What happened
Shares of the co-working company WeWork (WE) fell more than 9% on Monday after the company on Friday adopted a tax asset preservation plan, which is also referred to as a "poison pill."
So what
WeWork is adopting this plan because it wants to preserve its right to use prior losses to offset income taxes in the future. At the end of 2021, WeWork had roughly $6.9 billion of federal net operating loss (NOLs) carryforwards and $6.6 billion of state NOLs. But these can't be used in the future if there is an ownership change.
According to WeWork, an ownership change would occur if shareholders who already own 5% of outstanding shares bought an additional 50 percentage points of common shares over a rolling three-year period.
By adopting a poison pill, WeWork makes this very difficult to do. If a party attempts to acquire 4.9% or more of common shares, all other shareholders will be able to purchase new common shares for half price, which would dilute the new stake and bring it below the 4.9% threshold.
The poison pill enables management and the board of directors to also fend off acquisition attempts, which become a real possibility when the share price and valuation of a company fall significantly. Shares of WeWork are now down more than 90% over the last year and traded at just $0.59 as of market close today.
Now what
WeWork recently completed a recapitalization, getting help from a familiar face in SoftBank (SFTBF -1.55%), which has been funding the company since the former CEO, Adam Neumann, ran the company.
But WeWork still has more than $2 billion in debt, and the poison pill is going to make the company unattractive to a lot of bigger shareholders who can actually move the needle until the poison pill expires next April.
While co-working space could be more compelling in the new economy where remote and hybrid work is more popular, I don't see any need to rush into this stock until more progress is made.
