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SoftBank’s nuclear option puts the 'you' back in to WeWork

WeWorkfounderAdam Neumann’s past shenanigans are catching up with him, andSoftBankGroup Corp. seems delighted.

Probes by the U.S. Justice Department and the Securities and Exchange Commission have given SoftBank an excuse to go back and renegotiate a deal with existing shareholders of The We Company, of which Neumann was among the largest, The Wall Street Journal and Bloomberg News reported late Tuesday.

SoftBank is unlikely to give up on the troubled office-rental company, because it can’t. Which puts the ball in Neumann’s court.

The $3 billion deal that the Japanese company says it could walk away from, because of the regulatory investigations, is just one part of a package totaling close to $8 billion put together to bail out the startup after its offering plans were scrapped and value massively written down. Among the items in its Oct. 23 funding announcement is the acceleration of an existing $1.5 billion commitment and over $5 billion in debt financing. The tender offer for shares was a big deal because that’s what helped SoftBank boost its stake from 29% to 80%.

It also allowed SoftBank chairman Masayoshi Son to install his own executive team at WeWork — Chairman Marcelo Claure is SoftBank’s chief operating officer —and start calling the shots on everything from employee layoffs to unwinding earlier acquisitions.

If the purchase of those existing shares doesn’t go through, then Neumann gets to hold on to his stake in a company worth pennies to the dollar of where it was a year ago. SoftBank may not even have control, limiting its ability to steer WeWork to profitability.

But SoftBank has to do something. Last week it announced plans to buy back $4.8 billion shares, an opportunistic move aimed at propping up the stock and alleviating some of the pressure put on by activist investorElliott Management Corp. That move spurred S&P Global Ratings to put SoftBank on negative outlook, the first step before actually cutting its credit rating. Its stock dropped as much as 12%, taking the decline over the past month to more than 40%.

At the same time, the global economic meltdown caused by the Covid-19 pandemic has made the Vision Fund’s portfolio of unprofitable startups look shaky. These companies survive on continuous streams of cash until they can eventually turn a profit, and that lifeline may get cut in a credit crunch.

Walking away from the tender offer is entirely possible. This would be the nuclear option in the sense that doing so amounts to mutually assured destruction.

Without purchasing that stake, SoftBank would be left sharing control with the same executive team and investors who oversaw WeWork’s early blunders — making it tough to effect the wholesale changes needed for a turnaround. Yet SoftBank has already plowed so much cash into the business that WeWork’s final demise would cause further pain not just to investors, but Son’s own reputation as a savvy and trustworthy investor.

Neumann could hold his ground and insist on the originally agreed price. But these regulatory investigations seem targeted at him, and actions that took place under his watch, including concerns over self-dealings, disclosures and conflicts of interest. That gives SoftBank the opportunity to point the finger not only at Neumann but at existing shareholders who share the responsibility of not exercising enough oversight.

That means that if the tender offer does fail, SoftBank can put the blame on the counterparty with a reminder that there won’t be a better offer elsewhere. In the current meltdown, Son is in a position to show what it would look like if “We” are not in this together.


March 19, 2020

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