The best laugh in the WeWork farce – better even than the loss-making property company’s claim to be “elevating the world’s consciousness” – was provided by Masayoshi Son, founder of Softbank, the Japanese investment firm that largely bankrolled the venture and has now rescued it from collapse. Reflecting on failures during his career, Son said last week that “the small crises that pop up here and there today are mere child’s play”.
One can understand what he was getting at, of course. Softbank has backed some big successes over the years – notably Alibaba, the huge Chinese online retailer – so you can’t blame Son for defending the idea that an occasional loss is part of the game when you’re in the business of spotting visionaries who can transform entire industries. He is, after all, still trying to raise $100bn for a second Softbank-led “Vision” fund.
Come on, though: the WeWork flop is more than a hiccup. The tale belongs in “what were you smoking?” territory. WeWork was never the type of next-generation technology company that is supposed to be a target for Softbank’s money. It’s a company that rents out offices and sub-leases the space to tenants, a business model that isn’t remotely novel. The London stock market has boasted one example for years – IWG, the old Regus group, which, unlike WeWork, makes hard profits, generates cash and pays dividends.
The only true point of difference at WeWork was the presence of Adam Neumann, the charismatic co-founder with a talent for self-promotion. Maybe Son, before he read the Wall Street Journal’s profile in the midst of the IPO debacle, was unaware that Neumann had expressed an ambition to live for ever and run for “president of the world”. But he did presumably know that WeWork, absurdly, had paid almost $6m to Neumann for the rights to the trademarked word “we” – a clue that governance might be a little lax.
Lest we forget, the original IPO prospectus was stuffed with other governance red flags. If Neumann were to fall short of immortality and die in office, his wife would have a say in picking his successor. In the meantime, his shares would carry 20 times the votes of the ordinary equity. It read like a cult of personality.
This was a business that reported a net loss of $1.6bn in 2018 on revenues of $1.8bn. Yet Softbank, in the last private funding round, had injected the last portion of its investment at a valuation of $47bn (£37bn). Baffled outsiders screamed that it made no financial sense, especially as bigger and profitable IWG was sitting around the £3bn mark, but Son went ahead.
He knows the price of his misjudgment now. In last week’s rescue deal, WeWork was valued at $8bn and Softbank had to throw in another $6.5bn in equity and debt to gain control. Neumann agreed to sell his shares and will walk away with roughly $1.7bn. It’s not hard to identify the winner and loser in that relationship.
Another winner is the reputation of public-market investors. Wall Street tends to love larger-than-life personalities pitching visions of global expansion and domination, but Neumann didn’t get off first base. WeWork went from publication of grand IPO prospectus to emergency rescue in two months. Gravity rarely reasserts itself so quickly in financial markets.
That is why this is more than a “small crisis” for Softbank and Son. The IPO roadshow was an embarrassment from start to finish, and the long-term impact may only emerge when Softbank tries to sell its next “visionary” offering. After WeWork, fund managers have learned that private market valuations can be more than merely optimistic – they can come from a parallel universe.
Draghi fires a warning shot at the Germans
Mario Draghi’s parting shot as president of the European Central Bank was a warning about the knock-on effects of a global slowdown and how they could trigger another financial crash.
Like most central bankers, he used more ambiguous language when giving his final press conference following the ECB’s October policy decision. Yet the warning was clear enough. What he actually said was: “The main risk from all viewpoints, but especially also from a financial stability viewpoint, is a downturn in the economy … whether it is global or it is eurozone.”
As so often, Germany was his target. It is Europe’s largest economy and its laws stop politicians from opening the public-spending taps before a recession – or two quarters of consecutive contraction – is officially declared.
The slowdown in Germany so far has brought one quarterly decline of 0.1%, which is crippling, but not enough to unleash a €50bn stimulus package that chancellor Angela Merkel’s ministers have put together and is waiting in the wings.
In the meantime, Germans make the situation worse by saving more than they spend, storing up funds for their retirement. Admittedly, they don’t get much return on their savings now the ECB has cut the eurozone deposit rate to -0.5%, which savers grumble about while stashing away even more funds to make up the shortfall.
What do Germans buy with their savings? Too many buy assets with shaky foundations. And what happens when GDP growth dries up? The world’s banks and finance companies become vulnerable, just as they were in 2008.
Draghi denies that his negative interest rate policies are in any way to blame. He says low rates keep the economy moving and, as long as that happens, the finance sector is safe. So his warning is to populist politicians, who can wreck any chance of escape with their trade wars and prolonged austerity. They should listen. Another financial crash is only a few bad decisions away.
Barclays should stump up for post office services
It’s funny how the threat of being dragged before a committee of hostile MPs can make even the most intransigent boss see sense.
Seven hours before the Commons business, energy and industrial strategy (BEIS) committee was due to publish a report attacking Barclays’s decision to stop customers from withdrawing cash at post offices, and revealing it would be hauling in the bosses to face tough questions, the bank blinked and performed a crunching U-turn. It said it had been “persuaded to rethink” its decision and would now be keeping the cash withdrawal facility after all.
From the moment it announced its original decision to scrap over-the-counter cash withdrawals at Post Office branches, Barclays had faced a deluge of criticism. But that appointment with MPs was never going to be pleasant for the bank, and Barclays has form when it comes to disastrous appearances before Commons committees: in 2003, its then chief executive, Matt Barrett, stunned everyone with his Gerald Ratner-esque admission that he didn’t use a Barclaycard or any other credit card to borrow money “because it’s too expensive”? So what on earth possessed the bank to announce it was withdrawing access to cash in the first place? It was the only one out of 28 UK banks to take this position.
It seems Barclays was keen to make a stand against a chunky rise in the bank-funded fees paid to post offices for their services. Presumably it also wanted to send a signal to the government to come forward with a proper funding commitment for the post office network. It is true that under the new deal between the Post Office and the 28 banks, postmasters and postmistresses will receive about three times more money for providing banking services than under the previous arrangement. But there needed to be a better financial deal for them, most of whom are self-employed small business owners – as recently asin April this year, evidence emerged that many are working for less than the national minimum wage, and some are handing back the keys because they can’t make ends meet.
And why shouldn’t they be properly paid for providing banking services when banks decide to abandon communities by shutting branches? Barclays has closed at least 481 branches since 2015, according to the consumer body Which?. Somewhat damningly, Which? adds on its website that “the figure for Barclays is likely to be underestimated because they are not willing to share complete closure information with us”.