WeWork Delays I.P.O. After Chilly Reception From Investors

WeWork Delays I.P.O. After Chilly Reception From Investors

WeWork, the shared office space giant, gained the backing of some of the world’s top investors, but it received a much colder reception when it tried to sell its shares on Wall Street.

Facing deep skepticism about its business model and corporate governance, the company has delayed its initial public offering by several months. A person with knowledge of the offering says the stock sale, which was expected to happen in a matter of weeks, may wind up being scrapped entirely.

The botched deal may now go down as a lesson of how not to conduct an initial public offering. The We Company, the parent of WeWork, was always going to have a hard time persuading investors to put their faith — and billions of dollars — in a business that is likely to lose money for the foreseeable future. Yet the company and its bankers appear to have misread the markets, and their efforts to put investors at ease fell flat.

This week, the company had been expected to begin a road show — where executives and bankers pitch prospective investors on the offering — two people with knowledge of the deal said. That would have put We’s shares on track to begin trading on the Nasdaq stock market by the end of next week.

But at a meeting on Monday, executives and advisers decided to shelve those plans after finding that investors had little appetite for the company’s stock, the people said, asking not to be identified discussing internal deliberations.

In a statement released late Monday, We said it anticipated that the offering would be completed by the end of the year.

A delay — whether for weeks or months — may still not allay the concerns of investors who had questioned the valuation of the company. We had been privately valued at $47 billion in January, when SoftBank of Japan made a large investment.

WeWork’s troubled offering highlights what can happen when companies that gained stratospheric valuations as private firms try to go public, says Len Sherman, an adjunct professor at Columbia Business School. “WeWork is the most extreme, almost ludicrously funny, example of a trend that’s been building for a while,” he said. “But the public markets are finally saying, ‘No más.’”

The company has been trying to rescue its public offering in a number of ways. On Friday, the company said it would reduce the power of its co-founder and chief executive, Adam Neumann, amid criticism that he exerted too much control over the business.

WeWork, the biggest private tenant in Manhattan, leases large amounts of office space and converts it into sleek work areas that it rents out to professionals, start-ups and corporations. Though the company has grown quickly, it remains deeply unprofitable.

Without an infusion of new money, the company may have to slow or stop its expansion. In the first half of this year, it posted an operating loss of $1.37 billion and spent $1.5 billion running its business and building out its operations. It had nearly $2.5 billion of cash on hand at the end of June.

We had anticipated borrowing $6 billion from banks. But those loans are contingent on the company’s ability to raise at least $3 billion from the I.P.O.

That financing has not yet been renegotiated, one of the people briefed on the matter said, though We could eventually strike a new agreement with its lenders.

The company’s I.P.O. has been one of the biggest debacles on Wall Street in recent years.

Many companies with uncertain futures and conspicuous shortcomings have managed to list themselves on the stock market. Uber and Lyft, for example, are also unprofitable, and their shares have slumped in recent months, but they managed to pull off public stock offerings this year.

Investors can live with big losses if they believe that a company can one day earn big profits and weather storms along the way. But several analysts and industry executives said there were good reasons to doubt that WeWork, which operates in the cutthroat and cyclical market for office space, could achieve either goal. That’s because the company has run up such huge losses during relatively good times — the current economic expansion recently became the longest on record.

“WeWork has never been tested,” said Vicki Bryan, chief executive of Bond Angle, a research firm. “They’ve had the wind at their backs for nine years.”

In its I.P.O. filing, however, We notes that it has done well in markets roiled by economic uncertainty. The company said the occupancy rates at its spaces in London increased after the Brexit referendum in June 2016 even as the overall commercial real estate business was flat.

Still, WeWork’s potential annual earnings from its locations appear to be only around 5 percent of the nearly $13 billion that has been invested in the company, according to calculations by Amol Sarva, chief executive of Knotel, a WeWork rival. He says that rate of return is similar to what a landlord might earn from a large office building.

“That’s not so different from what a lucky real estate developer might expect from their building in Hudson Yards,” Mr. Sarva added, referring to the large development on the Far West Side of Manhattan.

Investors might have been more willing to invest in WeWork had the company disclosed data that would have allowed them to analyze how much money it earns or loses at different kinds of locations. International Workspace Group, another WeWork rival, discloses earnings and occupancy for spaces that have been open for different lengths of time, but WeWork has not done so.

Investors have other concerns, too. The company leases buildings from landlords and spends a lot to turn them into attractive spaces. But WeWork’s leases run about 15 years on average, much longer than the average two-year commitments its customers make to the company. If WeWork loses many tenants during a recession, say, the company may be caught short. The company has leases valued at over $18 billion.

The way WeWork is run also turned off some investors. Last week, the company sought to address some of those concerns by appointing a lead independent director and cutting in half the shareholder votes that come with the special class of stock that Mr. Neumann, the chief executive, owns. Even so, Mr. Neumann retained a majority of all votes. By contrast, Uber went public after making more far-reaching changes to reduce the clout of Travis Kalanick, the company’s former chief executive.

Over time, We’s stumbles could prompt other companies to take concerns about corporate governance more seriously.

“If you really need to raise capital, and need to do an I.P.O., you have to think about corporate governance,” said Reena Aggarwal, a finance and business professor at Georgetown University.