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The death of the unicorn


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The death of the unicorn

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

What is it about unicorns? Why has this mystical creature engendered so much fascination at least since the Middle Ages and perhaps as far back as Biblical times? Throughout history, the unicorn has stood for magic, for purity, for enchantment and for the occurrence of miracles. And one need only Google the word "unicorn" to see that this interest has not diminished over the centuries but seems to have intensified in the present day. Perhaps the beauty and mystery of the unicorn serves for some as an antidote to the ugliness of our present daily maelstrom — or something like that.

I had my introduction to the unicorn of ancient lore in Paris, on my first foray into one of that city's great (but sadly, not well-known) cultural institutions — the Musée de Cluny. Located in the Latin Quarter, this museum of medieval and Roman treasures is housed in the remains of a 16th century abbey that was itself built upon the ruins of a 3rd century Roman bath. One could easily spend a day there looking at the jewel-encrusted Bibles, the crowns of the Visigoths, finds from Roman Parisii, Byzantine ivory carvings, and on and on. But the Cluny's greatest treasures are the six large and highly stylized tapestries from the 1500's depicting "The Lady and the Unicorn" — five of which illustrate the human senses (touch, taste, etc.) and the sixth of which has been interpreted to have a host of meanings related to both religion and to the medieval concept of courtly love.

The word "unicorn" also has another meaning — something that is highly desirable but exceedingly difficult to find and obtain. To that end, the word has (naturally) found its way into usage on Wall Street — a place devoted to finding and obtaining desirable things — in the form of a term denoting a certain type of IPO. That is a startup whose valuation in its initial public offering is $1 billion or greater, and the term seems to have been coined by venture capitalist Aileen Lee (founder of Cowboy Ventures and long-time Kleiner Perkins partner) who used the word unicorn to convey the "rarity and alchemy" of these types of deals.

Alchemy maybe, but rarity — not so much. I Googled the words "unicorn IPOs 2019" and got 15 recognizable names, ranging from "Airbnb" to "Zoom." While some of these companies have already had their IPOs — Uber, Lyft and Peloton chief among them — there are still a number that have yet to experience their 15 minutes of fame and hoped-for 15 minutes of high valuations. There has been a virtual thundering herd of "unicorns" in the past few years, some with sound business plans but more whose path to profitability was uncertain and years away.

So much for all that. The march of the unicorns has been halted — at least for the moment — by the spectacular implosion of The We Co. (a.k.a. WeWork) and the wholesale change of management and operating model that have followed in the wake of its failure to win investor support for a proposed multi-billion dollar offering. In retrospect, it seems amazing that any investment banker would not have been able to read the tea leaves on this one — a real estate company (not a tech company) entering into long-term contracts in order to lease space on a short-term basis. What could possibly go wrong?

Add to the equation a charismatic but slightly off-kilter CEO who had installed numerous friends and relatives in the top ranks of the company and who was living a lifestyle that can only be described as opulent, complete with private jet and multiple lavish homes — all purchased with loans from the company and in some instances from large banks with which WeWork did business. Its high valuation (estimated to be as high as $50 billion at one point) was due in part to the large presence in the investor base of SoftBank and its founder, Masayoshi Son — who, in the words of one pundit, "aims a fire hose of cash at his companies" — but that reality has now seemingly changed.

Indeed, the proposed WeWork IPO crumbled as potential investors began to question the company's operating model and also its corporate governance practices — or lack thereof — and to question the stewardship of CEO Adam Neumann and his co-founder wife, Rebekah. The outcome of this "IPO cleansing" has been the removal of Mr. Neumann, the sale of the corporate jet, layoffs of thousands of employees, the installation of a new management team to stabilize the company, and the shelving of any IPO plans for the foreseeable future. Indeed, the company is now seeking to sell $5 billion in junk debt — some reportedly with a 15% coupon — and the ultimate survival of the company remains in the balance.

For a bank analyst, it's hard to see the demise of the WeWork deal as anything other than a positive. For one thing, the bursting of the company's ridiculous valuation bubble should serve as a reminder to potential investors that governance counts and that a clear path to profitability should be something that's on the table from Day One. (Even Masayoshi Son has reportedly stated that his future investments will be in already-profitable companies.) And this bubble has been deflated without taking the market with it — unlike the 1999 to 2001 period, when the demise of the tech bubble brought down the stock market and the economy with it.

Will there be an impact on the banking industry? Indeed, there might — JPMorgan Chase & Co. and its own charismatic CEO, Jamie Dimon, may end up with WeWork splattered all over them. Dimon had reportedly cultivated a close friendship with Adam Neumann — in order to facilitate banking and investment banking relationships, one would surmise — and indeed, Forbes has reported that even Mary Callahan Erdoes, the head of asset management at JPMorgan, has been closely involved in the WeWork negotiations due to the considerable personal ties with the founder. (Forbes reports mortgages of $97.5 million resident at the bank, plus an extensive line of credit secured by Mr. Neumann's WeWork shares. Oops.)

Dimon and his colleagues may suffer embarrassment due to their sponsorship of WeWork and there may be losses — which one might hope would be eventually reflected in the JPMorgan CEO's compensation package — but there are no banks likely to be sunk by the sudden change of fortunes for the current crop of unicorns. Instead, banks like JPMorgan and Goldman Sachs Group Inc. (which is saddled with its own relationship with Uber) will simply absorb this as a cost of doing business and go on to the next deal.

Indeed, will the concept of the "unicorn" also now die a natural death? Not likely. I was reminded by a friend that "The Lady and the Unicorn" tapestries in Paris are not the only medieval depiction of that elusive creature. The Cloisters in New York City house an even more famous series of unicorn tapestries that detail the progression of "The Hunt of the Unicorn." The sixth tapestry of the seven-part series depicts the death of the mythical and lovely creature and the return of its body to the castle. But the most famous of the bunch — depicted on drink coasters and tea towels worldwide — is No. 7, titled "The Unicorn is in Captivity and No Longer Dead." Proof positive — unicorns never die, they just get temporarily fenced in.