Going with the “Experts”
Written by Ryan Bouchey
With so many news stories to consume on a day to day basis, the one that I’ve been fascinated with since the summer has been the story of WeWork and its founder, Adam Neumann. The rise and fall of this company in such a short period of time will be written about for years, studied as case studies in business school and I cannot wait for the full inside story to be reported sometime in the coming years. For those of you not familiar with WeWork, here are a few articles to help bring you up to speed:
The New Yorker – https://www.newyorker.com/culture/culture-desk/the-rise-and-fall-of-wework
Vanity Fair – https://www.vanityfair.com/news/2019/11/inside-the-fall-of-wework
What fascinates me most in all of this is how the “experts”, aka traditional large banks, private equity and hedge funds, were able to get this so wrong over the past few years. Long story short, the private market had WeWork valued around $47 billion (thanks, in large part, to SoftBank’s late-round financing) and companies like Goldman Sachs, JP Morgan and Morgan Stanley were fighting over the rights to be the lead underwriter in bringing this company public (IPO) so that individual investors across the world could own a stake in the company. JP Morgan had it valued over $60 billion, Goldman had it valued around $90 billion, and Morgan Stanley was touting it at over $100 billion. Now granted, they were trying to convince the owner of WeWork, Adam Neumann, that the company was valued this high so these banks could all profit by over $100 million if they won the rights to selling the IPO (conflict of interest anyone?). This NY Times piece gives all the background on this fight to bring WeWork public, and how many conflicts of interests came into play:
https://www.nytimes.com/2019/09/25/business/wework-jpmorgan.html
When WeWork filed with the SEC to go public, thereby making available to the general public its financials and plans for growth, the public market ripped it apart. Many articles were written about how poorly run the business was, how they were burning cash and questioning the overall future prospects of the company. With its latest private fund-raising efforts valuing the company at $47 billion and expectations to IPO with a valuation over $60 billion, the public market quickly came to the conclusion the value was no more than $10 – $12 billion, and maybe even less than that. With this new data, WeWork scaled back its plan for an IPO and ended up canceling it altogether. In the coming weeks and months, Adam Neumann was forced out of the company (along with more than a billion-dollar golden parachute) and its biggest private backer, SoftBank, ended up taking over at a valuation under $10 billion. With the pace at which this company is burning through cash I wouldn’t be surprised if it was bankrupt and out of business sometime over the next 12 months.
What does this have to do with the “experts”? Not to pick on the big banks I mentioned before, but how in the world were the Goldmans and JP Morgans of the world valuing a company at $80-$100 billion dollars, when the public didn’t think it was worth $10 billion? And not only were their valuations 80-90% off the true value of this company, but they were looking to package this fraud company in a pretty bow and sell it to individual investors like you and me for that $80-$100 billion valuation through an Initial Public Offering (IPO). If you were to buy into the IPO (which never happened), you could have been paying 8 to 10 times the true value because these banks were fighting for a $100 million windfall by winning over its out of touch, narcissistic owner.
We hear sometimes from prospective clients “how do you stack up against the big banks?” And some prospects worry we don’t have the same “expertise” the larger institutions may have. Well what does expertise mean? Having significant conflicts of interest that would allow you to sell something to your customers that could potentially be priced 8-10 times too high? Or is it working with an independent advisor who’s interests align with their clients and are able to remove conflicts of interest to work side by side to attain their individual goals? If it’s the latter, we may be able to help.