WeWork, the beleaguered shared workspace company, is reportedly preparing to file for bankruptcy protection as early as next week according to sources cited by The Wall Street Journal.
The news comes after years of financial turmoil for the once high-flying startup following its failed IPO attempt in 2019. WeWork has struggled with steadily declining occupancy rates, heavy losses, high debts, and a plunging stock valuation this year.
As a result, WeWork is reportedly planning to file for Chapter 11 bankruptcy in New Jersey. The company declined to comment on “speculation” when contacted about the reports.
The potential bankruptcy filing underscores WeWork’s remarkable downfall since reaching a peak valuation of $47 billion in January 2019. At the time, the company was seen as a revolutionary player in the ‘mobile workforce’ space that was also transforming office real estate.
But its fortunes changed quickly after investors realized that the model just wasn’t popular with consumers and soured on its losses, leadership, and business model ahead of its planned stock market debut.
Here’s How WeWork Went from Boom to Bust in Just 4 Years
WeWork gained vast sums of investor capital early on by pitching itself as a high-growth tech disruptor for office space leasing. Softbank, which is famous for investing billions into companies that eventually implode, and its Saudi-backed Vision Fund invested over $18.5 billion in WeWork prior to its IPO efforts.
However, concerns emerged about breakneck expansion, sky-high valuations, and the eccentric management style of its co-founder Adam Neumann and his practices involving the use of company money to finance a luxurious and extravagant lifestyle.
The company delayed its once highly anticipated initial public offering (IPO) in September 2019 as investors balked at its losses and corporate governance issues emerged under Neumann. The failed offering left WeWork on the brink of bankruptcy without fresh capital.
Neumann eventually departed the company he co-founded while Softbank provided a massive bailout to keep WeWork afloat. However, the company kept burning through its cash reserves, even after slashing thousands of jobs and dumping side businesses.
After barely avoiding collapse in late 2019, the onset of the COVID-19 pandemic poured more fuel on the fire. WeWork finally became a public company via a SPAC merger in 2021 at a valuation below $10 billion. Its stock price has since cratered as losses mounted.
WeWork’s Finances Have Been Deteriorating Rapidly The Pandemic
With offices shuttering worldwide, demand for WeWork’s flexible workspace model evaporated during the pandemic. The company’s occupancy rates plunged dramatically as the entire world went into lockdown and this resulted in heavy losses for the firm. By the end of the second quarter of this year, WeWork reported occupancy rates stood at 72%.
Net losses in 2020 ended at $3.8 billion and the company lost even more in 2021 when it booked negative bottom-line results of $4.6 billion. Last year, WeWork reported net losses of $2.3 billion.
The firm tried to adopt aggressive cost-cutting measures that included exiting various leases and laying off thousands of employees but stagnant revenues and higher interest expenditures kept dragging down its financial performance.
The company’s stock shed nearly 84% of its value in 2022 as investors jumped ship in anticipation of an imminent collapse. So far this year, the stock price has declined by 96% while today’s reports are plunging WeWork’s valuation by 40% in pre-market stock trading activity.
In 2022, WeWork’s financial situation went from bad to worse. Even though the company managed to reduce its net losses during the first semester to $696 million, it still burned around $600 million in cash.
By the end of this period, the company had cash reserves of $239 million. Without a lifeline, it would be virtually impossible for WeWork to survive another quarter if the firm maintains its current cash burn rate. It’s surprising that the company has lasted this long after losing billions of dollars every year since 2020.
In August, WeWork warned in its quarterly earnings report filed with the Securities and Exchange Commission (SEC) that “substantial doubt” existed about the firm’s ability to keep operating due to its mounting losses and liquidity levels.
Its CEO, Sandeep Mathrani, recently departed amid an executive exodus. The company officially appointed David Tolley in mid-October this year as Chief Executive Officer after he spent the past few months serving in an interim role following Mathrani’s departure.
What looks like the final straw for WeWork were debt interest payments due this week that it just couldn’t pay. These missed payments spurred talks regarding restructuring options including bankruptcy, as per the sources cited by The Journal. The total payments withheld by the company amount to $6.4 million.
Investors reportedly gave the firm 30 days to explore options including a lifeline from a financial backer like SoftBank. The management has not commented on the state of these negotiations.
What does Bankruptcy Mean for WeWork and Its Investors?
A Chapter 11 filing would allow WeWork to continue operating while negotiating with creditors to restructure its mammoth-sized long-term debt, which included $13.3 billion in long-term lease obligations and $2.9 billion in bonds and business loans. It can also help the company trim its most unprofitable leases and locations.
WeWork could attempt to emerge from bankruptcy as a leaner company focused on core office space offerings. But the path forward remains challenging given the state of the real estate market.
For the commercial real estate industry, WeWork’s bankruptcy filing may cause the already struggling office real estate market to crumble further if the firm decides to vacate some of its 777 premises.
WeWork’s fall from a $47 billion valuation high to the brink of Chapter 11 bankruptcy stands as a cautionary tale of startup hype taken to extremes. The company’s struggles reflect how hard it is for companies to turn ‘disrupting’ value propositions into sustainable business models.
Even if a court approves the firm’s bankruptcy plan, the roadmap to a WeWork turnaround remains very challenging and uncertain. Such a filing may offer temporary breathing room to reassess its business model for changing times but top investors must sign off on the deal before it can be turned into an actionable plan.