When WeWork (WE) finally became a publicly traded company on Oct. 21 through a SPAC merger, the long and dramatic saga leading up to its IPO finally came to an end. In this segment of Backstage Pass, recorded on Oct. 22, Fool.com contributors Jason Hall and Toby Bordelon discuss the story of WeWork. 

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Jason Hall: Our third topic, it's crazy to think that I was first reading about this before Motley Fool was even doing livestreams. WeWork finally public. Toby, I feel like they cheated, I really do. [laughs] I feel like they cheated. Let's tell everybody. I'll let you just tell the story and I'll jump in every once in a while. But let's tell the whole WeWork story.

Toby Bordelon: Let's go through the brief history of WeWork, because this is fun. Back in the day, a dude name Adam Neumann decided to start this company with a friend of his. What did they do? Right they're a start-up in the co-working.

Jason Hall: Did you say a dude named Adam Neumann?

Toby Bordelon: Yeah. [laughs]

Jason Hall: That's exactly him too. That's a perfect description.

Toby Bordelon: That's how you had to describe him.

Jason Hall: Yes.

Toby Bordelon: That's exactly the point. They're in the co-working space. The idea is, you're leasing space to people who might want, maybe they are a freelancer, maybe they are a remote worker for a company, whenever they want a small little office. They can have their own office.

They have different models. If you want a private office, you can rent a desk in the common room that will be dedicated to you or you could be like a hot working desk where you get whatever is available, you come in, then they started to expand into things like managing space for small and medium businesses. If you had three or four employees, maybe the easy way to get an office somewhere. Managing spaces for large businesses came later.

But the basic model is you lease a whole bunch of space in an office building like a couple of floors, you renovate that into smaller co-working spaces or co-working space with smaller segments, small private offices plus big common areas, and then you lease that out to your customers. You're leasing from the building owner on a long-term lease, and you are leasing to your customers on a short-term, sometimes just month-to-month.

It could be month-to-month. Now, the astute among us will immediately recognize the potential problem with this model. We'll get into that later. But if you are paying long-term for your lease, if you're signing a long-term lease with a space, but your customers are paying you on a short-term, month-to-month basis, potentially, anything that tanks demand for office space is going to be problematic for you potentially.

We'll come back to that. [laughs] What does that mean? Look, I want to be a little careful. I don't want to go too far. Adam Neumann is an interesting guy.

Jason Hall: Do you, Toby? Do you really [laughs] not want to go too far?

Toby Bordelon: What are we rated PG-13, is that where we are at?

Jason Hall: That's the thing. Yeah.

Toby Bordelon: That's the thing. Interesting guy, his wife a little bit odd too. If you read about them, you'll see some things like "That's interesting." She had increasing responsibilities to the company, but she didn't necessarily seem qualifed for it other than the fact that she was his wife.

There was an investment from SoftBank, which is a big fund, invested a lot of money into WeWork. WeWork really, they're pretending to invent this new business model, which has been around forever, a company like Regus has been doing this for decades, this co-working space. Then just throwing a new millennium side saying, "Oh, this is new and fancy, we'd give you free beer and the common space," come payout rates. They are going to IPO.

They headed into an IPO and people kept  giving them money. It was a big hot story. They kept doing fundraising rounds, never really making a profit, but keeping the grow their valuation for these various fund-raising rounds. We get to 2019, IPO time, in the IPO added a valuation at $47 billion, which seems insane, but that's where they were around the time of the IPO. The corporate governance thing, Jason, this was ridiculous. You read through-

Jason Hall: The fact is that the bottom line that you expect better governance for this company as a start-up. Because you have a really big investors that should be doing really tight due diligence. That's what they do.

Toby Bordelon: Especially with SoftBank in there. I don't know why they let them do. To give you an example. Like Adam Neumann had total control. It was the most insane thing I've seen. It's one thing to have class of stock, a super majority control, a lot of people do that, but get this. The mechanism to replace him if he died or was permanently disabled, it really resembled like this succession plan for a medieval monarch. His wife would form this committee and they would pick the successor. Like electing the pope is a model of transparency.

Jason Hall: Is that where you were expect to watch the colored smoke come out?

Toby Bordelon: Yes. It is insane. What is this? It may be a great way to run like a mob family, but this is not how you run a public company. Like institutes, who get a new CEO. This was insane. The other thing is you he had several leasing deals with a contract he would own the building and lease it to them, which looks a lot like a massive conflict of interest in self-dealing. One of his family members who made like $200,000 as the head of wellness or something like that. What is going on right is running this for the personal fiefdom.

Needless to say, the IPO fell apart. It just totally sank investors when they saw us for like, "No thanks." They couldn't get any traction. SoftBank kind of lost their shirt on this, did some real damage to their business and their portfolio. Neumann ends up resigning as CEO. But hey, now they're public. They went public with the SPAC yesterday. Valuation of $10 billion is where there are about now after the bump from the IPO, I think it's around $10 billion now.

That's a lot less than $47 billion.

Rachel Warren: Just a little, yeah. 

They've come far since 2019 and not in a good direction. Well, we'll put it that way. I think it's probably still overvalued too. I think you can make an argument that this is still overvalued. That's the real thing. Love this company as fodder for business news. They certainly delivered there. But I'm not sure I love them as an investment.

Jason Hall: It's fun and the same way is like that good friend that you've known for a long time, who you know is going to make the worst possible decision every time. I feel like that's the case.

Toby Bordelon: I remember in 2019 because we were still doing member events back then before the pandemic sent us all home. I think we were actually at a member events for Fool One when the news broke through, the IPO is dead and Neumann was resigning which spurred a lot of hilarious conversation.

Jason Hall: With a billion-dollar parachute, by the way.

Toby Bordelon: He did. No one should feel bad for Mr. Neumann, he's doing all right. He's got enough for a while.

Jason Hall: No doubt about it. I think the biggest thing right now, I'll cut back on the rhetoric here. But the thing that really concerns me is, I think about real estate as an investment and there's plenty of real estate investment that there are growth opportunities. But it's the business that you can use, a modest amount of leverage and debt and you can build a stable, safe, predictable cash flow business that's profitable.

Then you can keep growing it from there. This to me is far less a real estate business than a middleman business. You're a real estate guy. It's like you're leveraging yourselves and you're tying yourself to these cash flows and you're just trying to live in the middle.

Toby Bordelon: Your inflows don't match up with your outflows in terms of obligation. You sign these long-term leases and you're getting short-term rent from your customers. I alluded to you that's obviously when you tank demand for office space, that model becomes a serious problem for you.

You're on the hook for those long-term leases and you have no money coming in. 2020 was a prime example of that. I think that's a lot. I'm honestly somewhat impressed the company still exists after the pandemic that, that didn't totally destroy them.

Jason Hall: If it had already been a public company probably would've gone bankrupt.

Toby Bordelon: If they had gone public, especially that valuation, that would have been a lot of pain in that business for those shareholders. I guess count your blessings. If you were thinking about investing in this company in 2019, if you get an opportunity too. I have an opportunity and we are post-pandemic. We want to say something positive. You can say, "Well, they survived." There's that.

Jason Hall: You're sure, that's a positive, Toby? [laughs]

Toby Bordelon: People can make their decision if they want to invest in this or not. I know where I lie right now on it.

Jason Hall: Yeah, me too. It's just the structure of the business I don't like.