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Real Estate

Deal Hurdles for WeWork: Neumann’s Style and Rich Stock Price

When executives at office space provider WeWork considered expanding into China two years ago, they discussed buying a fledgling Chinese co-working firm called UrWork. A deal didn’t get done, in part because WeWork offered stock, which UrWork didn't want to accept, a UrWork adviser said.

That was due to WeWork's rich stock value. UrWork executives felt their company had more room to grow. For WeWork, this was a missed opportunity: Today, UrWork is the largest co-working company in China, valued at more than $1 billion, and has begun to expand to the United States and other countries. Competition between the two has escalated. Last month, WeWork won a legal fight preventing UrWork from using its name on a soon-to-launch New York office.

The Takeaway
• WeWork’s high stock price hurting M&A
• Revenue per member flat since 2015
• Overseas markets are key growth targets

This episode highlights a challenge for WeWork, which has become a major force in commercial real estate with a valuation of $20 billion. As part of its ambitious growth plans, WeWork is pursuing acquisitions and partnerships. But WeWork typically offers stock as at least part of the payment, and some of the companies it wants to buy are reluctant to take it.

That’s because WeWork’s valuation is high when compared to some other companies. Airbnb, another high-growth company upending the real estate industry, is valued at only about 11 times this year’s revenues—compared with about 20 times for WeWork. The worry among executives negotiating with WeWork is that its stock is so highly valued that it’s unlikely to appreciate much going forward.

Another obstacle that has impeded WeWork’s ability to do deals is the negotiating style of CEO and co-founder Adam Neumann. While some found him charming, others who have negotiated with him described an approach that included threats of competition, hard bargaining, unpredictable communication, late-night meetings and rounds of tequila. Both internal and external business meetings with Mr. Neumann have been known to go until 4 a.m., sometimes starting after midnight, and he is known to call employees past midnight, according to former employees. (Mr. Neumann, who has said he is dyslexic, emails less frequently.)

The Information spoke to executives and advisers at four companies who have discussed acquisitions with WeWork but said they declined to sell their companies. Three cited the high value of WeWork stock as a concern. Two of the four also cited Mr. Neumann’s approach during negotiations. A fifth executive who did strike a business partnership with WeWork said negotiating with Mr. Neumann was a negative experience.

One executive who declined to sell his company said Mr. Neumann disparaged his company, frequently rescheduled meetings, was highly unorthodox when it came to where and when the meetings took place, and made it clear he wanted to acquire the company for the cheapest price possible. He said Mr. Neumann “can go from being very charming and very ingratiating to savagely mean.”

Others had a more positive viewpoint. Omer Ozden, a UrWork investor and adviser, liked his negotiating style, which he described as very direct and confident. “It saves time. We’re not there for pleasantries, we’re there to do business. If we can’t do a deal, it’s fine,” Mr. Ozden said. “He asked us about our specific numbers and our construction costs and so forth; we were writing them down together. We were getting down to the questions, he was firing questions and we were just answering them.”

To be sure, Mr. Neumann’s tactics can be used effectively in negotiations. WeWork has completed five acquisitions, three of them this year as it has ramped up dealmaking, and more are likely as it expands.

WeWork declined to comment on previous acquisition talks or Mr. Neumann’s negotiating style. But its executives did discuss growth plans and how acquisitions will fit.

Rapid Growth

WeWork has grown rapidly, recently reaching 150,000 tenants working out of more than 160 locations, and generating revenue in recent months that would top $1 billion if annualized. That's up from less than $100 million in annualized revenue two years ago. But its below WeWork's projections of three years ago, when it told investors it could reach $1.5 billion in revenue by this year. 

Executives remain confident in WeWork’s growth potential. Mr. Neumann believes it can reach 1 million tenants, say people close to the company. If it then increases revenue per individual tenant, known as members, by about 30%, that would result in $10 billion in annual revenue. Alternatively, reaching 1.5 million tenants at the current level of revenue per tenant would result in $10 billion in revenue. One executive said the $10 billion figure is achievable, but WeWork doesn’t think it can reach that level in the next three to five years.

To reach its targets, WeWork plans to add hundreds of locations by 2020, most of them outside the U.S. WeWork expects locations outside of North America to account for a majority of its office space in the coming years, up from more than one-third currently, according to Rich Gomel, head of the company’s co-working business. He said revenue from Asia and Latin America is expected to grow by three to four times annually for the next few years.

But growing overseas has already had an impact on growth in revenue per member. In markets like Mexico, for instance, desks lease out for lower prices, CFO Artie Minson told The Information in an interview. As a result, WeWork’s revenue per member has remained essentially flat since 2015—at about $650. That’s a far cry from the $1,000 that WeWork executives talk about one day hitting, which has also been hurt by slow sales of services such as printing and phone use.

Another issue is that some landlords in newer markets have been less willing to pay for tenant improvements, which means WeWork has to spend more on construction. That has reduced WeWork’s profit margins in those locations below the levels it reaches in cities like New York or London. WeWork expects that to change as it grows in the newer markets, Mr. Gomel said. At the same time, WeWork has found ways to reduce construction costs significantly, thanks partly to advances in technology.

Still, company executives have lowered the profit margins they cite when it comes to fully running buildings. Whereas profit margins of 40% were once touted at mature spaces, the figure these days is closer to 30%. (These margins are based on profitability as measured before interest, taxes, depreciation and amortization.)

Mr. Neumann “can go from being very charming and very ingratiating to savagely mean.”

To help grow, WeWork has leaned on partnerships and acquisitions in some territories, such as Asia. In August, it acquired Singapore co-working company Spacemob as part of an effort to expand in Southeast Asia and South Korea. It has also set up separate entities in China and Japan with investor SoftBank, which has led more than $1 billion in investments for Asian expansion.

More deals are likely, especially as the company plans to expand into designing, constructing and managing office space for large companies, touting technology and analytics that lead to more efficient spaces. In July, for example, it acquired Fieldlens, a maker of mobile communication tools for the construction industry.

Dave Fano, WeWork’s chief growth officer, said more deals to enhance technology and the new real estate services could follow. “We’re going to do all three--buy, build, partner. It’s going to be an active area of energy for the company,” he said. “At the pace we’re looking to scale and the expertise we’re looking to bring on, I would imagine we’ll be looking at companies that could potentially come on board.”

Mr. Minson, however, played down the significance of buying companies. While the company has started to think more about acquisitions this year, it is still seeing high returns on investing cash into its core business, and executives would remain sensitive to how returns on an acquisition would compare with returns from the core business.

Looking Outside

One hangup with acquisition attempts has been the value of its stock. Mr. Neumann discussed acquiring a smaller office-space provider earlier this year, according to an executive at the firm. But preliminary talks quickly fizzled, the executive said, because Mr. Neumann primarily wanted to offer stock, which the executive thought was overvalued. When the executive conveyed to Mr. Neumann that he didn’t want stock, all communication stopped. “We thought we would hear back, but we didn’t hear anything,” the executive said. “He didn’t answer emails, didn’t pick up the phone. It was very hard to contact him.”

When negotiating to buy companies, WeWork has been known to offer its common stock at preferred stock prices, said multiple people familiar with the matter. Preferred stock is typically valued more highly than common because it carries extra rights than common stock. Offering common at the higher value means investors selling a company would receive less stock than they would otherwise.

There are instances where the company has overcome initially alienating its counterparts. In the company’s early days, Mr. Neumann was heavily involved in negotiating individual leases with local landlords. The negotiations were combative, and some landlords vowed not to do business with WeWork, said a former employee. Over time, some landlords came around, persuaded by Mr. Neumann of WeWork’s value as a tenant, the person said.

And the fact that Mr. Neumann was disliked by much of real estate’s old guard was, to some people within the company, a good sign as it showed that WeWork was shaking up a stagnant industry.

“Real estate is still a very institutional-type business. The startup mentality in a real estate sector dominated by grey-haired people is not going to work,” the former employee said. “Innovation requires boldness, which Adam does not lack.”

Mr. Neumann can be a tough negotiator in partnerships as well. One tech executive who agreed to a partnership during WeWork’s early years said Mr. Neumann made it clear WeWork could get into the same business, causing the executive to worry that WeWork would compete against it if it did not close a deal. The deal got done.

Notably, Mr. Neumann this year helped put together one of WeWork’s biggest deals yet, SoftBank’s agreement to invest $4.4 billion in the company. As with previous investor rounds, WeWork was able to preserve the influence of Mr. Neumann and other insiders, WeWork’s charter documents show. WeWork has established supervoting stock that carries more votes than other kinds of stock, but unlike at many other private tech companies, none of WeWork’s preferred stock investors have extra votes, increasing the control of its founders.

UPDATE: WeWork could reach $10 billion in annual revenue by increasing the number of tenants to 1.5 million. This story has been updated to reflect this as a possible route to that number.