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Thursday, February 20, 2020

Behind WeWork CEO’s rise and fall: A Wall Street bank playing many angles

While SoftBank, the Japanese conglomerate, is the biggest and most notable investor in WeWork’s parent company, JPMorgan has been one of its most ardent backers for years, working multiple sides.

By: New York Times | Published: September 26, 2019 1:54:05 pm
A man enters a WeWork co-working space in New York City, New York U.S., January 8, 2019. (Reuters)

By Andrew Ross Sorkin

The ouster of WeWork’s co-founder and its botched initial public offering are a remarkable collapse of what was considered, up until weeks ago, one of the most valuable startups in the world.

This is not simply the failure of a young and capricious founder. Adam Neumann, who helped start the company in his early 30s, was a magnetic leader with a brash style that constantly invited controversy. The problem is that the adults in the room didn’t act like adults.

One of those adults was perhaps Neumann’s most critical enabler: JPMorgan Chase.

While SoftBank, the Japanese conglomerate, is the biggest and most notable investor in WeWork’s parent company, JPMorgan has been one of its most ardent backers for years, working multiple sides. It lent Neumann money personally (with his inflated shares as collateral), provided equity and debt for the company, served as a corporate advisor for the IPO, and secured nearly $6 billion in financing as part of the now scotched offering.

If there was one institution best placed to fully understand the various conflicts of Neumann, it was JPMorgan.

The bank, in concert with UBS and Credit Suisse, provided Neumann with a $500 million line of personal credit, some of which was used to buy stakes in four buildings where he then had WeWork lease space. The self-dealing was so offensive to investors that he was forced to unwind the arrangement ahead of the public offering. JPMorgan also provided Neumann with an additional $97.5 million in loans, according to company filings, including for a mortgage used to buy a 60-acre property in Westchester County.

JPMorgan was working for the company, too, leading an extension of a $1.2 billion line of credit for WeWork all the way back in 2015; it later led another round of some $700 million in additional debt for the company. JPMorgan also participated in at least one funding round for WeWork in which its asset management clients invested in the company.

All of which is to say, some of the money intended for the company seemed to go from WeWork’s pocket into Neumann’s pocket.

And JPMorgan either knew it or should have known it.

“That is an all-time Gordian knot of conflicts of interest, and there is no way to get around it,” said Nell Minow, a longtime corporate governance expert who is now vice chair at ValueEdge Advisors.

JPMorgan “had to know” about all of Neumann’s self-dealing and other behavior, she added. “That’s literally their job. And if they didn’t, they were beyond negligent.”

Given the required diligence to provide loans, JPMorgan had better access to both WeWork’s finances and the personal finances of Neumann than even the company’s biggest investors, like SoftBank.

JPMorgan’s aggressive effort to lend money to Neumann and WeWork was all part of the bank’s desire to win the lead role for its high-profile initial public offering and earn part of the estimated $100 million in fees. JPMorgan eventually did win that role, but a failed IPO isn’t much of a prize.

To be fair, JPMorgan wasn’t alone on Wall Street in courting WeWork. Goldman Sachs, Morgan Stanley and just about every major firm made pilgrimages to Neumann’s office with proposals for the services they could provide. Had JPMorgan not provided the personal or corporate loans, another bank most likely would have happily done so.

But at any point, JPMorgan could have said it wouldn’t work with Neumann if the bank felt that actions of the company’s leadership raised red flags.

A spokesman for the bank declined to comment.

To its credit, the bank pressed Neumann and the company to disclose his personal conflicts in its offering filings. Those disclosures led to a backlash by investors, upending the stock offering. Depending on your perspective, arguably the “process” worked, providing transparency about the mismanagement at the company to potential public investors who were so turned off that the offering has been shelved for now.

In truth, it is easy to look back and point fingers. There was a collective mania around WeWork. Virtually every bank that pitched WeWork on its offering got it wrong. Just a year ago, JPMorgan was telling Neumann that it could find buyers at a company value of more than $60 billion; Goldman Sachs was floating a number over $90 billion, and Morgan Stanley speculated that even more than $100 billion was possible, according to people briefed on the proposals, who spoke on the condition of anonymity to discuss private negotiations. All of those valuations, inevitably, only emboldened Neumann.

And therein may lie the lesson: JPMorgan might have thought it would have lost big fees if it had abandoned WeWork, but it lost something more valuable — a small part of its reputation — by sticking with it.

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