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Announcing the First Winner of the Archie McCardell Award for Truly Horrendous Management: WeWork

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Via Naked Capitalism

Yves here. We are pleased to help publicize the first recipient of the Archie McCardell Award, which we hope becomes an important badge of dishonor in Corporate America.

I assume that the reason that WeWork received the award, as opposed to just its CEO Adam Neumann, was that for a high-profite, supposed tech wonder to be such a governance mess, on top of its now-well-known operational and business howlers, took a lot of parents.

WeWork had Silicon Valley funders as well as Softbank, meaning grownups who had operating brain cells chose to put good money into a company that now looks to on a fast track to bankruptcy. With WeWork seeking a valuation of $48 billion in its IPO, this is an even more dramatic reversal than the $9-billion-at-its-peak Theranos, and there wasn’t even widespread fraud in the picture.

And even though securities underwriters are very careful not to take financial risks,1 the lead manager of the shelved IPO, JP Morgan, also deserves a heaping dose of opprobrium for putting its name on the widely-ridiculed prospectus.1 Similarly, Rebekah Paltrow Neumann, CEO Adam’s wife, played a prominent role in company management, with her New Agey meddling. While cults are an effective business model, all she seemed to do was add considerably to the flakiness of WeWork’s practices. so she also bears culpability.

By Michael Olenick, a research fellow at INSEAD. Originally published at Innowiki

Archie McCardell

Archie McCardell is the worst CEO in history.

Sure, there are CEO’s who committed crimes, CEO’s who bankrupt their businesses, and CEO’s who looted their businesses. There are crooks, those who hire cronies, people who paid bribes, plenty who demanded sex or servitude, and countless sociopaths.

In fairness to him, Archie did none of these things. Which makes winning his place as the worst CEO of all time all the more remarkable.

Background

McCardell is a University of Michigan MBA who started his career at Ford focused on finance. At Ford, Archie trained under Robert McNamara, the future US Secretary of Defense. McNamara is a key person who fabricated the Gulf of Tonkin invasion by North Vietnam to justify a massive escalation in the Vietnam War. Eventually, by the time the US effectively surrendered on March 29, 1973, 57,939 Americans and about a quarter-million South Vietnamese died in the conflict. Vietnam remained communist for about a decade then eventually transformed to capitalism, proving the entire war pointless in hindsight. McNamara trained his prodigy, McCardell, well.

Xerox

After Ford, Archie started at Xerox in 1966. They promoted him to president in 1971. For three years, Xerox continued to announce record profits, just as they had for the prior two decades. Xerox had two research centers, one in New York and the then-new Xerox Palo Alto Research Center, Xerox PARC, in California. Significantly, McCardell pushed the Rochester center for profits but largely ignored the quirkier California group. Later, Archie’s executives were ready to cancel a New York-based project led by Gary Starkweather to image a copier drum by lasers, the laser printer. However, Starkweather negotiated a last-minute relocation to Palo Alto and saved his project.

Other interesting projects happening in Palo Alto, a center set up before McCardell’s time, included computer work building on Douglas Engelbart’s work at the Stanford Research Institute (SRI). Engelbart demonstrated video teleconferencing, intuitive interactive interfaces for computers, editable lists on computers, windows, dynamic file linking, and a new input device, the mouse. Subsequently, Xerox PARC hired many of Engelbart’s researchers and supplemented them with others led by the legendary Robert Taylor.

Archie Blows the Future

During McCardell’s reign, Xerox PARC created the modern computer interface, building on and perfecting windows, the mouse, icons, visual files, and intuitive interactive computing. Eventually, they created the idea of the personal computer, internally called the “Dynabook.” Object-oriented programming, the building block of all modern computer systems, came from Xerox PARC. Ethernet networking, which is how virtually all computers connect (WiFi is wireless Ethernet) is from there and so are spline fonts and What You See is What You Get on-screen displays and printing. And, of course, Starkweather perfected his laser printer that also came from PARC.

McCardell purposefully threw it all away. The Xerox Alto, developed at Xerox PARC, was the first modern personal computer. The Alto is the Mac before the Mac. “At Xerox, McCardell and [Ford alum head of engineering Jim] O’Neill created a numbers culture where decisions were put through the NPV test. Not surprisingly, the Alto failed,” reads an analysis.

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After he left Xerox, they’d eventually commercialize an enterprise laser printer but the executive team he put in place – and the toxic environment Archie left behind – ignored the most valuable technology since the invention of the internal combustion engine and the car.

Simultaneously, while ignoring all the PARC technology, McCardell also ceded Xerox’s core copier business to the Japanese.

Blowing the third industrial revolution should be enough to secure McCardell’s position as the worst CEO ever. However, most historical records barely mention Archie’s disastrous Reign of Error at Xerox. He was just getting started.

International Harvester

In 1977, Archie took over as CEO of International Harvester. At this time, International Harvester was the third most valuable American business. McCardell’s starting salary was $460,000, making him one of the highest-paid CEO’s in the world. He also accepted a $1.5 million signing bonus and a $1.8 million loan at 8 percent (an interest rate which, at that time, was considered low).

Quoting the Washington Post: “The company had been directed primarily by family members since its founding by American inventor Cyrus McCormick in 1831, but the board decided it was getting stodgy and turned to a high-powered executive from the outside.” Management consulting firm Booz Allen Hamilton advanced the perception an outsider was needed and recruited McCardell.

Archie cut spending by $640 million and invested $879 million, over three years, into modernization. The latter figure seems impressive except it was essentially just copying International Harvester’s competitors.

Eventually, in the fall of 1979, Archie tired of trying to grow the business or cut costs traditionally and opted for a different approach. He purposefully picked a fight with the United Auto Workers, the trade union virtually all plant workers belonged to. McCardell insisted on pay cuts and increasing the use of non-union labor.

An American Icon, Destroyed

Archie singlehanded caused a 172-day strike that began November 1, 1979, the longest-ever strike at International Harvester.

By the time the strike ended, International Harvester lost $479.4 million then lost an additional $397.3 million in the next fiscal year directly due to fallout. In the end, the union conceded virtually nothing. International Harvester’s suppliers were devasted; the strike bankrupted Chicago’s Wisconsin Steel.

Besides the losses, International Harvester’s inability to deliver caused a loss of customer confidence. Sales slid by almost half. The business took on debt to keep the company afloat, eventually reaching a staggering $4.5 billion of early 1980s high-interest debt.

McCardell restructured the debt to $4.15 billion, cut $200 million, and demanded union concessions. At the same time, Archie paid out $6 million in executive bonuses. Seeing the dismal condition of the firm, the union agreed to $200 million in wage and benefit cuts.

The union agreed to contract concessions on May 2, 1982. Archie was fired the next day.

The firm’s stock, trading in the mid $40s when McCardell was hired, traded at $2 by the time he left. International Harvester was forced to sell off many business units, including the venerable farm machinery division. Eventually, 6,400 jobs were lost. What remained was renamed Navistar.

Epilogue

“I don’t think we made any one major mistake,” McCardell said in a 1986 UPI interview. “I feel very good about my years at Harvester.” Later, he adds, “I think I was underpaid.” In a different interview with the New York Times he said: “I think I rate myself superb.”

Pundits aren’t as enthusiastic. One speculated he might have been carrying out “an industrial sabotage operation.”

Archie didn’t do much after International Harvester. There was a land development project he labeled “a disaster.” He launched a turnaround business but refused to name his clients noting that knowledge of his involvement could “add to their problems.”

McCardell did have one insight that resonates: “I don’t know many CEOs who didn’t reach their positions without some good luck along the way. I had incredibly good luck as a young man. I also had ability, but luck plays a very important part,” he told UPI.

Archie McCardell died July 10, 2008, as the US was heading into the worst financial crisis since the Great Depression.

Archie McCardell

Archie McCardell Award

Inspired by true events we realized Archie’s management talents aren’t unique. Granted, nobody is likely to replicate his success decimating two businesses in entirely separate industries. Archie’s ability to destroy was positively Romanesque in scope, unlikely to be repeated anytime soon.

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However, their failure to fail, and to flame-out spectacularly, won’t be for lack of ambition. In this spirit, we’ve decided to create an award, the Archie McCardell Award, for absolutely horrendous management.

Archie McCardell Award Winner: WeWork

WeWork Summer Camp

In the summer of 2019, commercial rental space company WeWork was valued at $47 billion. That’s $47,000,000,000 US dollars, not Nambian. By September, founder Adam Neumann was out as CEO and the business was hoping for a $10 billion valuation. As of October, the scuttlebutt is they may be bankrupt. From a $47 billion to an impending bankruptcy within a half year. Adam, we salute you. You’ve earned the first Archie McCardell Award.

Personally buying buildings and leasing them back the company, secretly owning the company’s trademark, filling your buildings by offering free wine and beer, and smoking pot in the $60 million company jet are the types of things needed to win a coveted Archie. Selling $700 million of your own stock while urging the public to buy the same would make Archie proud. Throwing a wild party featuring a famous DJ after a significant round of layoffs. Jumping on desks and tables barefoot to yell at people (Archie sent armed thugs but, hey, it was a different time).

Adam aspired to be the world’s first trillionaire, and Archie was the world’s first executive to blow a trillion-dollar opportunity; you’re like brothers from different mothers.

Neumann renamed WeWork to just “We” before the planned IPO, filed Aug. 14, 2019, in anticipation of expanding the brand into every corner of life. His circle-of-life idea wasn’t just something the company talked about; they lived it, doing things like insisting on listing the IPO underwriters in a circle:

Screen-shot from the We IPO prospectus. Source: EDGAR

You can almost see investment bankers sitting around a circle, with barefoot Neumann and his ever-present wife, Rebekah Paltrow Neumann, in the center. Rebekah is Gwyneth’s cousin, a fact repeatedly mentioned and somehow relevant to a business renting office space.

It’s not hard to imagine the bankers from Citi, HSBC, Goldman Sachs, and UBS wearing suits while sitting uncomfortably in the lotus position thinking “how the fuck did we get ourselves into this?” as the Neumann’s do shots of expensive tequila and harangue.

However, the bankers knew better than to say or even think that aloud, lest Rebekah fire them for “bad energy” as she reportedly repeatedly did at We nee WeWork. Rebekah needed good vibes because there are apparently kids around in a daycare she started, WeGrow. Her price per child is $22,000 for age 2, $36,000 per year for ages 3-4 and $42,000 for age 5. Her school stops age 5 but offers “mentorships” for the six-year-old and over crowd.

The WeWhatever prospectus explains the businesses secret-sauce is technology, with “1,000 engineers, product designers and machine learning scientists that are dedicated to building, integrating and automating the complex systems we use to operate our business.” I have a friend who operates a similar operation renting office space in South Florida. The only engineers he employes are those who unclog the toilet after somebody enjoys an unfortunate visit to a questionable food truck for lunch. A machine-learning algorithm might figure out who did the deed, assuming anybody really wants to know.

The prospectus has profound business insights, like this: “… each additional location not only adds members to our platform and revenue to our income statement, but also becomes profitable once it reaches a break-even point.” Who would’ve thought a business becomes profitable after reaching breakeven? This goes along with the company’s “space as a service” model which means … I have no clue. I don’t know how somebody wrote this prospectus sober, assuming that they were.

There are ten risk-factors listed and, buried smack in the middle of the pack at the #5 position, is this stinky: “risks related to the long-term and fixed-cost nature of our leases.” We commits to extremely long-term commercial leases. Their “members” (that’d be “tenants” in normal-speak) are typically month-to-month. The company has high occupancy rates during a booming economy. But economic cycles come-and-go and this one is long overdue for a correction. When that happens the free-beer tenants simply leave, no notice required, while, We keep is committed to top-of-the-market rents. We also notes a future cooling of the commercial real estate market might allow competitors to offer similar space at lower prices, poaching tenants (er, members). We, on the other hand, cannot renegotiate their lease payments downward.

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In these healthy economic times, We reported six-month financials ending June 30, 2019. The company brought in $1.5 billion of revenue with $2.9 billion of total expenses. With some financial shenanigans, they reduce the net loss to a mere $690 million. That is, after the (admittedly usual) cooking of the books We still lost $115 million each and every month for the first half of 2019 despite their high occupancy rates. The company notes debt of $1.34 billion then, on page 41, quietly mentions future undiscounted lease obligations of a mere $47.2 billion.

Finally, We notes all the revenue and liabilities — really, the entire business — is owned by the “We Company Partnership” which the “We Company,” the one offering shares, owns no part of. That is, they were planning to sell what were essentially tracking shares of a crappy company, not shares of the crappy company itself.

On Monday, Sept. 30, 2019, We withdrew the IPO. Along with their public offering went a $6 billion in promised loans that were dependent upon the IPO. One of their risk factors came true: “Our future success depends in large part on the continued service of Adam Neumann, our Co-Founder and Chief Executive Officer, which cannot be ensured or guaranteed.” Adam is out as CEO though continues as Chairman. Some analysts convincingly assert the next federal filing We makes may be a bankruptcy petition.

Congratulations (former) WeWork CEO Adam Neumann, you’ve earned the first-ever Archie Award.
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1 Even though underwriters do nominally underwrite, as in they commit to buy all of the securities sold in the public offering, and then re-sell them to investors, in reality they pre-sell the deal. That’s why the price is often adjusted upward or downward during the “book building” process: it reflects the level of demand during the period when the preliminary prospectus is released and the deal is priced and goes “effective” (the pricing amendment is filed with and accepted by the SEC). Even though the indications of interest or “circles” are not contractually binding, any institutional investor that reneged on a commitment to buy stock once the IPO was released would find it not seeing any more IPOs (which are sought to be priced to trade up on the first day, so participating regularly in IPOs ought to be a profitable strategy for an institutional investor).

Having said that, once in a great while, an IPO goes so sour that the underwriters lose money. But this is a very uncommon event.

And the discussion above applies to equity offerings. Large debt deals by regular issuers like big banks are done on a “shelf registration” basis where the underwriters (usually one or a few of what in the old day would have been called bulge bracket firms) bid and buy the deal. So they are taking true price risk, but they typically price in the risk of adverse market moves in their bids.

2 Even though the contract between the lead underwriters and the company makes clear that the prospectus is the company’s document, and the underwriters from a legal perspective say they provided virtually nada, like their names on the cover page, the offering price and underwriters’ discount, and some language about them back in the bowels of the offering document, the lead underwriters are actively involved in the drafting of IPOs and most assuredly reviewed every word. At Goldman, I was personally involved in writing prospectuses on behalf of clients who lacked the capacity to do so. WeWork was so well funded that the company and its lawyer would have provided a complete and detailed first draft, and would also have in virtually all instances made any revisions or additions that the lead manager thought was necessary. However, the bigger point is that JP Morgan was all over the prospectus-drafting process and was therefore fully aware of what a garbage barge the company was. Ditto the other co-managers.

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