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WeWork CEO to Step Down: Are They Finally Ready to Go Public?

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Office space company WeWork, now known as We Co, continued to tread water as board members and officials from its largest investor, SoftBank Group , were seeking the resignation of company cofounder and CEO, Adam Neumann. The board members pushed for Neumann to step down after a controversial week where the CEO’s eccentric behavior and drug use came to light resulting in the delay of its much-anticipated IPO. Adam Neumann is now expected to step down from the Chief Executive position but will remain Chairman.

How did a company who was initially valued at $47 billion get into this position and are they finally ready to go public? Let’s go more in depth into the young startup and see what headwinds remain.

Problematic Business Model

Many investors have come to question whether We Co’s business model can ever become profitable. Essentially, We Co leases and remodels large spaces with state-of-the-art themes and designs, and then rents them out at a higher price to companies looking for office space. To cover the costs of the renovations and leases, We Co charges individuals and companies through four different membership plans. As of 2018, the firm operated more than 35 million square feet of space and occupies 528 locations in 29 countries around the world.

So, what’s the issue investors see within the business model? Many investors are skeptical about the company’s lease obligations as on average, the firm commits to 15-year leases while We Co members only commit to an average of 15 months. The company, as of June 30, 2019, has $47.2 billion in lease obligations but its customers have only signed leases on $3.4 billion worth of space. And recently, We Co has started signing more long-term clients such as Goldman Sachs (GS - Free Report) , Lyft (LYFT - Free Report) , and Yelp (YELP - Free Report) . Despite the recent signings, the amount of space We Co needs to fill to break even still remains unclear and their occupancy rate fell from 84% to about 80% in Q4 2018, which has worried investors.

Investors also question the company’s resilience to an economic downturn and wonder how heavily they would be impacted. Speculation arose of how We Co would perform if a recession caused office space demand to fall or if existing tenants began to default. These speculations arose as companies with similar business models suffered heavily in the recession of the early 2000s; revenue fell for these companies but the long-term lease obligations remained, which resulted in the bankruptcy of some. Another headwind is that We Co’s business model can be easily replicated by a company with enough capital. These holes found within its business model resulted in the company’s valuation to be cut down to as low as $15 billion from the initial $47 billion.

Where Do They Go from Here?

Issues with its corporate governance and profitability are what lead to the company’s initial IPO delay but now, with the resignation of their controversial CEO, it definitely puts them in a better position to move forward with their potential listing. Neumann will cease his majority control of We Co, with his voting shares reduced to 3-1 from 10-1. We Co, in turn, plans to name two internal executives as Co-CEOs: Artie Minson, current We Co CFO and former Amazon (AMZN - Free Report) senior VP, Sebastian Gunningham.

With Neumann out, the company can rekindle its relationship with its major investor SoftBank, who was at the forefront of the effort to remove the now ex-CEO. SoftBank was expected to contribute as much as a third of the $3 billion or so of the IPO proceeds. Without this support, We Co would have struggled tremendously to find the money it needs to keep growing at its current rate.

The fate of the company’s IPO remains to be seen as the newly instated CEOs will likely require a further delay. However, now that it seems to have solved one of the major issues that investors had with the company, its new co-CEOs inherit the task of solving the reamining problem of long-term profitability.

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