Economy insight
Company story read through financial statements
There have been recent media reports that WeWork, the world’s largest shared office company, is on the verge of bankruptcy. WeWork office in San Francisco, California, USA. REUTERS
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Media reports poured in from August to September 2023 that WeWork, the world’s largest shared office (office) company, was on the verge of bankruptcy. WeWork was once called one of the ‘three leaders of the sharing economy’ along with Uber (taxi) and Airbnb (lodging), and its corporate value reached $47 billion (approximately 63 trillion won). However, as of September 8, 2023, the closing price was $2.65 per share, resulting in a market capitalization of only $2.101 billion (about 3 trillion won). It’s like being cut into pieces by 1/20th. The process of WeWork’s downfall is well known not only through media reports, but also through a drama aired on Apple TV in 2022. Can WeWork really survive on the edge of a cliff? I am trying to consider that possibility by looking at the financial statements. “The losses resulting from the recent increase in member attrition, anticipated cash needs and current liquidity levels place significant doubt on the company’s ability to continue as a going concern over the next 12 months.” This is written in the investment risk factors section of the ‘2023 Second Quarter Report’ published by WeWork on August 8. This means that the situation is so difficult that the company itself admits, “It is highly doubtful whether we will be able to continue to exist.” WeWork, a split-lease business, was founded in 2010 and was indirectly listed on the New York Stock Exchange in 2021 through a merger with SPAC (a paper company established to merge unlisted companies). The largest shareholder is Japan’s Softbank, led by Chairman Masayoshi Son. The basic business model is ‘sublease’, which is re-leasing a rented building. This is a ‘split re-lease business’ in which WeWork leases space rented for a long period of time from an office building owner on a short-term basis to startups (new companies) that need work space. According to the company website, WeWork operates collaborative work spaces in 119 cities around the world, including New York and Washington in the United States, London in the United Kingdom, Beijing in China, and Tokyo in Japan. In Korea, WeWork Asia Holdings also established ‘WeWork Korea’, which has a 100% stake, and operates a rental business in Gangnam and Yeouido in Seoul and Seomyeon in Busan. More than half of sales occur in global metropolitan cities such as New York, San Francisco, and Boston in the United States and London in the United Kingdom. Looking at the financial statement, the company’s crisis situation is clearly visible. As of the end of June, WeWork’s total debt was $18.656 billion (about 25 trillion won), which far exceeds the company’s assets ($15.063 billion). Shareholder’s equity is minus $3.56 billion, a state of ‘complete capital erosion.’ This is because the company’s accumulated deficit amounts to $16.79 billion (about 22 trillion won). This means that since its establishment in 2010, it has suffered an average loss of around 1 trillion won every year. As of the end of June, WeWork had only $200 million in cash. This means that money has dried up within the company. The biggest problem is the cost structure. WeWork’s sales generally showed gradual growth every quarter, from $593 million in the second quarter of 2021 to $844 million in the second quarter of 2023. However, so-called ‘variable costs’, which increase when sales increase, continue to exceed sales by a large margin. For example, the total variable cost of WeWork in the second quarter of 2023, which includes the rent paid by WeWork to the building owner, facility management and operation costs, and office interior costs (depreciation costs), is $889 million. It is more than $40 million more than sales during this period ($844 million). It’s like renting a house at a high price and re-renting it cheaply while the company incurs a loss. This is because even if WeWork significantly expands its business (sales) compared to now, it is difficult to expect the ‘economy of scale’ effect, which increases profits by offsetting fixed costs.
On October 21, 2021, when WeWork was indirectly listed on the New York Stock Exchange, the WeWork logo was visible on the exchange’s electronic display board. REUTERS
There are only two ways for a company to return to operating surplus. The rent received from existing office tenants, such as startups, must be drastically increased or the rent paid to building owners must be drastically reduced. However, as telecommuting and flexible working have expanded since COVID-19, WeWork’s market share, which refers to the actual number of users (730,000) compared to the total work space (906,000), is only 72%. With the vacancy rate approaching 30% due to lack of demand, it is virtually impossible to increase rent. The reason WeWork is obsessed with negotiating with building owners to change contract terms to reduce rent is because this is currently the only way to improve its financial structure. The total lease cost that the company must pay amounts to about $1.2 billion in the second half of 2023 alone, and totaling $25.1 billion (approximately 34 trillion won) including after 2028. Looking at WeWork’s financial statements, it is not easy to come up with a silver bullet to save the company. The fact that all four outside directors recently appointed by the company have experience managing corporate defaults and bankruptcies also predicts a bleak future, including more intensive restructuring. Lessons from the WeWork incident There are lessons left behind by the WeWork incident. The point is that drastic cost reduction efforts are more important than external growth with a rosy vision. This is why the numerous small and medium-sized companies in Korea that make cost reduction the most important management topic seem more valuable than WeWork, whose corporate value once exceeded 60 trillion won. We must also check in advance measures to prepare for the social repercussions that could result from the downfall of a large platform company such as WeWork. There are concerns that the bankruptcy of WeWork, which was a ‘dinosaur blue-chip tenant’ in the United States, will deepen the recession in the local commercial real estate market and spread the risk to the financial sector. In Korea, where platform companies that place growth as their top priority have deeply penetrated all aspects of society, including logistics and distribution, we need to think about how to respond if a similar situation arises. It is also worth learning about foreign cultures that record the failures of famous companies such as WeWork in books, movies, and documentaries. You can avoid repeating the same mistake if you know the cause and background of the downfall in detail. Chanho Certified Public Accountant [email protected]
2023-10-07 00:00:27
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