WeWork's IPO filing; 10% Tariffs Were Manageable. At 25%, Businesses Are Squirming; Former NYU Business School Standout Charged With Insider Trading
1) WeWork's parent company, The We Company, just filed its Form S-1 (you can read it here) in preparation for its highly anticipated IPO, which could take place as early as next month.
There are so many red flags surrounding this company (beginning with the dumbest name ever) that I scarcely know where to start. How about with the financials: In the first six months of this year, the company managed to lose a staggering $690 million on revenues of $1.54 billion in revenue. That's a negative 45% net margin!
The Twitter-sphere is going nuts about what's in the S-1. Bloomberg reporter Shira Ovide just tweeted:
I have only read the related party section in the WeWork IPO filing so far, and I am not kidding that it is THE MOST BANANAS THING I HAVE EVER READ.
(I did a search in the S-1 for "related party" and "related parties" and came up with 68 and 39 hits, respectively!)
Geoffrey Batt tweeted:
WeWork minimum future lease obligations over 15yrs = $47.2 billion. Seems like leasing space to WeWork is the better business, which might explain why the CEO owns the buildings receiving WeWork lease payments in a separate company.
But not to worry, Batt adds, tongue in cheek:
The We culture is so tight members would sell their first born before breaking a lease. What's more, the filing says the total addressable market is a solid $3 trillion, and WE only realized 0.2% of it. I'm sure everything will be fine.
Another tweeter adds:
Just another wealth transfer business then. 2&20 Hedge Fund Managers are probably fuming that they did not do this – stuck in front of a Bloomberg Terminal in Manhattan every day while Neumann gets rich private jetting around the world and snowboarding.
For a more in-depth look at WeWork, here's a recent article in the Boston Globe: WeWork rose fast on short-term leases. But can it stick around long-term? Excerpt:
These are boom times for WeWork.
The co-working giant has been scooping up Boston office space at a torrid clip, some 1.5 million square feet in 16 buildings, from downtown towers to Fort Point warehouses. That's nearly a Hancock Tower of desks that it rents from landlords and then sublets on flexible terms to everyone from freelancers to Fortune 500 companies.
At this pace, WeWork should soon surpass Fidelity as the largest user of office space in Boston, a swift ascent for a firm that in 2016 had two outposts renting desks for a few hundred dollars.
But its meteoric rise in the notoriously cyclical commercial real estate industry also raises a troubling question, with broader implications beyond the fate of one company: What happens when a recession hits, or if WeWork falls?...
WeWork's fortunes are being closely watched by real estate executives and Wall Street types alike as the company readies for a public stock offering, likely this fall, while gobbling up ever-larger chunks of buildings in cities worldwide.
There are reasons to fret. Just nine years old, WeWork has known only boom times. It's never reckoned with a recession. The company's bread-and-butter clients are startups and other companies too small or too fast-growing to commit to traditional long-term real estate, and they are susceptible to vanishing just as quickly as they come.
Oh, and there's this: WeWork lost nearly $2 billion last year.
"I'm highly skeptical," said Mark Hickey, director of market analytics at real estate data firm CoStar. "They really could get hit on all fronts. The whole well could dry up."...
In a downturn, it wouldn't take much for WeWork to get hit. Freelancers and solo entrepreneurs might decide to save on their $500 a month WeWork membership by working from a coffee shop instead. The venture capital firms that float midsize startups could get cold feet and pull their funding, forcing the companies to lay off employees or close outright. Corporate tenants to whom WeWork increasingly leases satellite office space may find they have room to spare again at headquarters.
And because WeWork's business model isn't based on the traditional 10-year office lease, with many tenants renting month-to-month, those bustling, hip work spaces could empty out fast.
That's what happened to Regus, a co-working pioneer that prospered during the tech bubble of the late 1990s but filed for bankruptcy protection in 2003 after the bubble popped and many of its tenants folded.
2) This insightful article from the front page of yesterday's Wall Street Journal captures how businesses are struggling to cope with the higher 25% tariffs: 10% Tariffs Were Manageable. At 25%, Businesses Are Squirming. Excerpt:
When the Trump administration first imposed 10% tariffs on many Chinese goods about a year ago, suppliers, importers, distributors and retailers worked together to defray the cost and try to avoid passing it on to consumers for fear of losing sales. Mr. Stone and his Chinese partners initially ate most of the vinyl flooring tariff cost, passing just a tad on to retailers.
Tariffs at the 25% level are quite another matter. They are upending cost projections and business models and straining relationships built up over decades. For operations such as Mr. Stone's, the math is painful. He and others are trying to figure out how much of the new expense can be dispersed throughout the supply chain, how much should be passed to customers, at what potential cost in lost sales, and how much they must swallow.
These tit-for-tat tariffs, at their new higher levels, are forcing businesses into tortuous calculations and negotiations. How these ultimately turn out will have ramifications throughout the U.S. economy, determining how the higher costs get distributed and what effects they may have on sales, as the U.S. and China dig in for what is becoming a protracted trade battle.
"This is a chaos moment. If I pay the tariffs, I don't have any money," said Mr. Stone.
3) What a cautionary tale about a young guy who's just destroyed his entire career in an attempt to make $99,000... Former NYU Business School Standout, New to Wall Street, Charged With Insider Trading. Excerpt:
A new arrival to Wall Street and former student-body president at New York University's Stern School of Business was charged with insider trading tied to a $1.7 billion buyout.
Bill Tsai, a 23-year-old analyst at RBC Capital Markets, was arrested Sunday and charged with criminal securities fraud, according to federal prosecutors in New York. The Securities and Exchange Commission also sued Mr. Tsai Monday on civil claims.
Authorities allege that Mr. Tsai earned about $99,000 by purchasing bullish options on Electronics for Imaging Inc. that rose in value after the company announced it would be acquired by a private-equity firm. Mr. Tsai didn't disclose to RBC the account he used to buy the options, according to the SEC's complaint.
This reminds me of one of my favorite Warren Buffett quotes: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."
Best regards,
Whitney