[caption id="attachment_69329" align="alignnone" width="696"] WeWork's $47 billion valuation tanked before its IPO—and for good reason. We should've known better.[/caption] Investors in WeWork should sing the Beatles 1964 lament, “I Should’ve Know Better.” The company’s IPO plan floundered when its $47 billion valuation plummeted 80 percent the week it was supposed to price—and for good reason. As I pointed out several months ago in multiple outlets, bombastic founder and now ex-CEO Adam Neumann’s sale of over $700 million of his own shares just ahead of an attempted IPO was a sign that his real estate empire, the largest office-space holder in New York, London, San Francisco and Washington, D.C., was house of cards. His sale of a trademarked use of “WE” back to his own company and covert ownership of several of the buildings that he leased to WeWork was classic self-dealing. Neumann’s global shared-space office complexes sprawl with fun foosball games, bean bag furniture and Nespresso machines for nomadic 20-somethings, but the glam factor couldn’t hide the huge financial gap of $47.2 billion of long-term lease commitments and only $3.4 billion in short-term leases to tenants revealed in his S1 filing. The unrealistic market growth expectations brought losses of $120,000 a minute and $5,200 per customer, in contrast to longstanding successful global competitors. For example, the truly pioneering 40-year-old Serve Corp. of Australia is now in 34 countries, and newer competitors like Mindspace, Knowtel, and IWG/Regus, are gaining momentum. Furthermore Neumann’s owner-controlled governance system permitted naming his own board, and his wife selecting a successor if he were incapacitated. We’ve seen such abuses before. Tyco was founded in 1960 as a government supplier of advanced technical materials. After just a decade under “Deal a Day Dennis” Kozlowski, it had morphed into a dizzying conglomerate of more than 3,000 unrelated acquired businesses, encompassing intercontinental cables, surgical supplies, retail inventory systems, baby diapers, home security alarms and commercial lending. The company’s practice of flamboyant toga parties and boisterous bravado created a strategic smokescreen of confusion that analysts failed to see through for far too long. When the smoke dissipated, Kozlowski and his finance chief Mark Swartz were accused of stealing $150 million and sent to prison, and the company collapsed. WeWork, which changed its name to the We Company, was at least honest about truly becoming a “wee” company. Beware of believing bosses who rely on: 1) Big Mouths: CEOs like Steve Jobs, Elon Musk and Tom Edison were effective self-promoters but had substance to sell—not just sizzle like Neumann. Those who questioned Skilling or Theranos’s Elizabeth Holmes were threatened. 2) Big Momentum: Worldcom’s Bernie Ebbers, a barroom bouncer and motel owner, was so busy stapling together businesses that he didn’t have time to hire a general counsel, leading to prison for him and the then-largest U.S. corporate bankruptcy. Dizzying rollups like US Office, Valeant, and Tyco, fueled their growth by more growth—until they collapsed. 3) Big Money Manias: Driven by backers like Softbank’s Vision Fund, real estate experts shrugged their shoulders and jumped in on the WeWorks frenzy, akin to Solomon Smith Barney Jack Grubman fueling the Worldcom fraud. 4) Big Magic: No scientist could understand the mystery of Theranos’s technology and the company’s CEO refused to show them. Yet, overly busy marquee political names eagerly hopped on board in pursuit of relevance and riches. In the end, you don’t need to be Bethany McLean to size up a CEO with a plan so bold, it defies basic accounting. Just remember: if something seems too good to be true...
Boeing CEO Dennis Muilenberg is receiving wilting criticism in the Senate and in the media for his company’s development of the 737 Max and the way it handled the aftermath of two crashes that killed 346 passengers, his tenure running the company in question after the board stripped him of his chairmanship while commercial aviation chief Kevin McAllister was fired. He’s hardly alone. The headlines are filled with sudden CEO successions lately. WeWork forced out their charismatic but misleading founder Adam Neumann after paying him an obscene $1.7 billion ransom to leave. Overstock’s founder Patrick Byrne and Papa John’s founder John Schnatter each resigned in scandal earlier this year. According to the outplacement firm Challenger, Gray & Christmas, a record 1,160 U.S. corporations announced this year that their CEOs were leaving office over the last 12 months. They departed for all kinds of reasons: retirement, planned succession, some from sheer exhaustion, some through appropriate accountability for performance slumps or personal conduct failures. And some were vilified as scapegoats for problems elsewhere. Earlier this year, Wells Fargo’s CEO Tim Sloan—a humble, heroic executive doing his best to fix the bank after it was nearly destroyed by scandal —was pummeled by both the left and right, with Senator Elizabeth Warren, Congressman Katie Porter, Congressman Patrick McHenry and White House chief of Staff Mick Mulvaney piling on when the culpability should have been directed toward fired CEO John Stumpf. No matter. Sloan, a symbol of past leadership, became a convenient whipping boy. He left office soon afterwards despite soaring performance and success over his 2.5 years in office—and the great respect of his constituents. Now it’s Muilenberg’s turn. To be sure, he has to take the heat from Senators— some of it properly targeting Boeing missteps, some of it the usual bipartisan political grandstanding. “Have there been discussions it is time for you to transition out of the CEO job?” CNBC’s Phil Lebeau asked Muilenberg in the halls seconds before his Senate hearing started, anticipating the questions to come. “On this day our deepest sympathies go with the families of Lion Air,” Muilenberg replied. “We are humbled. It has only amplified our focus on safety. Going to do everything we can to ensure this never happens again. I am focused on the job at hand. We understand those criticisms and those views but my job is to provide safe travel.” There is a contrary old adage about Machiavellian sea captains that “The captain announces shore leave to the crew but it is the first mate who has to cancel shore leave.” When things go wrong, we look to the CEO to explain mishaps and to be accountable. So often we’ve seen tragic situations such as at BP, Toyota and Carnival Cruise lines, where lieutenants were thrown under the bus. At Boeing, problems in the commercial aviation division were laid at the feet of McAllister, not Muilenberg—at least for now. That’s fair. Muilenberg seems to have engaged in no deceit or misconduct. Boeing informed the Department of Justice about some ambiguous text messages from a former test pilot that the Justice Department did not want referred to the FAA due to a criminal investigation, but no true wrong doing has surfaced. With their reliance on 900 vendors as well as the maintenance systems of the air carriers who use their planes, faulty external sensors on two planes were not repaired, a redundancy in those sensors was not considered, the alert over inconsistent sensors was inadvertently missing from many instrument panels, the MCAS auto pilot system was not as easily turned disengaged by newer less experienced pilots, as well as an apparent lack of transparency and training for all pilots to understand the MCAS system would continually revert to force the nose down. There are, of course, problems that need addressing. A review of the culture is in order to fortify Boeing’s historic focus on safety, as well as new software fixes, new training procedures, new centralized safety processes and a new board committee overseeing safety. But, as Jim Cramer of CNBC commented, “Dennis Muilenberg is showing remarkable contrition, not combative but outlining what they’ve learned to do better.” Muilenberg’s and Boeing’s mission now is to rebuild trust and clear certification for the 737 Max to return the air, drawing on its 100-year safety record, current contrition, and new improvements. The stock market seems to support Muilenberg. Mary Barra of GM succeeded at this mission leading their recovery from their ignition safety crisis. The question here—as it is whenever there’s a crisis in a company—seems simple enough: Are we better off with him or without him? But as we all know, things are seldom simple. If Muilenberg can accomplish his mission, it would be wrong for the board to wilt. But that doesn’t mean—no matter the facts or how well he handles the situation—that they won’t. After all, CEOs make for good sacrifices. Like it or not, that's part of the job.
WeWork needs leadership not tied to Neumann and soiled by being a part of his team’s ill-fated maneuvers. Coincidentally, T-Mobile’s inspiring CEO John Legere may soon be all dressed and ready for the spot as the T-Mobile-Sprint merger closes.
This week's proclamation by the Business Roundtable is not a novel position, but a rediscovery of the group's original position. Furthermore, such responsible and responsive social conduct has long been far more accepted practice by progressive business leaders than presumed.
[caption id="attachment_69329" align="alignnone" width="696"] WeWork's Adam Neumann Credit:WeWork.com[/caption] Next month the iconic satirical MAD Magazine prints its last new issue. The infamous motto of its fictitious mascot is the grinning Alfred E. Neuman was “What me worry?” When it comes to WeWork founder Adam Neumann, perhaps a distant cousin, the question should be “What WE worry?” And there is more and more to worry about, starting with the news this week that Neumann has sold more than $700 million of his ownership pre-IPO, indicating a lack of faith in his own company while he prepares to hawk it to new investors. Surely founders, like other people, have expenses related to family vacations, home upkeep, kids, cars, and college loans. But those minimal lifestyle maintenance costs don’t seem to be the motive here. TechCrunch reported that Neumann has comfortably spent $80 million on his six homes including his 13,000-square-foot San Francisco crash pad, complete with a guitar-shaped room. This nine-year-old co-working startup has a pumped-up valuation, somehow, of $47 billion. The Wall Street Journal questioned this lush valuation as Neumann tried to distance himself from Uber’s IPO collapse this spring. Eyebrows were raised earlier this year when The Journal questioned a potential conflict of interest with Neumann earning of millions of dollars as landlord and owner of many of the buildings that WeWork leased. This was not fully disclosed to equity investors, The Journal reported. Research by Noam Wasserman in his book, The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls that Can Sink a Startup, has shown that founder-led companies outperform matched non-founder led enterprises given their dedication to an insurgent mission and their owner mindset. This is why legendary founders such as Bernard Marcus of The Home Depot, Michael Dell of Dell Technologies, Bill Gates of Microsoft and others retained their ownership, especially pre-IPO. Contrast that with the founders of the Groupon and Zinga, who massively sold out pre-IPO. So, what could Neumann know that has him worried about his own investment in WeWork? Well, for one thing, they’re losing more than $2 billion a year—that’s $120,000 of losses every hour of every day. WeWork is in 36 countries and is the largest landlord in New York, San Francisco, and Washington DC. But are those high-cost leases a good thing in a downturn? Its competitor, IWG, formally Regus. was forced into bankruptcy in the 2003 market downturn with a similar model. (Andrew Ross Sorkin of The New York Times has questioned whether WeWork is too big to fail.) Meanwhile, speaking of similar models—what is unique here? Neumann is hardly Mark Zuckerberg or Elon Musk, who, despite their own larger-than-life personas, do at least have unique, disruptive technologies. Strip away the barn-wood interiors, bean bags and espresso bars, and Neumann’s empire looks a lot like…a lot of other real estate companies. New, fast-growing entrants like New York’s Knowtel, Serve Corp of Australia and Mindspace—not to mention the far more global IWG—are genuine competitive threats. IWG, for example, is in 70 more countries than WeWork and twice as many cities (250 to WeWork’s 124). Oh, and IWG actually makes money—while also providing a wider array of offerings like serviced offices, virtual offices meeting rooms. Yes, Neumann is certainly charismatic, regaling students recently at a college commencement with tales of playboy years “hitting on every girl in the city.” But as he cashes out ahead of his own IPO, many should worry whether WeWork really works—for anyone beyond its founder.
Lee Iacocca was a car making titan who led a massive transformation of the industry at Ford and Chrysler. He was a hugely competitive executive—driven by commercial success and patriotic pride. Jeffrey Sonnenfeld looks back at his life.