What to Make of The We Company's Unprecedented IPO Implosion

Not many weeks ago, Wall Street was looking forward to the public debut of The We Company, operator of the WeWork chain of co-working spaces. They seem to be popping up all over, and with large fractions of the U.S. economy shifting toward contractor and remote-work models, there certainly has seemed to be a fair amount of demand for these alternative offices. But then came the public filings, and in the course of about a month, the investor view of We has gone from upbeat to beatdown. On Tuesday, management announced the company was postponing its initial public offering (IPO).

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker talk about what it will take for We to get its public aspirations back on track.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 17, 2019.

Chris Hill: We're going to start with the end of We Company. Not the end, I suppose, for the parent company of WeWork, but certainly the end of its attempt to be a public company. It is officially over. WeWork has shelved its plans to go public. I'll just say something that I've said before, which is, I have never seen anything like this before. I've never seen anything this negative, this fast. To go from, in less than a month, basically, "We're going public, here's our valuation. Oh, you don't like that? We're going to cut it in half. Oh, you don't like that?! Can we lower it even further?" And now, I don't know what happens to this company.

Bill Barker: They've postponed the IPO until at least October. You've said this is the end, but I think is just the end of the beginning, the end of the first attempt to go public. Let's paint a good picture here for them for a moment, which is that they come out with another quarter of results; the results are better than expectations. Expectations are to lose billions of dollars, and they probably will pull that off, but maybe in a smaller amount than the worst fears. Revamp the atrocious executive compensation and, ownership structure that they've got, and bring this out at something approaching a reasonable valuation. Then, maybe, you see this come out again, which may be necessary, because they're going to need the money. They have adopted a business plan which appears to be, "We can burn through lots of money because we're going to be able to get money out of an IPO when we need it." I think they're still pretty much wedded to that business plan.

Hill: That may be, but keep in mind, the most recent public filing we got from WeWork was a revamping of, maybe not all of the moves they could have made in terms of executive compensation, but they certainly ratcheted down the power that the CEO has; they improved the corporate governance. It seemed at the time, and it still seems, like rearranging deck chairs on the Titanic. If they really need to go public, then yeah, you're right, I suppose there's a pathway in which they beat expectations on how much money they lose; they still need to radically overhaul what they're doing on the compensation side. And, I would argue, even the corporate governance side. I feel like they're just scratching the surface of that, if they really need to unlock public market value.

Barker: I agree, and I think that that is probably what is ahead, at least probably rearranging some of the names of some of the higher up executives.

Hill: Do you think they need a change in leadership? In the same way that Uber got to the point, when it was still a private company, that Travis Kalanick was no longer tenable as the leader of that company? It seemed very much the case that, certainly, behind closed doors, there were people telling Kalanick that, and other people who have that company, "Look, if you want to go public and have any decent shot of overhauling your image, that guy has to go."

Barker: Yes. I think that's what they need to do. Whether that is what is done will remain to be seen. But if they were to do that, and get some very credible leadership to come in there, that's their best opportunity, I think, for a valuation along the lines that they want. It's a long way from here to there, given the ownership structure. But that's a better path, I think, than any other one. If you're talking about what, from the outside, seems to be a small change -- just get a different person who has the skill set and credibility. There are those kinds of people out there.

Now, that said, Uber did that, and it's not like they've been a great IPO. They went public, and one can always take the perspective that if you go public and achieve more money than the stock is worth later on in time, then you've done a good job in terms of getting money into the company, and not selling all of your company at the wrong valuation in terms of fundraising. But, in terms of what investors want, and what investors are looking at, given the somewhat broken IPOs of Uber, Lyft, Slack, yeah, this does not appear to be the time to bring out a, "we're growing really fast, we're losing lots of money, trust us" IPO.

Hill: Last thing before we move on. How confident are you that they go public before the end of 2019?

Barker: I'll take the under.

Hill: Does that mean yes?

Barker: Less than all of them go public. [laughs] I think it's not going to happen in 2019. They've announced this is postponed until at least October. They're going to bring it in, retool, talk to people, see where the sentiment is. I think that the things they're going to hear are, "You need to do more than you think you need to do." And that's going to take longer. It's easy from the outside, "Why don't you just get a different CEO together?" That's not going to sit well with the current CEO and founder. You have to wade through that. Everybody has their price, though. If his interests are, "Look, I just want to have a whole lot of money from this," then he may be convinced that that is the way to get the biggest pile of money.