SoftBank Looks To WeWork For 'Large And Momentous Deal'

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Includes: GE, SFTBY, VWORK
by: John M. Mason

Summary

Japan's SoftBank Group is talking with WeWork Cos. to make a "giant bet," one that will highlight the evolution of the "new" Modern Corporation.

The "new" Modern Corporation builds platforms - something that SoftBank has done and WeWork is trying to do - moving away from the "old" concept of the linear production organization.

There is still a lot of misunderstanding about valuations in this space and, consequently, we need to learn more about how its value is determined and how it is earned.

Here we are in the world of the "new" Modern Corporation.

SoftBank Group Corp. (OTCPK:SFTBY) is looking to take over WeWork Cos. (VWORK), in what would be “one of the largest and more momentous deals of the past decade’s startup boom,” according to the Wall Street Journal.

This deal is of interest because it includes an entity, SoftBank Group, that is defined as a multinational holding conglomerate. SoftBank has been in the news a lot recently because of its growth and movement into new and different “spaces.” And supposedly, the “conglomerate” form of organization is not in the greatest favor these days.

One can only point to the problems faced by General Electric, Co. (NYSE:GE) and the continuing efforts to contain the free fall the company has experienced in recent years.

Why the excitement about the movements of SoftBank - a conglomerate - while discussion surrounding General Electric - another conglomerate - takes place in a dark and gloomy atmosphere? Both organizations are composed of a multitude of separate firms.

Well, the answer seems to lie in the fact that General Electric represents the “old guard,” while SoftBank represents the “new”... the “new” I have tried to capture in my writings on the “new” Modern Corporation.

The legacy idea of the “old” conglomerate was for an organization to put together a portfolio of independent companies in a holding company, with the holding company overseeing that each portfolio company was run as efficiently and effectively as possible and then see that each got the financial resources they needed in order to perform in an optimal manner.

The emphasis here was on the independence of each portfolio company. In current terminology, each of the companies was a “linear” organization that produced products for customers. The relationship between the firm and the customer was “linear” in that the producer produced what was felt that the customer wanted.

The “new” conglomerate is one that achieves a certain degree of integration between portfolio companies and works off of the concept of building platforms, networks of people that in one way or another interact with each other so as to maximize the connections between all those within the community.

SoftBank is one of the “new” conglomerates. A list of its component companies include broadband, fixed-line telecommunications, e-commerce, internet, technology services, finance, media and marketing, semiconductor design and other firms that fit into this picture.

The portfolio companies seem to have “overlapping” interests, most of them of an “intangible nature,” and this moves them into the world of the “new” Modern Corporation. Furthermore, SoftBank also conforms to the picture of the “new” Modern Corporation in that it is very good at financial engineering and has access to sufficient financial capital, so it is not dependent upon others to impact the timing of its acquisitions.

It seems as if General Electric is moving more in this direction. The new “leader” of General Electric is Mr. Larry Culp, who recently joined the GE board after turning around a company called Danaher Corp. (NYSE:DHR) from 2000 to 2014.

Danaher was a conglomerate, but according to Kimberly Chin in the Wall Street Journal, it became “a tightly focused portfolio of businesses with clear overlapping interests.” In other words, Danaher became something more like the “new” Modern Corporation. Obviously, the GE board would like to see Mr. Culp bring his knowledge of this “new” world to GE and focus more on the “overlapping interest” of GE’s portfolio, its platforms and networks than with the independent, “linear organizations” of the past.

This is the way the world is moving and how the “old” industrial structure is becoming the “new” platform community. SoftBank sees this in WeWork, a company whose core business is office leasing. But, according to the first Wall Street Journal article cited above, WeWork’s has always marketed itself “more like a tech company”... more like a “new” Modern Corporation.

WeWork’s “takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month.” No buying here, just leasing. No producing, just providing community.

The grand ambition of WeWork’s has been in “developing entire neighborhoods full of not just its offices, but also WeWork-run apartments, gyms and even schools.” In addition, “it has bought a search engine optimization company, a software-coding school, an even a stake in a wave-pool business.”

Furthermore, we see that the “new” format is priced differently from the “old” business model. “WeWork’s valuation has long baffled real estate landlords as well as veterans of the serviced-office business, which offers a similar product - rental housing - though general with less-hip vibe.” “The leading company in that business, IWG PLC (OTC:IWGFF), had nearly twice as many desks for rent as WeWork as of June, but roughly one-fifth its valuation.” These are all characteristics found in the world of the “new” Modern Corporation.

There are many questions about what WeWork is doing and when, if at all, it might succeed under the umbrella of SoftBank. But here we are talking about the “new” paradigm that SoftBank - and others - are trying to create.

It may be a while before we fully understand the “new” Modern Corporation and the platform world it brings with it. One thing that can be said is that it will be an interesting ride.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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