WeWork rework

0:06Pushkin. In the easy money era, we saw a lot of crazy business ideas and crazy founders get funded. but there was perhaps no easy money founder that was as easy money as Adam Neumann, the head of WeWork. He turned a real estate company subleasing office space into a tech company that was going to elevate your consciousness to a level never before seen. And it ended in tears for the investors. Today on the show, why some big name investors want to bring Adam Neumann back. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm reporter Ethan Wu here in the New York studio, joined by reporter Hortensa Aliyei, who, as I understand, is basically best friends with Adam Neumann.

0:55Yes, I'm here to elevate unhedged listeners' consciousness. Well, I'm already feeling elevated, my consciousness is at least. So, Hortensa, you covered this for a while, right? You've been kind of in the thicket of WeWork for some time. Yes, I came into the WeWork story relatively late. It was after everything had sort of fallen apart and it was about to go public through a deal with a special purpose acquisition company, SPAC. And I followed Adam Neumann around a party at the Stanford Hotel whilst eight months pregnant. Oh, wow. Oh, wow. How was that? Tiring. Yeah, it sounds tiring. I want to take it back though, because I feel like it's been a few years, people may not have fresh memories about WeWork.

1:43The broad scope of it is there's very straightforward business model, right? They buy buildings, they sublease out chunks of them, they make them pretty, kombucha on tap, beer on tap, fancy glass doors or whatever, straightforward business. What happened is a lot of money got poured into it by one particular investor, that's SoftBank of Japan run by Masayoshi Son. And the whole thing went a little bananas, didn't it? It did. Just a quick clarification. The WeWork business model was long-term leases. So I don't think they bought a lot of their buildings. I think that was the sort of liquidity mismatch.

2:17They were taking on these long-term leases and providing short-term leases to people who are renting. And yes, that was the entire business model effectively with some apps and websites, and it got repackaged into a big tech company. Or that's how they marketed themselves. We could argue about how tech it really was. Yes, exactly. But before we get into it a little more, what was your favorite moment of the WeWork saga that was? That's hard. So many to choose from. There's so many to choose from. I don't know if you've read the book that came out by the two Wall Street Journal reporters, was great.

2:53But my favorite moment is obviously just smoking pot on a plane. Truly flying high. That's just called a Tuesday for Elon Musk, right? Well, my favorite moment, I dig back in the archive for this a little bit, was they had this summer camp, right? They had an annual summer camp where all the employees would have a big bonfire. They had their own little Burning Man, essentially. And there's a great anecdote in New York Magazine from a few years ago, where one employee told the reporter that they would camp out in tents, and she woke up one morning to see urine pooling on the top of her tent, and she just had to sort of pray that it would not fall on her.

3:32She's just looking up at the urine, hoping for the best. So anyway, this is all to say, like, it got a little crazy. It got a little crazy everywhere. We urinate. Not at Bridgewater.

3:47All right, let's get this back on the rails. Like you said, Rutenza, and thank you for the corrective. They would take long-term leases. They would sub them out on sort of a short-term basis. There's some kind of real business model there, and there are other companies that actually do that for real. But WeWork ended up getting to this preposterous valuation with all this venture capital money from SoftBank. And the whole thing, it kind of imploded. I mean, what was the story of the fall, just given briefly? Yeah, I'll give you a 30 second version. So it got this enormous valuation upwards of 40 billion when SoftBank invested in it or the last investment it made in it as a private company at the time before it filed an S1, which is a filing that you make for an initial public offering for your shares to float in the stock market.

4:33and when it filed the S1, the investors looked at it and were like, wait, there's a lot of conflicts of interest here. And this guy, Adam Neumann, who runs the company, he's getting paid for kind of insane things. He trademarked the word we. And then sold it back to the company. And then sold it back to the company, yes. Anyway, investors looked at it and they were like, no, we don't want to invest in this. And I think that was the start of the end for WeWork because everything had come out into the open, right? The whole machination had been exposed. Yeah. And that started its kind of long march down toward bankruptcy from a couple of months ago, which is a story that is about WeWork, but it's also a story about commercial real estate, which we talk about all the time on this show as a potential crisis risk.

5:21But I mean, that's a market that has struggled and WeWork was not immune from it. And perhaps it was one of the more exposed companies in that segment. And it declared bankruptcy in the middle of last year, was it? Yes, I think so. So at some point, my two worlds collided and WeWork went public through a special purpose acquisition company, which is a shell company that takes private businesses public. So it did eventually manage to do a public listing, but at a much lower valuation, I believe it was around seven or eight billion. But by that point, I think it was still spiraling. Then we have this bad real estate market, people working from homes, they're not really going into offices.

5:59And it has leases in this sort of overexposed areas, which I think is what they've tried to rein in. And then it filed for bankruptcy, which was a big slap in the face for SoftBank. Yeah. Yeah. And at that point, Newman was long gone, had been let go of a long time ago. Was long gone and had taken a lot of money to be long gone. SoftBank had given him a pretty hefty package for him to leave the company. And he'd started his own other real estate company called Flow, which is basically a apartment business. He couldn't stay away. He needed to do more real estate stuff. Yeah. Well, so toward the end of last year, the state of play is WeWork is in bankruptcy.

6:45Newman is off flowing his flow. And I think a lot of people saw it as sort of the end of the story and maybe WeWork would restructure. But that is not, at least right now, that does not appear to be what's happening. There is interest in bringing Newman back, in buying WeWork out of bankruptcy. What's the idea here? Who are the investors involved? Why would anyone want to take another dice roll on this guy and his bankrupt real estate company? Yeah, this is really interesting. The fact that Newman can get Wall Street backing, And I will say backing with a caveat that he doesn't currently have financial commitments.

7:22He's in talks with several with hedge funds. But like big names. Big names. Yeah. So Dan Lopes Third Point, which is a big hedge fund based in New York and is known predominantly for shareholder activism. And the other one is Seth Klarman's Baupost Group. People who are listening might know Seth Klarman. He is a very, very famous value investor. His letters are sort of like mini Warren Buffett letters, and he has a huge following. So yeah, these two very prestigious and respected figures in finance have been talking to Adam about potentially investing in WeWork. Why? Right? Like, why? This Newman guy walked away from incinerating an incredible amount of value, billions and billions of dollars, and now people want to give him more money?

8:08I mean, it seems like patently insane. Yes. Adam Newman's ability to raise funds is genuinely quite enviable. We also just saw this with his new property company, Flow, where he managed to convince Addison Horowitz, a very famous VC firm, to give him more money for another real estate company with a very similar concept, except for you don't work there, you live there. You flow there. You flow there. We live. So what we get from people that we speak to is, look, WeWork is still a good business. It needs to cut back on certain things, but it's been streamlined. It's cut costs a lot. It's closing down a lot of offices and trying to become a much more lean operation.

8:55And for them, it probably represents a business opportunity. The real question is why with Newman, you know, that they don't, neither of these firms need Newman to come back into WeWork. And that we don't know. On the other hand, you know, maybe he has a plausible case to make, Newman that is, that, well, the idea was there, right? That, you know, maybe Newman is like a master vibes curator and he can just make the greatest office of all time. Everyone wants to go work at it. Everyone I've ever talked to who's been into WeWork is like, it's nice. I like the kombucha on tap. It's a nice environment.

9:30I feel it feels open. It feels modern. Maybe that's the sales pitch is that yes, it got a little crazy, but we're at such modest starting valuations, i.e. bankruptcy. And the fundamental idea is still sound. And bankruptcy gives us the ability to renegotiate our leases, which is crucial, especially in a real estate market that's resetting. You could really get much more favorable terms in 2024 on your leases than you could in 2019 or whatever, maybe that's the pitch. At least that's how I imagine it going. Yes. I think that's the pitch in a broad macro way, let's say. But what really happens next is up to the creditors.

10:09The largest or among the largest is obviously SoftBank. But I think it's funny because Adam has come into the process. I know he's tried to help WeWork raise money in other occasions which weren't made public, so we didn't know about them. But he's come into the process quite late. WeWork has already started bankruptcy proceedings. And a lot of the creditors are currently focused on renegotiating leases with landlords and figuring out how the ownership structure is going to work after the company comes out of bankruptcy. Now, I'm not saying that if Adam Neumann came to the table with$5 billion and funding is secured, to borrow a from Mr.

10:48Musk, they wouldn't leap at it because at the end of the day, they're there to make money. But from the people involved that we've spoken to, they don't see Adam as the future of WeWork. On the SoftBank side, that is. Several creditors, not just SoftBank, but yes, a lot of the creditors that are currently involved. One of the interesting aspects of this is that if something was to happen and Adam did make it back into WeWork, it would kind of put Masayoshi-san and Adam sort of forcibly back together, which I think is really interesting because SoftBank has put about$16 billion into WeWork in total, a company that is now bankrupt.

11:32It's a big, big four-par for them. I mean, four-par is a very soft word, actually. It's a disaster. And I don't get the impression that they're necessarily keen on starting that relationship back up again. But again, SoftBank is trying to salvage a pretty bad investment. And I think they'd rather do it without Newman. Yeah. Why didn't SoftBank wash their hands of this earlier? You would think at some point, you'd want to cut your losses and just sell the debt on to someone else or turn it into equity and sell it to someone else. I mean, how are they still involved in this? Yeah, it's weird. They provided more funding.

12:11Actually, we reported on this with my colleague, Eric Platt. When WeWork went into bankruptcy, they had to wire another$1.5 billion. Right. Bankruptcy financing. Right. Exactly. And at a certain point, yeah, most investors have been like, I'm done. This isn't happening. But clearly, there is some belief. Also, I should say the people who are involved in WeWork at SoftBank were very senior people like Rajiv Mizra. And maybe it's an emotional attachment. I don't know. VC investors tend to have an emotional attachment to the companies that they invest in. I mean, clearly they believed in WeWork on some level, whether it was just like Newman's salesmanship or the fundamental pitch of a, I don't know, vibes-driven real estate company, consciousness-lifting real estate company.

12:55They believed in it on some level, which is why they made such a massive investment in the first place. Yeah. And the fact that we're seeing your involvement at SoftBank shows, it wasn't just Masayoshi Sun's grand gamble. It was something that there was some amount of buy-in on the team. Yeah. We can't forget the fact that WeWork is still the dominant company in co-working spaces. Yeah, yeah. Right? It dominates that market as a name. So there must be some way to make a business out of it. Yeah, yeah. Well, maybe second time's the charm for WeWork, and we'll see if Newman is along for the ride.

13:29All right, Rtenso, we'll be back in a moment with Long Short.

13:45Welcome back. This is Long Short, that part of the show where today we talk about NVIDIA because there is nothing else to talk about. The stock beat earnings again. Its market caps on the way up to$2 trillion. It's up like 12 % today. I mean, this is like the unbeatable stock of the moment. And it's not just NVIDIA's price too. It's like propping up a bunch of other stuff. Like in the FT today, we called it like the global catalyst for stock markets going up everywhere. And it's even having like random spillover effects on like completely ancillary companies. Like there was this, there's a story of these like two little stocks or tens of that.

14:22I know you've been looking into a bit that NVIDIA re-disclosed that it had shares in, but it was already public information beforehand and yet the stocks went up. Yes. What's up with that? It's the tide that lifts all boats, including these two companies that I had never heard of, but it seems you have, Ethan. One of them is called SoundHound. Although SoundHound seems to have the word AI after its name now. So I don't know if that was always the case, if it's ever been just SoundHound. It used to just be, I mean, I'm like a legacy user of SoundHound just because I randomly installed this music finding Shazam competitor when I was a child.

15:01But yeah, it's just like a music finding app. I don't know why it's AI. I'm sure there's some angle on the pitch deck or whatever. But yeah, SoundHound is up like 100 % in the past month for absolutely no reason. It was known that NVIDIA owned this company? It was, yeah. So the reason that NVIDIA had to make public its ownership stakes is because it hit over$100 million in stock ownership. And that means that you have to disclose to the SEC what you own. So this wasn't new information. The market already knew that NVIDIA had invested in SoundHound and this other company called Nano X. But for some reason people continue to buy.

15:38And it's wild because I've been reading about it now because I'm too old to know what SoundHound or Shazam are. And initially I thought it was SoundCloud. And I was like, I'm happy for SoundCloud, which is what I use. But in 2022, it had to basically do all these salary cuts and cut stuff. And now two years later, it's booming. It's weird though, right? Because I guess we can argue all day about whether Nvidia is actually worth$2 trillion. But it does seem like a lot of this is massive hype. And I'm not calling, I don't want to say that I'm calling the market top, but I'm just conscious of the fact that this has become a feature of the stock market over the past sort of decade where there's these massive booms in a certain asset class.

16:23We actually saw this with special purpose acquisition companies, which I was saying I covered for two years, where everyone piles in and then all of a sudden the the bottom falls out. But go NVIDIA. I mean, the one thing you can say in NVIDIA's favor, and we've discussed this on the show a bit, is real earnings growth, right? I mean, again, the stock went up today not because people were like, AI, yeah, it was real profit. They're generating a tremendous amount of sales. It's only going up and continues to beat what are already really optimistic expectations. So I mean, that's the one thing you could say is disanalogous between I mean, NVIDIA and AI now, and then the dot-com companies of 20 years ago, are there stretched valuations?

17:03And is NVIDIA stretched? That's a real and important debate. But that at least seems to be one piece of it that's not quite the same as tech bubbles past. Yeah. And to be clear, I don't think NVIDIA's valuation itself is the issue. I think it's when investors start piling into these other ancillary stocks just because they're associated with that company. Yeah. Is this like implicitly we're short Soundhound? Is that the conclusion of this long show? It's a good app. Again, I like this app. I don't own the stock, but you know, it does the job, right? It tells me what song is playing. All right, listeners, I'm sick of talking about artificial intelligence.

17:39I would like to hear from some real intelligence, specifically some intelligent questions for me, Katie, and Rob. As I mentioned in the last show, we're doing a listener questions episode in the near future, and we'd love to hear from you. Ethan.woo. W-U-A-F-T.com. All right, Retenza, thank you for being here. We'll have you back soon. And listeners, we're back in your feed on Tuesday with another episode of Unhedged. We'll catch you then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio.

18:13Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Ethan Wu. Thanks for listening.