a professor of finance and entrepreneurship at the University of Chicago. If it persists, that could make it harder for start-ups to raise money, he said. To be fair there is a difference between "fledgling companies" and "startups," at least in modern usage. WeWork is a "startup" in the sense that (1) it is private, (2) it is venture-backed, (3) it calls itself a tech company, (4) it does weird stuff, etc. It is not a "fledgling company" in the sense that it has raised $12.8 billion and has thousands of employees. If public markets sour on the current crop of startups, that will propagate back to the private markets, but I suspect it will be felt most by the big private tech companies looking to raise billions of dollars at 11-digit valuations. That is the model that seems to be specifically going wrong. One thing to think about is poor SoftBank Group Corp., which is out raising its second $100 billion Vision Fund even as the wheels are falling off the IPO market. The timing is awkward in a narrow sense because potential investors in Vision Fund II will be interested in the performance of Vision Fund I, and Vision Fund I was a late-stage investor in WeWork and Uber and has taken some big valuation hits recently. If you invested in Vision Fund I because you had total faith in Masayoshi Son's abilities as a stock-picker, you might have changed your mind by Vision Fund II. But the timing is awkward in a broader sense because the recent IPO sputtering calls into question not just Son's ability to pick winners but also the whole thesis of having a hundred-billion-dollar venture fund in the first place. Traditionally venture capital involved putting modest amounts of money into relatively small companies so they could get themselves in shape to go public. Vision Fund venture capital involves putting billions of dollars into multibillion-dollar companies so they can grow rapidly without making any money. Uber and WeWork are the highest-profile examples of that strategy, and the fact that they were IPO duds might mean less that they were bad at executing it and more that the public market doesn't believe it. And if that's true, it's a bad time to double down on the strategy. Everything is securities fraud If a public company misclassifies a lifesaving treatment as a generic drug rather than a branded drug, charging patients very high prices while paying relatively low rebates to the government for purchases through Medicaid, who is the victim there? The obvious answer is "patients," the specifically correct answer is "Medicaid," but as readers of Money Stuff know, the universally correct answer is "the shareholders": The Securities and Exchange Commission today announced charges against Pennsylvania-based pharmaceutical company Mylan N.V. for accounting and disclosure failures relating to a Department of Justice (DOJ) probe into whether Mylan overcharged Medicaid by hundreds of millions of dollars for EpiPen, its largest revenue and profit generating product. Mylan agreed to pay $30 million to settle the SEC's charges. … Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation before October 2016, when it announced a $465 million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions, when CMS had already informed Mylan that EpiPen was misclassified, were misleading. Naively you might think that overcharging for drugs is a way to transfer money from patients to shareholders, and that shareholders benefit in possibly socially harmful ways when drug companies gouge patients, but the galaxy brain of U.S. securities regulation says that you are wrong and that the shareholders are in fact the victims here. People are worried about non-GAAP accounting "Do Non-GAAP Expense Exclusions Mislead Investors?," is the headline of this blog post by Thomas Lopez, Christopher McCoy, Gary Taylor and Michael Young; their related paper is titled "Are Investors Misled by Non-GAAP Expense Exclusions Used to Beat Analysts' Earnings Forecasts?" The answer is yes: We investigate whether investors are misled by firms that exclude particular expenses in calculating non-GAAP earnings in order to beat analysts' earnings forecasts. Our empirical analyses suggest that firms that pursue a strategy of non-GAAP reporting to beat analysts' earnings forecasts not only avoid the market penalty normally assessed to firms that miss expectations, they are rewarded by the market. However, when we examine the future performance of these firms we find that they subsequently perform similar to firms that miss expectations. Further, our persistence tests suggest that non-GAAP expense exclusions used to beat forecasts exhibit persistence that is indistinguishable from the persistence of non-GAAP earnings. Taken together, our evidence strongly suggests that at least some investors are misled by the use of non-GAAP expense exclusions. I find this extremely counterintuitive and frankly annoying, but there you go. There are two theories of why, alongside their earnings under generally accepted accounting principles, companies would also report non-GAAP earnings measures. One theory is that GAAP is its own odd set of conventions that does not always reflect economic reality or provide the clearest possible insight into the company's business, and that companies report adjusted non-GAAP numbers to help investors and analysts get a fuller understanding of their results. The other theory is that investors are extremely dimwitted and distractible, and if you say "we lost $2 per share but let's just pretend we made $3 per share instead," they will happily go along with it. It seems to me that this theory demands a high degree of stupidity of investors: Companies have to give the investors the GAAP numbers, and explain the differences between the GAAP and non-GAAP ones in detail, so the only way you could be fooled by the non-GAAP numbers is if you (1) don't actually read the earnings release and (2) also don't read the ten thousand articles a year about how companies are fooling investors with non-GAAP numbers. I tend to be a believer in the ability of markets, as emergent systems for aggregating and responding to information, to at least read a press release, so I do not find this theory appealing at all. Nonetheless, apparently true! Patrick Byrne! Last week Patrick Byrne, the former CEO of Overstock.com Inc., who recently resigned as CEO because Warren Buffett had advised him to come clean about his affair with and betrayal of a Russian spy, did some even weirder stuff. We talked about it at great length last week and I do not have the space or energy to get into it again. The short version is that he secretly dumped all of his Overstock stock in the middle a controversy about whether Overstock would get in trouble for engineering a short squeeze by paying a divided on the blockchain. I apologize that you had to read that sentence but keep in mind that I had to type it. Anyway this week on his blog, which of course is called DeepCapture.com, Byrne justified his actions in detail. I am not personally able to read the post all the way through, but I have dipped into it at random and found it largely enjoyable, and figured I might pass it on to you. If you like this sort of stuff— Now I was in a quandary. My decision was made and instructions given three weeks earlier. But now I had also heard a rumor that the SEC was leaking something. What were my duties to the marketplace? Legally, I had none, I think, but it seemed ethically problematic. Do I have inside information if I hear the SEC is leaking something? Or does the fact that the SEC is leaking it make it not inside information? It seemed perhaps worthy of lengthy Talmudic debate, but one thing I knew: it did not seem fair that the primes were given preferential leaks by the SEC, so I leaked the SEC leak to the marketplace in a blog I drafted and posted in between SCUBA dives. —then there is a lot of that sort of stuff. For what it is worth I agree with him that there is no insider-trading problem with any of this, as long as I do not have to answer any follow-up questions or otherwise think any more about the issue. Also this week, Overstock filed a shelf registration statement for its blockchain stock, which is apparently designed to allow the dividend of that stock to be freely tradable immediately. (See our previous discussion here.) As I have mentioned before, neither I nor any securities lawyer I talk to understands why Overstock would need to do this to make the dividend freely tradable, but here they are, doing it. Things happen Wells Fargo Names BNY Mellon's Charles Scharf CEO to Lead Turnaround. Hedge Funds Struggle to Replicate Warren Buffett's Reinsurance Success. FTSE Russell leaves China out of flagship bond index. Venezuela Has Bitcoin Stash and Doesn't Know What to Do With It. Darfur Victims Allege BNP Paribas Helped Prop Up Sudan's Regime. How an Oil Giant Tries to Thrive in Chaos. Large Marathon Petroleum Shareholders Seek CEO Ouster. Herbalife to Pay $20 Million for Misleading Investors. Washington Gives Exchange-Traded Funds Fast Lane to Market. Billionaire Waited Years for Sale of Wall Street Steakhouse. Prehistoric Parents Used Baby Bottles Made of Pottery. Red Sox And Rangers Cast Aside All Dignity In Battle Over Individual Statistical Milestone. Mathematicians' blackboards. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] And, as I suggested the other day, if you *did* like the old WeWork, you might be bummed about the new one. The thesis behind the old WeWork was, as Reeves Wiedeman put it all the way back in June, "to build a machine capable of leasing, designing, building, and managing space at an unprecedented scale, on top of which various kinds of moneymaking enterprises can be built." Getting rid of the school side project is one thing, but getting rid of "event organizing platform Meetup, office management startup Managed by Q and marketing company Conductor" sounds, from the outside, like an abandonment of that dream. Renting companies offices and also encompassing all aspects of their lives, or at least providing a lot of ancillary office-type services like event organizing, is more complicated than just renting them the offices, but surely adds some potential upside. | 
Post a Comment