WeCrashed? Why WeWork, a 47-billion-dollar company, went bankrupt
WeWork, a co-working space founded in 2010 and which flourished during the pandemic, has officially filed for bankruptcy on November 6, 2023. The company, which was once valued at 47 billion dollars, has now reported liabilities of 10 billion-50 billion dollars, according to a bankruptcy filing in the New Jersey federal court.
The what and the when
WeWork is a US-headquartered company that was founded in 2010 by Adam Neumann and Miguel McKelvey. It has offices worldwide and its main job is to provide shared office spaces.
On November 6, the company filed for bankruptcy after last week it reported that its shares fell by nearly 50 per cent.
The actual reason
The company filed Chapter 11 of bankruptcy, and mounting debts, high-interest rates, and an increasing number of people working from home as reasons for the filing. But there are some other reasons as well.
- Losses: As of June 2023, the company had amassed $16 billion in losses.
- Rent and interest: The company was still paying over $2.7 billion a year in rent and interest, which was over 80 per cent of its entire revenue.
- Lease terms: The high cost and inflexibility of the lease terms that WeWork had with the investors.
- Cash on hand: In October, WeWork shares fell to an all-time low after the company admitted that it did not have enough cash on hand to make an interest payment on its debt.
Another major reason that caused this is,
Covid.
Demand for co-sharing office spaces by WeWork was hit after a disastrous 2019 effort to raise money in an IPO, which went really badly, and led to the ousting of its co-founder Adam Neumann from his own company.
- SoftBank, a Japanese company that is a 60% stakeholder in WeWork, had to increase its investment in WeWork and brought in Sandeep Mathrani as the CEO.
- In 2021, SoftBank arranged for WeWork to go public through a merger with a blank-check acquisition company, and reducing its (WeWork) value at $8 billion.
- However, it still made efforts to modify 590 leases, resulting in savings of approximately $12.7 billion, somehow.
- But these efforts fell short of compensating for the adverse effects of the Covid pandemic, which forced office workers to work from home.
- Despite WeWork's struggles, most of its landlords were unsympathetic and unwilling to offer favourable lease terms.
- In May 2023, Mathrani also left WeWork after his growing frustration with SoftBank, its largest shareholder and lender, after which David Tolley stepped in as the CEO.
- While WeWork attracted some major corporations as clients, a significant portion of its customer base consisted of startups and smaller businesses, which reduced their spending due to rising inflation and deteriorating economic conditions.
- And even now, a lot of people are bringing in remote work as a permanent option, which has cost WeWork a lot of clients.
What's next?
So here's the thing: when a company files for Chapter 11 bankruptcy in the United States, it initiates a legal process that allows the company to reorganise its financial affairs and operations in an attempt to become financially viable again.
Chapter 11 bankruptcy is primarily used by businesses, including corporations and small businesses, to "address their financial difficulties".
The process allows a company to continue operating as it reorganises itself.
WeWork locations overall will remain open, the company says, and the process affects only locations in the US and Canada, as it also plans to file for similar protections in Canada.
But as a part of its filing, WeWork is requesting to leave leases in some locations it says are “largely non-operational".
So, WeWork will be restructuring its leases and negotiating with investors.
What about WeWork India?
The operations of WeWork will be impacted in only US and Canada, and nowhere else.
WeWork India has clarified that it is an entity separate from WeWork Global.
“The recent Chapter 11 filing will not impact our members and stakeholders in India. We will continue to operate and serve our members, landlords, and partners as usual. Committed to the growth and success of our business,” WeWork tweeted today, November 7.
WeWork India is a separate entity from WeWork Global. The recent Chapter 11 filing will not impact our members and stakeholders in India. We will continue to operate and serve our members, landlords, and partners as usual. Committed to the growth and success of our business. pic.twitter.com/92KeXB1X4I
— WeWork India (@WeWorkIndia) November 7, 2023