September 26, 2019 / 6:59 PM / 17 days ago

WeWork's Neumann voted to oust himself as CEO after failed IPO: sources

NEW YORK (Reuters) - When WeWork’s directors voted on Tuesday to oust Adam Neumann as chief executive after a failed attempt to take the office-sharing startup public, Neumann cast his vote against himself, according to three people familiar with the situation.

FILE PHOTO: Adam Neumann, CEO of WeWork, speaks to guests during the TechCrunch Disrupt event in Manhattan, in New York City, NY, U.S. May 15, 2017. REUTERS/Eduardo Munoz

The vote by Neumann, who remains non-executive chairman but gave up majority control of the company he co-founded, was the culmination of a stunning coup to remove him led by his biggest backer, Masayoshi Son, the billionaire CEO of SoftBank Group Corp (9984.T), these sources said.

Neumann’s downfall came after WeWork’s parent, We Company, spent months preparing for an initial public offering, only to have to postpone its plans last week, as estimates of its value fell by tens of billions of dollars amid investor concerns about its corporate governance under Neumann, 40, and its ability to generate a profit.

The falling estimates came as a shock to Son, who had ploughed in more than $10 billion to WeWork, the last investment at a $47 billion valuation, according to three people familiar with the matter. At that level, WeWork was the world’s fourth-most valuable private startup, according to data firm CB Insights. By the time the IPO was pulled, estimates of WeWork’s value had come down as low as $10 billion.

By last weekend, some WeWork directors started to lay the groundwork for Neumann’s departure, according to a source familiar with the seven-member board’s deliberations.

The notion would have been unthinkable only a few months ago, with the WeWork brand strongly tied to the flamboyant, freewheeling Israel-born entrepreneur who has said that his company’s mission was to “elevate the world’s consciousness.”

The substance of the message to Neumann from them: “Listen, this IPO has gotten distracted by you,” the source said.

Neumann decided to back the management changes because he became convinced they were in the best interest of the company, according to a person close to him. Neumann owns about a quarter of WeWork, sources have previously said, tying much of his wealth to the company. WeWork has not disclosed what percentage of the company he owns.

Neumann did not respond to calls and emails requesting an interview.

SoftBank and WeWork declined to comment.

HANDSHAKE DEAL

Things looked very different just a year ago. New York-based WeWork, which leases office spaces and rents them out to individuals and startups, was seen as a disruptor with a business model unhindered by property ownership.

It was expanding at breakneck speed, increasing revenue but also racking up steep losses, as demand for flexible office space steadily grew. Backed by Son, the company commanded massive valuations as it expanded globally.

Last October, Neumann struck a handshake deal with Son for SoftBank to invest an additional $16 billion, valuing WeWork at $35 billion, according to a person with direct knowledge of the discussions inside SoftBank.

But some investors in SoftBank’s $100 billion private equity Vision Fund were concerned about the size of the check, given that Son had already invested more than $8 billion into the startup, the source said.

Son backed down. In January, he agreed to a more modest $2 billion investment in WeWork at valuations of up to $47 billion.

INVESTOR PRESSURE

Much is at stake for Son, ranked by Forbes as Japan’s second-richest person. Perhaps best known for his $20-million investment in 2000 to the then-obscure Chinese e-commerce firm Alibaba Group Holding Ltd (BABA.N), the 62-year-old billionaire executive has become one of the most powerful investors in the world. But his investment record is coming under greater scrutiny.

The precipitous fall in WeWork’s estimated valuation followed dips in other high-profile SoftBank investments. Shares of Uber Technologies Inc (UBER.N), another of its major holdings, have fallen nearly 30% since the ride-hailing firm went public in May. The patchy record comes at a particularly sensitive time for SoftBank – the company is in the midst of raising a second $100 billion-plus Vision Fund.

SoftBank said last month that the first Vision Fund’s operating profit jumped 66% year-on-year to $3.74 billion for the three months ended in June. But much of the returns are on paper, and it needs to be able to exit investments such as WeWork to execute its plans.

A source close to Mubadala, a major investor in the first Vision Fund, said the Abu Dhabi sovereign wealth fund is closely watching the WeWork situation as it considers investing in the second fund.

This time, the source added, Mubadala is looking at having a larger voice in how the fund deploys its money.

FALLING VALUATION

Son started to have some misgivings about WeWork this summer, as he grew concerned that the company would not be able to achieve a $47 billion value in an IPO, two of the sources said.

In August, We Company’s IPO filing revealed extensive and unusual ties between the startup and Neumann, including him being a landlord to the company on some properties, drawing criticism from investors.

WeWork’s potential valuation in its IPO kept falling as bankers tested the market for demand.

“It was so frustrating,” said the source familiar with the board’s deliberations. “The company was misreading the market too optimistically.”

Last week, Neumann agreed to delay the IPO when it became clear that it would not even manage to raise $3 billion, the minimum amount WeWork needed to fund its growth plans, according to two of the sources familiar with the situation.

For some directors it was the final straw, as they realized that the market was too focused on Neumann, said the source familiar with the board’s deliberations.

At the board meeting on Tuesday, Neumann did not put up much of a fight, four sources familiar with the situation said.

“Since the announcement of our IPO, too much of the focus has been placed on me,” Neumann wrote in a memo to employees, following his decision to step aside.

Anirban Sen reported from Bangalore; Additional reporting by Stanley Carvalho and Saeed Azhar in Dubai and Julie Zhu in Hong Kong; Writing by Paritosh Bansal; Editing by Greg Roumeliotis and Bill Rigby

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