Coyote Blog

WeWork is a provider of work spaces for individuals and startup companies.  Unless I am missing something (and WeWork devotees are welcome to chime in) it is essentially a hipper rebranding of traditional small business office space and services companies like Regus (now IWG).

Currently, Regus / IWG has about $3 billion in annual revenue on which it makes something like a positive 5% net income margin and trades at a valuation of about 1x annual revenues.  WeWork is a private company, though is rumored to be IPOing soon.  It had $1.8 billion of revenue last year but lost $1.9 billion, meaning that it was basically selling $10 bills for $5 each with an negative net income margin of 105%.  Its last funding round was done at a $45 billion valuation, or 81 times 2018 revenue.  This valuation will likely go up in an IPO.

No real point here, except to say that I have not seen valuations this insane since the late 1990's.  What makes the examples of WeWork and Tesla perhaps even more incredible than examples in the 1990's is that the market is putting growth software valuations on bricks and mortar companies.  Oracle or Microsoft might have been expected to scale up easily and relatively cheaply, but scaling a real estate company takes a ton of money.  Not sure where the growth economy of scale is in office space.  And don't even get me started with the extrapolated growth projections here.  When the tech bubble bursts, WeWork is going to have a ton of grief on its hands, and unlike software companies it is not going to be able to slash SG&A by cutting payrolls.  It is going to be stuck in a lot of long term leases and mortgages that it can't break (just ask Tesla about that when they tried to cut SG&A by closing their stores).

PS-  As with Tesla and any number of other examples, many devotees of certain products hear criticism of the company's valuation as criticism of the company's product.  The two do not have to be related.  Grossly overvalued companies can still have products you might want to buy.  In fact, if WeWork is selling you a $10 product for $5, I would not be at all surprised if you are satisfied.

PPS-  This is not to say you can't make money in a bubble.  Careful, observant, and risk tolerant individuals can make money riding stocks up that they know are due for a crash some day.  Readers know that I believe Tesla is headed for a reckoning, but I am making money this week on short term calls I bought last week because I knew that Musk is going to pump the stock like hell last week and this week and pull forward every bit of volume he can into Q1 in a bid to save a dying growth story.  I bet the stock would ride up on early reports of this but fall off once financials are out and further when Q2 shows that the order books have been drained.  But this is risky, risky, risky.  It is a tiny piece of my investment portfolio and this sort of investing is but a hobby for me, a bar bet to determine if I have really come to understand how Elon Musk ticks.  Also, I am just a layman and not a professional so don't listen to me.

Steven Rattner, investment banker and former member of the Obama Administration,  is terrified that under a proposed law companies will be able to raise money without investment bankers.

Most troublesome is the legalization of “crowd funding,” the ability of start-up companies to raise capital from small investors on the Internet. While such lightly regulated capital raising has existed for years, until now, “investors” could receive only trinkets and other items of small value, similar to the way public television raises funds. As soon as regulations required to implement the new rules are completed, people who invest money in start-ups through sites similar to Kickstarter will be able to receive a financial interest in the soliciting company, much like buying shares on the stock exchange. But the enterprises soliciting these funds will hardly be big corporations like Wal-Mart or Exxon; they will be small start-ups with no track records.

This is absolutely, classically representative of the technocratic arrogance of the Obama Administration and the investment bankers that inhabit it.  I have three quick thoughts:

1. Rattner's concern for individual investors comes rather late.  After all, he was the primary architect of the extra-legal screwing of GM and Chrysler secured creditors in favor of the UAW and other Obama supporters.
2. God forbid investors get actual, you know, ownership in a company for their capital rather than just trinkets.  This is so bizarrely patronizing that I had to read it twice just to make sure I wasn't missing something.  But no, he is explicitly preferring that you and I get trinkets rather than ownership  (ownership, apparently, to be reserved for millionaire insiders like himself).
3. We have truly entered the corporate state when leftish opinion makers argue that large corporations like Exxon and Wal-Mart get preferential access to capital and that smaller startups that might compete with them be shut out of the market.

I predict that over that Internet entrepreneurs running such crowd-sourcing sites would develop reputation management and review tools for investors (similar to those at Amazon and eBay).  Over time, it may be that these become far more trustworthy than current credit agency reports or investment bank recommendations.  After all, which do you trust more -- a 5-star Amazon review with 35 responses or a Goldman Sachs "buy" recommendation on an IPO like Facebook or Groupon?  Besides, it would take a very long time, like eternity, for fraud losses in a crowd-sourcing site to equal 1/100 of the investor losses to heavily regulated Bernie Madoff.

As can be expected, the media really did a poor job of covering the GM IPO, consistently underestimating the total public cost of the bailout (e.g. no one is mentioning the $45 billion in tax-loss carryforwards GM was allowed to keep, against all precedent).

But the real cost of the handling of the GM bankruptcy is in 1) the terrible precedents it set in hammering secured creditors to the benefit of favored political allies of the Administration and 2) the loss of the opportunity to get billions of dollars in production assets out of the hands of the people who have be sub-optimizing them.

It was this latter issue I have focused the most on, particularly in this post where I argued for letting GM die.  I said in part:

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA.  ...

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one"¦ for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

In the earlier days of this blog, I used to post links to a lot of insane lawsuits.  The lawsuits just keep coming, but I have lost the energy to keep posting such stupidity.  And besides, Overlawyered does such a good job and seems to have infinite patience. 

But it was worth noting a silly shareholder suit that the media actually seems to have sniffed out for what it is:  Pure garbage.  For those who are not aware, there are a group of law firms who immediately file suit against any company whose stock drops by more than a few percent.  Bill Lerach, soon to be taking up residence in jail, used to keep a whole bullpen of folks on a sort of retainer to hold shares in numerous companies, so he instantly had someone close at hand who could file suit when any stock drops.  And since stocks go up and down, often in ways that the company itself has no control over, this leads to a lot of lawsuits.

Recently, the maker of Crocs sandles apparently had an IPO, had its stock price shoot up, and then had its stock price fall back when the company could not sustain its previous torrid growth pace.  Al Lewis of the Denver Post takes it from there:  (HT Overlawyered, of course)

Anybody who purchased stock in
Niwot-based Crocs Inc. between July 27 and Oct. 31 should not join the
class-action shareholders lawsuit that was recently filed against the
company and its stock-dumping executives.

Instead, they should look themselves in the mirror and admit two things:

      

I look ridiculous in these plastic shoes.

      

Anybody
who would pay an average of more than $60 a share for a company that
makes ugly plastic shoes deserves to take a hit in the stock market.

He continues:

Crocs and its officers also allegedly
misrepresented or failed to disclose their distribution problems in
Europe and their rising inventory levels, the lawsuit alleges. They
also failed to disclose that sales of their hole-riddled plastic clogs
were suddenly becoming more of a seasonal item. Imagine that! Sandals
seasonal? Who knew?

By the way, if you really want your head to explode, take a minute a think about shareholder lawsuits.  A group of shareholders are suing the company for a fall in the stock price.  Who do you think pays?  Why, current shareholders!  Though I do not accept the "logic" of these suits, if one were to accept their logic, then the most guilty party is the stockholder who sold the plaintiffs their stock just before the drop.  But these folks are exactly who will NOT owe any money on the suit.  They are no longer owners.  The people who will pay will be the owners of the stock at whatever time the suit settles, likely many people who bought in after the plaintiffs did.  The only real winner when the shareholders pay themselves such a verdict are the lawyers, who rake off 30%.  More on this bizarre situation here.

Update:  I will have to think about this more, but it kind of reminds me of a prisoners dilemma game in which the prosecutor gets a monetary bonus that increases with longer prison terms.

Unfortunately, it is behind the WSJ paid firewall and not on their opinion journal site, but Gary Kasparov has a very interesting editorial that confirms my fears about Russia:

Russia may not have much industry or democracy left, but we do have
massive amounts of oil and gas plus other natural resources. When
combined with our nuclear weapons, these resources are sufficient to
buy entry into the G-8 despite Mr. Putin's transformation of Russia
back into a one-party dictatorship. This newfound international sway is
also having serious repercussions inside my country. Many here would
like to believe that Mr. Putin is ushering in a return to our Soviet
superpower glory

He tells some pretty amazing tales of self-dealing by government officials on a massive scale. 

In perhaps the best example, the giant energy company Yukos was
dismembered and its chairman jailed. Next, Yukos assets were put up for
auction and the crown jewel, oil unit Yuganskneftegaz, was purchased at
a bargain price by the state-owned company Rosneft, which received
billions in mysterious loans. On July 14, Rosneft had an IPO in London
to sell these stolen assets and, of course, the money didn't go into
the treasury. This isn't nationalization, it's simple robbery. In
Russia the expenses are nationalized and the revenues are privatized.

That last line is a great one.  I for one have scratched my head at why Bush as consistently given Putin a pass.  My only guess is that he has prioritized his war with Muslim fundamentalism so high that he needs Putin as a potential ally in the area, though Kasparov presents evidence that Putin is likely exactly the opposite.  He concludes:

The West is making a terrible mistake by mixing realpolitik with a
battle of values. Drawing and defending moral lines is the first and
most essential step in combating extremism and there is no room for
double standards. If the West is keeping track of its friends, it's
time to take Mr. Putin off the list.

Sometimes entrepreneurs are successful enough to buy themselves sexy toys:  It may just be a nice pool table for the office, or it might be that new Gulfstream jet bought with the IPO proceeds.  But little did I know that entrepreneurial success would allow me to buy this beauty (click to enlarge):

This septic tank truck can really haul a load, carrying over 3800 gallons of, uh, poop.

We have a new facility at Pyramid Lake  we run in LA County, where, due to its location, all the bathrooms run into series of underground holding tanks.  At some point in the past, someone converted all the bathrooms into flush toilets, which in this area makes for a real waste of water and creates a lot of liquid waste we have to pump out and dispose of, at the cost of over $80,000 a year.  This truck is the intermediate solution, letting us cut our pumpong costs in half.  The long-term solution we are working with the US Forest Service on is to replace the bathrooms with a great composting technology from Bio-Sun, which will cut the waste and water use both to near zero.