Friday Digest: Is the endgame near for SoftBank & Wework?

Will it be Adam Neumman vs PEs bidding to take control of Wework?

In our December post entitled ‘SoftBank's 2020 Portfolio Dilemma’ - we covered Wework and the choices that we predict SoftBank will be faced with this year as the giant fund tries to move on from being further exposed to Wework’s risks.

Over the past few days, reports from media sources such as Axios is that SoftBank backed out of high profile deals even after sending the terms sheets - Honor, Seismic, and Creator were highlighted:

SoftBank Vision Fund has walked away from investing in several startups, months after submitting term sheets worth hundreds of millions of dollars and promising that closing delays were only temporary, Axios has learned. Axios report

Of course, we don’t have all the facts that led SoftBank to make the critical decisions that could potentially harm its ability to make future deals with promising startups in Silicon Valley and beyond. To make the situation more intriguing, high profile SoftBank backed companies such as Zume & Getaround have announced massive layoffs. On top of all this, another SoftBank backed company (Grubhub) listed on the NYSE is considering selling itself according to Business Insider.

What will SoftBank do next?

It’s hard to know at this stage what Mr. Son is thinking, but the signals strongly indicate that SoftBank will make a decision soon and one could guess the following two options are very likely:

  1. Adam Neumann returns (we compute a 50% probability) – with this option, Adam Neumann backed by deep-pocketed investors, buys a majority stake from SoftBank and takes back control. Will Adam Neumman reinvent himself into Adam Neumman 2.0 and as a result Wework 2.0? If so, what will Wework 2.0 become?

  2. Private Equity (we compute a 50% probability) - in this option, a deep-pocketed PE (e.g. Blackstone Group) buys a majority stake from SoftBank.

In a nutshell, the current signals indicate that SoftBank has had enough of the Wework debacle and it wants to move on by doing whatever it needs to do to sell its majority stake. Also, the most likely options are either Adam Neumann or a deep-pocketed PE firm as these will be the least damaging options.

Another option that we considered is the scenario in which SoftBank takes long-term bet on Wework à la PE, all in the hope of streamlining its operations and growing it back into a position where it can be a solid IPO candidate few years from now. The risks with this are that a few years can easily be 5 or even 10 years from 2020! Plus, will SoftBank’s own backers in Saudi Arabia and Abu Dhabi agree to this?

Could SoftBank let Wework collapse?

Of course, SoftBank could pull the plug as any investor who doesn’t want to expose itself to further risks would do. However, this could backfire heavily on multiple fronts. Firstly, all eyes will be on SoftBank because of the scale of the potential negative effects that come with the collapse of Wework, including; job losses in the company’s major hubs, disruption of small companies that need to scramble to find alternative co-working spaces, and regulators potentially scrutinizing the whole SoftBank investment approach. Secondly, it would send a very bad signal to founders who may be considering taking large sums of money from the firm. Thirdly, the reputation of the SoftBank vision fund and its ability to raise money from large investors such as sovereign wealth funds could be largely impacted.

In essence, SoftBank has found itself in a very uncomfortable position where Wework is inconveniently, too big to fail? Mr. Son and the team will definitely need a lot mathematical thinking to get the firm out of the current situation!

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