Features

If this company manages to go public, it just has to mark the top of the market

Inverting yield curves and trade wars are all very worrying, says John Stepek. But nothing says "top of the market" like the stockmarket-listing of this company.

190819-WeWork-634

WeWork: sending a signal to investors?

© 2019 Bloomberg Finance LP

Lots of things are going awry with the global financial system right now.

Bond yields are plumbing unheard-of depths. Yield curves are inverting all over the place. The trade war is an ongoing source of tension and nasty surprises. Economic growth is slowing in many critical areas Germany may even be heading for recession.

But you know the warning signal that worries me more than anything else?

The potential listing of one very specific company...

SoftBank the anti-Berkshire Hathaway

initial public offering (IPO)

There's a reason for this. It's only at the top of a bubble that you have the critical mix of founder arrogance and investor credulity needed to be able to get away with listing companies at valuations that would be impossible to justify in more "normal" times.

So when you see ridiculous companies coming to market, or you see perfectly decent companies coming to market at ridiculous prices, that's often a good sign that we're near the peak.

I've thought for some time that the great white whale for this cycle would be SoftBank, or a company involved with SoftBank. SoftBank was a Japanese telecoms company. It is now closer to being a massive investment fund.

Imagine if Berkshire Hathaway owned a phone company instead of an insurer. And imagine if, rather than buy good-value companies with proven business models, using its massive piles of cash, it indiscriminately bought any old company with a "disruptive" idea, using massive piles of debt.

To give you an idea of the antics that SoftBank gets up to, it's currently trying to raise money for a new technology investment fund, its second "Vision Fund". SoftBank itself has committed to invest $38bn in the fund.

On top of that, it's going to put up a further $15bn-$20bn on behalf of its employees. But the company itself will provide loans to its staff to put that money in. As Liz Hoffman and Bradley Hope put it in The Wall Street Journal, this is "an unusual setup that would doubly expose SoftBank to a startup economy that is starting to show cracks".

Given that the fund is so far expected to be worth just over $100bn when it is fully funded, then that means the company "could make up more than half of the money raised, far more than is typical for a fund sponsor".

Anyway, that's SoftBank. The anti-Berkshire Hathaway. Which is quite fitting for a world of negative interest rates, I suppose.

WeWork a company you could only sell at the top of the market

WeWork has everything. A "visionary" founder who spouts TED-talk-style garbage at every opportunity. An old-school business model (renting office space to companies) given a tech-ified sheen to justify its valuation.

It also has all the hallmarks of a modern-day IPO. For one, the shareholders will own shares but have virtually no control, because as the FT points out, the founder will own "supervoting shares, barring 20 times the votes of ordinary stock".

For another, there's a whole load of debtors standing in front of them in the queue for claims, should the company go bust. Oh, and the company doesn't make any money.

I could go on. I'm fairly sure I will, at length, in a future Money Morning. But you get the gist. In short, you'd have to work really hard to justify this as a good investment.

My view and it is just a view, and I realise I've been keen to call the "IPO at the top" of this cycle is that if WeWork manages to list, then there's a very good chance that we really have reached the top and that a bear market will begin shortly afterwards.

I might well be wrong. And I certainly wouldn't suggest changing your investment plan because of this. But in the panoply of "signs and portents" that I like to keep an eye on, the WeWork IPO is now right at the top of my list.

Just before I go if you're in Edinburgh this week, and you fancy visiting Adam Smith's old house and seeing Merryn Somerset Webb speaking to groups of smart people about the big political and economic themes of the day, then book your ticket here now there aren't many left.

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