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Startups

SoftBank struggles to rein in herd as WeWork goes rogue

Masayoshi Son's ideal of 'loose confederation' at crossroads

WeWork CEO Adam Neumann stepped down Tuesday amid questions surrounding his leadership.   © AP

NEW YORK/TOKYO -- The resignation of Adam Neumann from his post as CEO of WeWork exposes the cracks in the "herd" strategy espoused by Masayoshi Son, the chairman and CEO of SoftBank Group, the top shareholder of the office-sharing startup.

Son's concept of "herd" is a loose confederation of companies backed by the Japanese tech conglomerate that are able to operate without much meddling from the parent. "For a herd to be dynamic, the members should be loosely tied, with space for free movement," Son once said.

WeWork was the poster child of that vision, with Neumann and Son playing up their honeymoon relationship based on mutual trust. Now it appears that SoftBank's initial lack of involvement in business affairs exacerbated the problems surrounding WeWork.

Neumann engaged in a laundry list of questionable transactions with possible conflicts of interest, which were disclosed in filings submitted by WeWork's parent We Company ahead of a planned initial public offering. One much-publicized instance was We Company's $5.9 million purchase of the right to use the word "We" from an entity controlled by Neumann -- a transaction that was later reversed.

Neumann's heavy borrowing from banks -- some $380 million, according to We Company's prospectus -- shed light on the close connections built between Wall Street firms and unicorn chiefs.

The personal lending to Neumann, using his holdings in We Company as collateral, was extended by banks such as JPMorgan Chase, Credit Suisse and UBS, each eyeing a slice of the pie as underwriters for We's IPO.

The mounting concerns over corporate governance issues have jeopardized the IPO. While controlling a majority voting stake, Neumann would be unable to secure additional growth funds if he lost the support of SoftBank. He had no choice but to step down.

But the company's troubles are far from over. We Company is in talks with banks over ways to reduce costs, including laying off as many as 5,000 employees, The Information reported. The cuts amount to roughly a third of its workforce. Other ideas include withdrawing from businesses related to education and housing.

We Company had expanded its office subleasing business rapidly under Neumann. Heavy upfront investment to secure properties in prime locations and big-name clients caused its net loss to balloon to $1.61 billion -- roughly the same as revenue -- in 2018.

SoftBank offered no comment regarding Neumann's resignation, but an executive at the conglomerate confirmed that the principle investor requested a postponement of We Company's float.

The "herd" in SoftBank's Vision Fund consists of about 80 members, including the ride-hailer Uber Technologies. The $100 billion investment vehicle is stepping up business support for targets.

Rajeev Misra, SoftBank's executive vice president in charge of the Vision Fund, unveiled in April a plan to double the unit's staff to 800 people. The support provided by the Vision Fund is meant to lift the enterprise values of its targets, as well as the fund's yield on investments.

However, other SoftBank targets will not welcome the kind of excessive involvement that will push out the company head. Ani Technologies, the Indian startup behind the ride-sharing app Ola, decided in 2017 that any additional infusion from SoftBank Group will require the approval of the co-founders as well as the board -- a move apparently driven by the fear of losing independence.

On Wednesday, SoftBank Group's market value slipped below that of NTT Docomo, Japan's top mobile carrier, for the first time in roughly seven and a half months. Investors are starting to express doubts about SoftBank's investment strategy, and the company could be pressured into adjusting the way it tends the herd.

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