WeWork’s ‘substantial doubt’ about its future marks a stunning fall

For the past four years, WeWork Inc has been trying to deliver a turnaround story — one in which the rowdy co-working startup transforms into a stable, profitable public company. It sloughed off Adam Neumann, its rambunctious co-founder and former chief executive officer, and replaced him with an industry veteran boasting a reputation of saving troubled real estate companies.WeWork was not saved, and the co-working company now says there’s "substantial doubt” it will even be able to stay in business.The New York-based company is bleeding cash, and customers of its office rentals are cancelling their memberships in droves, WeWork said in a statement on Tuesday. Its shares plummeted 40% on Wednesday.WeWork’s stock has plunged 99% since the company went public in October 2021, wiping out nearly $9bn in market value. The stock closed at 13 cents on Wednesday. Its bonds are also at deeply distressed levels. The company’s 7.875% unsecured notes due in 2025 last changed hands for 33.5 cents on the dollar, according to data from Trace.Few companies have risen to such towering heights only to crash so badly. WeWork was built on the idealism and charisma of Neumann, who started the business in 2010 with the designer Miguel McKelvey. Their vision was to lease office space and then rent smaller parcels of it to customers.The startup expanded slowly, then quickly, then at blinding speeds, fuelled by a zero-interest-rate financial environment in which venture capitalists dumped truckloads of money into startups that showed impressive growth rather than profits. By 2019, WeWork was the biggest private occupier of office space in Manhattan and London, operated millions of square feet in dozens of countries and was valued at $47bn, which made it one of the most prized startups in America.Flush with money and momentum, Neumann tried to take the company public in 2019, but the attempt at an initial public offering crashed when investors collectively woke up to the company’s extravagant spending and Neumann’s power-hungry eccentricities. Disclosures in the prospectus set off alarms. He was leasing space to the company in buildings he owned and agreed to a $5.9mn equity deal with his own company for a set of trademarks related to the name "We” that he co-owned through a holding company.After the disclosure drew unwanted attention, his holding company returned the shares, but by that point, the damage had already been done with prospective investors. Neumann was ousted in late 2019, and after thousands of layoffs and a bailout from WeWork’s biggest investor SoftBank Group Corp, the company named Sandeep Mathrani as CEO in the hope of a turnaround. Mathrani took over in February 2020, promising to stanch the financial bleeding and restore order.Mathrani was dealt an unenviable hand. Almost immediately upon his arrival, offices worldwide shut down, as the Covid-19 virus sent people into sustained lockdown. Overnight, the idea of setting foot in a WeWork became outlandish, even terrifying, and occupancy dropped to 46% at its nadir.The recovery was slow, and it took more than two years until WeWork’s offices were as full as they had been in late 2019. During that time, Mathrani tried other ways to keep the business going. In 2021, he orchestrated a blank-check merger to take WeWork public, at the height of the frenzy for special purpose acquisition companies, or SPACs. He oversaw the creation of a tech tool that landlords could buy to use WeWork software in their own buildings and the development of more spontaneous, on-demand ways for customers to access WeWork offices.WeWork seemed to achieve a milestone in March when it struck a deal with some of its biggest creditors and SoftBank to cut its debt load by around $1.5bn and extend other maturities. But then in May, after three years on the job, Mathrani suddenly stepped down for a job at Sycamore Partners, leaving WeWork without a permanent replacement.As the pandemic dragged on, WeWork insisted that the shift toward remote and hybrid work would actually favour the company rather than weaken its business. Employers would be more wary of signing long-term leases and would turn to WeWork’s flexible models instead, the company argued.Though that could still pan out, it hasn’t been happening quickly enough for WeWork. In Tuesday’s statement, the company said more customers were leaving and fewer new members were signing up than it had anticipated. That churn was cutting into its occupancy rate, which dropped in the second quarter compared to the previous one.To avert disaster, WeWork said it will focus over the next 12 months on reducing rental costs, negotiating more favourable leases, increasing revenue and raising capital. On Tuesday, WeWork said three of its independent board members are being replaced by four new board members. It’s continuing to search for a permanent CEO.