WeWork is suing SoftBank over the Japanese conglomerate's refusal to honor $3 billion of its rescue package with the coworking space company. Lest you thought the WeWork/SoftBank drama had calmed down in recent months, let me assure you it is still a huge mess.
The deal, inked last October after the spectacular implosion of WeWork's IPO, laid out a plan that included buying $3 billion worth of WeWork stock from employees, investors, and disgraced CEO Adam Neumann. Last week, SoftBank announced it’s pulling out of that deal. Neumann will no longer be receiving $970 million from the stock sale to SoftBank. At the same time, he is still walking away with a $185 million consulting fee, a $500 million credit line, and a previous $700 million stock sale. After rounds of painful layoffs, meanwhile, current and former employees are left holding proverbial bags of tech unicorn shit.
SoftBank's reasoning for backing out includes concern about regulatory probes into WeWork and more technical details concerning an exchange of shares that SoftBank sabotaged in order to prevent this deal. WeWork is suing SoftBank, claiming that concern over regulatory troubles are not grounds for backing out because WeWork has been controlled by SoftBank for nearly half a year now. In WeWork's own words:
"The investigations were not a surprise, given Neumann's conduct and the Company's loss of billions in value. SoftBank had complete knowledge of the facts underlying the investigations when it executed the [Master Transaction Agreement]. ... All of the investigations were known to SoftBank at the time that it signed the December 27, 2019 amendment to the MTA. But SoftBank did not raise the investigations as a basis not to consummate the Tender Offer until recently, as the approaching April 1, 2020 closing date caused it to become increasingly desperate.”
SoftBank doesn’t care about any of this. For years, the $97 billion SoftBank Vision Fund’s investment strategy has seemed to be screwing over investors, but recently the company shifted to screwing over startups by suddenly walking away from deals it loses interest in.
It’s worth noting, of course, that WeWork’s revenue has plummeted as it’s been forced to close many of its coworking spaces as the coronavirus pandemic keeps people quarantined and tenants have started to miss rent payments.
It was clear that SoftBank’s strategy with WeWork was to use endless capital reserves as a weapon to drive out competitors, build a monopoly, and justify a vastly inflated valuation (see SoftBank’s other crown Jewel: Uber). The more scrutiny public markets gave the company, the less sound it looked even if it were to achieve a monopoly and the less reason the Vision Fund had to go defend burning billions of its investors’ capital.
Banks gave WeWork absolutely bonkers valuations: Morgan Stanley pegged its peak valuation at $104 billion, while JPMorgan offered a much more chaste but still ludicrous $63 billion. When its $47 billion IPO valuation was finally reached, that number began to drop like a rock from $47 billion to $23 billion to $8 billion to $5 billion, and with it fell SoftBank’s incentive to rescue the company.
As soon as WeWork lost its value to Softbank as a shortcut to real estate monopoly profits and outsized returns, it started looking for ways to back out, save face, and craft a narrative for the Vision Fund—whose explicit purpose was to fund a monopoly and reap the reward. SoftBank CEO Masayoshi Son has wasted no time in doing this, communicating in an exclusive interview with Forbes his many “regrets” over making such colossal mistakes but confidence in the Vision Fund and its portfolio.