WeWork IPO: Second Attempt at Public Markets

The Current Landscape of Growth Companies and Public Markets

A pertinent question arises: if a company isn't pursuing an initial public offering (IPO), a direct listing, or a special-purpose acquisition company (SPAC) merger, can it truly be considered a high-growth venture?

Conversations with CEOs of startups generating revenue beyond Series B funding consistently reveal that SPACs are actively seeking deals. This pursuit stems from the need to avoid returning capital to initial investors.

The SPAC Boom and its Implications

There's a common saying that highlights this trend: when your only tool is a hammer, every problem begins to resemble a nail. In this instance, with a blank-check company as the sole instrument, numerous startups appear poised for public market entry.

The situation is exemplified by WeWork, a company previously known for substantial financial losses, now aiming to go public through a SPAC merger. A critical assessment of their investor presentation prompts questions regarding the company’s current financial health and the necessity of revisiting the WeWork narrative.

Furthermore, Axios, a media startup demonstrating potential, is reportedly considering a merger with The Athletic, potentially leading to a public listing via a SPAC.

Potential Synergies and Underlying Motivations

Arguments can be made to support this potential deal. The Athletic possesses a subscriber base that Axios lacks, while Axios excels in newsletter distribution and advertising. Combining these strengths could create a more compelling business.

However, the primary driver behind these transactions appears to be the desire of private investors to realize returns on their investments while the opportunity remains. This explains the proliferation of SPACs focused on lidar and electric vehicle companies.

These companies aren't necessarily prepared for public markets; rather, their investors are eager to liquidate their holdings.

A Shift in Priorities

The same forces are likely at play in both the WeWork deal and the prospective Axios-SPAC combination. The current market dynamic suggests a prioritization of investor exits.

The pursuit of profit, once viewed with caution, has become the dominant force within the tech and financial sectors. This pervasive greed has become so commonplace that even referencing cautionary tales of financial excess feels uninspired.

Consequently, we are now observing the outcomes of this trend, as companies navigate the complexities of public markets.

Let's now examine the latest developments in this evolving landscape.

WeWork

Initially, the question arises: has WeWork successfully restructured and demonstrated a capacity for expansion while simultaneously reducing its financial losses? The answer, arguably, is no.

However, WeWork continues to position itself as a forward-thinking entity within the hybrid space, software, and services sector. This vision remains a central component of its strategy.

A review of its SPAC investor presentation reveals a level of accounting intricacy that appears excessive, potentially obscuring a clear understanding of the company’s financial status. This complexity raises concerns about transparency.

Examining the financial data presented on page 46 of the deck, it becomes apparent that WeWork experienced stagnant revenue in 2020, mirroring the results of 2019. Specifically, the company generated $3.21 billion in revenue (excluding its Chinese operations) while incurring a loss of $3.22 billion. This translates to a net margin of -100%. In 2019, revenue stood at $3.23 billion, contrasted by a net loss of $3.50 billion, resulting in a net margin of -108%.

Given these figures, a public offering via a SPAC seems questionable. What financial projections does WeWork offer for 2021? The company anticipates revenues of $3.25 billion and an adjusted EBITDA of -$922 million. Notably, WeWork does not currently provide GAAP-based profit forecasts. However, its adjusted EBITDA loss in 2020 was $1.75 billion, suggesting an expected improvement in financial performance this year.

Investing in WeWork, based on current projections, implies a willingness to await revenue growth until 2022, and a degree of profitability. WeWork forecasts positive adjusted EBITDA of $458 million in 2022, representing a substantial improvement of over $2 billion in adjusted profits within two years.

What factors differentiate 2021 and 2022 from 2020, enabling such a rapid and significant enhancement in WeWork’s adjusted profit margins? A key element is a shift in revenue composition. (Further details on this strategy can be found in Mary Ann Azevedo’s recent article on WeWork).

WeWork projects its “All Access” service – offering on-demand, pay-as-you-go, or monthly subscriptions for access to its global network of locations – to generate $0 in revenue in 2020, increasing to $90 million in 2021 and $215 million in 2022. These members likely contribute higher margins due to their non-commitment to a specific location.

Revenue from the “Marketplace” – described as “high-margin, value-add services” on page 21 – is also expected to increase from $37 million in 2020 to $86 million in 2021 and $153 million in 2022. Higher margins translate to increased gross profit per revenue dollar, potentially significantly impacting WeWork’s overall profitability.

Furthermore, the company’s Platform revenue category is projected to expand in the coming years. This category, as understood from the presentation, encompasses WeWork’s software business. The company previously acquired several businesses, some of which were divested, but others remain, contributing to this software-driven revenue stream, which typically boasts strong margins.

Coupled with anticipated reductions of several hundred million dollars in selling, general, and administrative (SG&A) costs in 2021, this creates a business model that, in theory, reduces losses over time. For investors considering a valuation of approximately 3x revenues, or $9 billion, this represents the core investment proposition. The company maintains its expectation of achieving adjusted profitability break-even by the end of the current year.

The following chart illustrates this projection, presenting a complex interpretation of non-GAAP financial metrics:

Indeed.

This marks WeWork’s second attempt at going public. The response from investors when trading commences in the coming months will be crucial.

Axios and The Athletic: Potential Merger

A potential merger between Axios and The Athletic is currently under consideration, potentially occurring prior to Axios’s planned initial public offering. This would result in a combined entity going public.

According to reporting from The Wall Street Journal, discussions are underway regarding this strategic combination.

Speculation has arisen concerning potential further acquisitions following this merger, with TechCrunch being mentioned as a possible target.

The Journal also suggests the possibility of utilizing a Special Purpose Acquisition Company (SPAC) to facilitate the process after the two publications are joined.

The Rise of SPACs

2021 has witnessed a significant surge in SPAC activity, mirroring the Initial Coin Offering (ICO) boom of 2017. Numerous entities are actively seeking investment through this mechanism.

However, it’s important to maintain a balanced perspective.

A combined Axios and The Athletic could potentially leverage their respective local news resources to contribute to the revitalization of local media outlets.

While optimism is tempered, this potential development feels comparatively positive in light of recent layoffs at companies like Medium and Mel.

Axios and The Athletic represent distinct approaches to news delivery, and a synergy could prove beneficial.