Softbank makes a major mistake investing in WeWork and Asia expansion questionable

Multiple reports over the weekend from both Japanese and international media point to a belief by insiders in Softbank that the company made a “major” mistake in investing in The We Company (TWC), the corporate parent of WeWork which provides flexible working space to individuals, startups and corporate clients.

A report by Thomson Reuters said that SoftBank wants to replace Adam Neumann as chief executive of the U.S. office-sharing start-up. The move comes as investor’s pushback against the company’s valuation, the postponement of an initial public offering (IPO), continuing and widening company losses, and issues related to the management of the company by both Neumann and his wife. 

HSBC’s Singapore headquarters at Collyer Quay

TWC’s IPO postponement was a major blow and embarrassment for SoftBank, which hoped that the IPO would bolster its profits, enhancing its ability to seeks investors for its second Vision Fund, valued at $108 billion USD. 

Softbank invested in TWC in January, when TWC was being valued as a $47 billion USD “Technology Company.” However, as investors and analysts have looked at TWC’s business model they have come to the realization that it is a real estate company that leases “space” and then resells it at a profit. 

In this analysis, TWC’s major global competitor is the International Workplace Group (IWG), which manages more than 3,000 Regus and other flexible office and serviced office brands in 106 countries. 

IWG has more square feet of office space than WeWork, five times more customers, earns more revenue, and actually earns a profit. However, IWG has a market cap of just $3.7 billion, less than 10% of WeWork’s most recent valuation. These disparities led Forbes to declare that, “WeWork is the most ridiculous IPO of 2019.

If the TWC has proceeded with its IPO as planned, it was estimated that the company’s valuation would be $10 ~ $12 billion USD, which meant it would be valued at less than the $12.8 billion USD in equity it has raised since it was founded in 2010.

Related to its Asia portfolio of offices in China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam. China and Japan are the markets where TWC has the most offices and in the rest of Asia the footprint is limited. In many of the locations, such as the Philippines and Vietnam, the company faces competition against a variety of local and international companies providing similar services.

TWC has been aggressive, as can be seen by its recent deal to take over 21-storey HSBC building in Singapore’s Collyer Quay. The current lease deal with Hongkong and Shanghai Banking Corp will end in April 2020 and WeWork’s lease will start in the second quarter of 2021 for seven years.

The lease of major properties like the HSBC building in Singapore are cash intensive and as much as $1 billion USD of money from TWC’s IPO was going to be used for future “investments” … aka. current losses … and to deepen the company’s footprint in Southeast Asia. With the delay of the IPO TWC’s continued expansion across Asia is now in doubt.