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Mergers and Acquisitions/Equities Update

Authors: Akhil Majithia Co-VP Education/ Research, Joseph Whibbs Co-VP Education/ Research, Amogh Rajpal Research Analyst, Rohit Dabke Research Analyst


Global deal making has eased to the slowest pace seen in more than two years, as fears of an economic slowdown sap corporate confidence and a $200bn tobacco industry merger was abandoned due to shareholder criticism and an increased risk of the government regulations on vaping. Total year-to-date mergers and acquisitions activity has fallen 11 per cent since last year to $2.8tn, with roughly $740bn of deals clinched in the third quarter, according to new figures from data provider Refinitiv.


A slowdown in economic growth, uncertainty over Brexit, and the trade war between the United States and China, accompanied by investors losing their willingness to support companies with sky-high valuations and no clear path to profitability, has resulted in a ghoulish series of IPO’s as well. Of the five most valuable $1+ billion firms to IPO this year, three (Uber, Lyft, and Peloton) have suffered an average decline of 28% in stock price post-IPO, bringing down the average IPO return of the year to 6%, down from over 30% since the end of June.


Beyond Meat

On May 2nd, Beyond Meat Inc. listed its shares publicly on NASDAQ, pricing its initial public offering at 25$ a share, raising at least $240 million at a valuation slightly shy of $1.5 billion. Goldman Sachs, JP Morgan, and Credit Suisse were the lead underwriters on the deal, while BofA Merrill Lynch, Jefferies and William Blair acting as co-managers. The first trade of the stock was $46, 84% above its IPO price, while it extended gains to close its first day at $65.75 (163%) above its IPO price, making it the best performing IPO in almost two decades.




www.forbes.com


Beyond Meat Inc., the company created in 2009, raised nearly a billion dollars to grow its variety of plant-based meats. Its innovative plant-based meat is found in thousands of grocery stores and several famous restaurant chains as well. The main ingredient in Beyond Meat’s products is pea protein, an extract of yellow peas. However, having only one supplier of the protein, which represented 79% of the net revenue, it has suffered delays and interruptions.


Beyond Meat is expecting the alternative meat category to become a multibillion-dollar market over time and to take significant share from the $1.4 trillion global market for meat. The company’s strategy is similar to that used by the plant-based dairy industry which is about 13% of the dairy industry.


Although Beyond Meat’s stock shot up 840% in June after going public on May 2nd there have been some recent uncertainties causing the stock to fall almost 40% in July. It is still extremely profitable with the recent announcement of a trial run with McDonalds making it more appealing.


Currently trading at 500% above its original price, some analysts still have their doubts, stating this meteoric rise is something that they have seen before. A very similar example would be LaCroix Sparkling water (FIZZ), thought to be the “next big thing”. Its stock surged 550% from May 2015 to September of 2017 and traded at a P/E ratio of 58x at its peak. It didn’t last long and now the FIZZ trades at 66% below its peak in 2017. The main reason behind this spectacular fall was the rise in competition from several established companies such as PepsiCo, COSTCO, and Kirkland. Some analysts are expecting a similar rise in competition to occur in the alternative meat industry. Already several alternatives such as Burger King’s Impossible Burger, Tyson’s alternative meat line, and Nestle’s Incredible Burger have begun to take market share away from Beyond Meat. These companies with deeper pockets, better distribution and the ability to develop new products and bring them to the market much faster puts Beyond Meat at a massive risk of becoming another FIZZ.


WeWork

WeWork is an American real estate company, founded by Alan Neumann, which is engaged in the business of providing shared physical and virtual work spaces. The business model involves buying long leases of office spaces, then sub-leasing to technology start-ups and other enterprises. However, WeWork drives big on the concept of developing, building and sustaining a community.


Although nowhere close to being a technology company, the valuations WeWork received from venture capitalists and private equity firms exceeded those of even some of the best performing unicorn companies. So what caused the company’s $47B dollar valuation to plummet to less than $20B?

  1. Creative Accounting - WeWork took advantage of being deemed an “emerging company” under the Jumpstart Our Business Startups (JOBS) Act of 2012, which permits these companies to follow lower standards of disclosure in an IPO. EBITDA (Earnings Before Interest Tax Depreciation and Amortization) is one of the most popular accounting metrics used in valuing a company, relative to others, as it provides an overview of operational performance, ignoring taxes and non-cash expenses. However, WeWork with its emphasis on building a community, presented a “Community Adjusted EBITDA”, which meant community building expenses such as rent, utilities, internet, facility expenses and other relevant costs were added back to the net loss. Furthermore, WeWork presented an “Adjusted EBITDA Before Growth Investments”, which was the EBITDA before deducting Selling, General & Administrative expenses.

  2. Missing Information - The S-1 Securities and Exchange Commission (SEC) filing, which is a mandatory registration filing required for companies going public in the U.S. failed to give guidance to potential investors in a number of areas. Important information such as impact of free rent and other concessions it gives to enterprises as an offset of concessions it receives, the impact of an IPO on shareholder dilution, SoftBank’s (a major shareholder in WeWork) executive role, and path to profitability were not provided in the filing, which left potential investors wondering whether WeWork was really, as its founder claimed, on a path toward galactic dominance and unimaginable profit.


Latest Update: The company has delayed its planned September, 2019 IPO. Co-founder Alan Neumann stepped down as CEO of The We Company, the parent of WeWork. CFO Artie Minson and Vice Chairman Sebastian Gunningham will take over as co-CEOs as the company tries to restructure itself for a future IPO or to raise funds privately.

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