The recent failed Initial Public Offering (IPO) of the office sharing space company WeCo. gives great insight into how the capital markets decide on the “fair” price for company shares. This post will highlight how this process works, as it is a mystery to most on how the price of any company is determined.
WeWork’s parent, WeCo. is a private company that leases office space from large landlords and then re-leases the space to smaller clients. They lease the space to tenants on daily and longer-term leases while providing office support services.
We Co. said it would file a request to withdraw its initial public offering filing with the Securities and Exchange Commission. The company said it is postponing its IPO to focus on its core business and that it has “every intention to operate WeWork as a public company” but didn’t provide a time frame.
A competitor in this space is IWG PLC, known for its Regus brand (which we previously used for our office space in Woodcliff Lake, NJ). The two companies had a similar number of occupied desks as of mid-2019. That is where the similarities end.
When WeCo started the process of exploring to sell their shares to the public, management and the current owners were hoping that the public capital markets would view the emerging company as they had. Recently private equity investors had added money to the firm and received shares which gave the company an implied valuation of $47 billion.
This $47 billion was based on the last private equity firm investment which believed the company’s marketing that it was actual a technology company. (Technology companies receive a market premium, and thus are valued higher). The 40 year old CEO and co-founder, Adam Neumann, clearly has marketing skill and was able to convince these initial investors that his company would be more than a real estate company. His dream of expanding the shared concept to education, wellness and short term apartment rentals, but these areas have not shown to be fast-growth profits centers as envisioned. (Adam Neumann was recently the ousted by the company board.)
So the company started the process of taking the company public known as an IPO (Initial Public Offering) in the summer of 2019 with the assumption that the public would agree to this valuation. The public did not agree.
The banks that sell the IPO shares to the public started the due diligence and found some governance problems. In addition, a comparison to the one competitor highlighted that the valuation was way off. The company was forced to delay the IPO.
Comparing the two company’s financials – WeCo and IWG PLC, highlights the pricing disparity. The clearest difference between the two firms was how IWG’s measured approach to growth has kept it profitable. The company made an operating profit of $61.4 million on $1.59 billion in revenue for the year ending June 2019. IWG’s share price nearly doubled since the beginning of the year, bringing its market capitalization to $4.5 billion.
By contrast, WeWork racked up an operational loss of $1.37 billion on $1.54 billion in revenues in the first half of this year, according to the IPO filing, after spending heavily in pursuit of growth.
The Switzerland-based IWG has a market capitalization that is about one-tenth the value investors assigned WeWork in January – $4.5 Billion. Clearly the public investors will require a substantial reduction in the company valuation for the IPO to be sold , even if investors agree to the fast growth story of We.
One other note while we are on the subject. This pricing failure highlights the value of investing in the large capital markets where millions of investors set the prices for all publicly traded shares. People make the wrong assumption that a few private equity investors have a specialized knowledge into pricing. They don’t. Trust the self interest of millions of globally investors to capture fair market prices for all participants.
Markets work best when they are both deep and wide, integrating many varied differences of opinion from many people into a single price that is fair to the buyer and seller of the security. It is why we invest for our clients in publicly traded shares in the global marketplace.
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