In what is one of the most dramatic collapses in the value of a firm in business history, WeWork – the start-up US-based rental firm – is this week seeking financing it needs to keep the firm operating.
Company failure is part of the dynamics of market economies. Conventional economic theory says it’s the natural and beneficial way inefficient and uncompetitive firms are displaced by better ones.
The failure leads to a loss of investment and employment in the short-term but in the end stimulates more of both.
It’s an example of what Joseph Schumpeter named Schöpferische Zerstörung (creative destruction).
And yet, WeWork’s travails are probably uniqud
In August, the company was planning to offer shares to the public at a total business valuation of $47 billion. This was halved. Investors then rejected an initial public offering (IPO) above $12bn. It’s now been withdrawn.
WeWork’s chief executive Adam Neumann has been deposed and is now non-executive chairman. Some of his senior supporters and family have left the firm. The company jet is up for sale, most future development is being cut, more than one third of the workforce of 15,000 faces the sack and recent acquisitions are being sold.
WeWork’s debts have been categorised distressed. Its future liabilities to landlords total $47bn. In mid-October, the company had less than one year’s worth of cash and was recording losses at the rate of more than $2bn a year.
What’s been most clearly exposed is the way WeWork’s financial advisors valued the firm. Despite making losses, they managed to construct a valuation that would have made it immediately one of the 30 most-valuable firms listed on the New York Stock Exchange.
How could that be possible?
The answer is that those valuing WeWork didn’t refer to historic losses but worked on projected profits, which were based on the expected income and capital gains in its property portfolio.
In other words, investors were being invited to join WeWork in a journey into an imagined future where profits and capital gains would be enormous.
WeWork’s planned IPO share price, therefore, was a fiction with a narrative that has now collapsed.
This is, however, just one of a growing number of stories of businesses that depend on intangible capital. These are assets with no physical characteristics that now dominate the balance sheets of all large companies in all advanced capitalist economies.
More than 95 per cent of the assets of the 25 largest firms listed on the London Stock Exchange are now non-physical. Their valuation is highly subjective and more vulnerable to shifts in mood among investors than it is to the behaviour of consumers.
The WeWork affair is the latest hi-tech start-up IPO to have gone wrong. Uber and Lyft were floated earlier in 2019, as well as the messenger app Slack and the home exercise business Peloton.
All are trading significantly below their offer prices.
Uber was originally said to be worth $120bn but its IPO was valued at $83bn. Its market value is now $55bn, which is still regarded as being too high.
The appetite for technology IPOs is evaporating. Some have been dropped. The Airbnb IPO has been deferred.
It could be argued that this is just part of the roller-coaster world of equity markets. The numbers are bigger, but the story remains the same.
But is it?
The troubling fact is that the methods used to price the shares of WeWork are similar to the way all large corporations are valued. This involves a projection of future profits and imagined capital gains rather than historic earnings and real asset valuations.
From this perspective, all listed companies are now potential WeWorks.
We are through the looking glass into a world that is both familiar but at the same time utterly unrecognisable.
Conventional methods of business management and regulation aren’t working in economies dominated by intangible capital and service creation industries.
And this will probably be exposed by the global economic downturn that is increasingly forecast and probably overdue.