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WeWork and Saudi Aramco Pose Big Tests for JPMorgan’s Resurgent Underwriting Business

It’s been a good year for JPMorgan’s IPO underwriting business.

While rivals Goldman Sachs and Morgan Stanley have traditionally been the Wall Street frontrunners when it comes to taking companies public, the Jamie Dimon-led investment bank has stepped up its game in 2019. 

It served as one of the lead underwriters on Tradeweb Markets’ $1.1 billion initial public offering—one of the year’s largest and most successful deals to date, with Tradeweb’s stock up more than 50% up from its $27 IPO price. It got the job done with Lyft—helming the ride-sharing giant’s $2.3 billion IPO despite well-documented issues around the company’s price performance since—and is now co-leading the imminent, $1 billion-plus public debuts of Peloton and SmileDirectClub.

Now, JPMorgan is rolling up its sleeves on its two largest, most high-profile deals of the year—coworking firm WeWork’s controversial IPO, which reportedly aims to raise $3 billion, and state-owned oil producer Saudi Aramco’s potentially record-breaking public listing, which is expected to raise upwards of $15 billion. The bank has already been officially tapped to help the WeWork deal, and it is reportedly the frontrunner for at least a co-lead role in the Aramco offering.

Both deals would bring JPMorgan ever closer to matching the volume of IPOs underwritten by Goldman Sachs and Morgan Stanley. While JPMorgan has led 13 IPOs that raised a combined $5 billion this year, according to data from institutional research firm Renaissance Capital, Goldman and Morgan Stanley remain well ahead—having completed 21 deals for $16.3 billion and 20 deals for $13.5 billion, respectively.

Looking further back, the schism between JPMorgan and its rival shops is only more pronounced; in the two-year period dating back to September 2017, Morgan Stanley has overseen 71 IPOs raising a total of $31 billion, while Goldman has handled 58 deals for a combined $31.7 billion, per Renaissance Capital. JPMorgan, by contrast, has led 42 IPOs that raised $10 billion over that period.

“[JPMorgan] are a legitimate underwriter and have done some very strong deals,” says Renaissance Capital principal Kathleen Smith, who noted that the 13 companies that JPMorgan has taken public in 2019 have delivered positive returns of 25% to date. 

By contrast, the returns on IPOs underwritten by Morgan Stanley this year have yielded returns of 19%, while those led by Goldman have delivered returns of 50%, per Renaissance’s data. 

“The way to judge an underwriter is whether they are doing deals that are traded well after the IPO, and trading well for a well,” Smith adds. “JPMorgan does deals that work, most of the time.”

Saudi Aramco IPO

The Aramco deal would almost certainly be the firm’s largest coup to date, given how the Saudis hold hopes for a $2 trillion valuation that could yield an IPO eclipsing Alibaba’s record $25 billion public offering. Unlike WeWork and Lyft, there are little concerns over Aramco’s ability to deliver shareholder returns; with a reported 2018 net income of $111 billion making it perhaps the world’s most profitable corporation, there will be no shortage of investors looking to own a piece of the company.

Yet it also promises to be a sprawling, complicated deal. There will almost certainly be corporate governance questions to answer due to Aramco’s status as a state-owned enterprise, and it remains uncertain where, exactly, the company will end up listing. The Saudis are reportedly leaning toward an initial two-part offering on the country’s domestic stock exchange, Reuters reported this week, a move designed to help investors more easily absorb the massive IPO. Yet an eventual international listing in New York—said to be favored by Crown Prince Mohammad bin Salman—could open Aramco up to shareholder lawsuits, and even U.S. anti-terrorism laws.

And then there are the optics associated with doing business with Saudi Arabia. Despite the Kingdom's strong ties with the U.S., the assassination of Saudi dissident and journalist Jamal Khashoggi—and the country's human rights record at large—continues to cast a shadow on its reputation. Indeed, Dimon was among a wave of American CEOs to withdraw from the Saudis' Future Investment Initiative conference in Riyadh last year, in the wake of Khashoggi's death.

Still, such considerations are unlikely to repel investors eager to buy a piece of an enormously profitable company backed by the world's largest oil producer—or dissuade JPMorgan from working with Aramco.

“There is a public relations situation that needs to be managed; the last thing [JPMorgan] wants is to be called greedy and a mercenary,” says Santosh Rao, head of research at Manhattan Venture Partners, a boutique merchant bank focused on pre-IPO companies. “But they will definitely make it work, because the stakes are very high and there is the chance of repeat business.”

When will WeWork go public?

WeWork, meanwhile, raises an entirely different set of issues. The corporate governance issues surrounding CEO Adam Neumann have been well-documented. With WeWork’s roadshow set to kickoff next week, the bank is said to be pushing the company to make changes to its governance structure, Bloomberg reported on Tuesday, though it is unclear what such changes would look like.

“Whatever irritants are there right now [for investors], they need to remove that,” according to Rao. “[WeWork] needs a straight-up, regular, mainstream corporate governance structure where there is accountability.”

Rao cites the array of governance-related matters that have emerged from WeWork’s prospectus—from the triple-class voting share structure that would ensure Neumann’s control over the company, to the influence that his wife, WeWork co-founder Rebekah Neumann, would have in selecting his successor. “When you’re priced at that kind of [$47 billion] valuation, and there are doubts about how you can ride out a recession, you cannot have this kind of corporate structure where accountability is not defined,” he says.

But perhaps more central to WeWork’s prospects as a public company are the financials behind its IPO. As lead underwriting, JPMorgan will be hugely influential in pricing the company’s shares and setting its public valuation—and while WeWork’s private investors would likely loathe to see that valuation drop precipitously, a figure substantially below $47 billion could make all the difference when it comes to finding success on the public market.

“Investors are letting us know that they want to get in [on WeWork’s stock] at a reasonable valuation,” according to Renaissance Capital’s Smith. “If there’s pushback on an aggressive [price] range, there may be a problem. But there are so many interests wanting this thing to come out at a high valuation, and a lot of investors who don’t want to see their [stake] priced down.”

She added that JPMorgan, in all likelihood, would also want to see a lower valuation. “They want to do deals that have positive returns,” Smith noted. “They don’t want [IPOs] to crater; it’s not good for their reputations.” (Representatives for JPMorgan declined to comment.)

What is WeWork worth?

Recent reports have suggested that WeWork may end up being valued closer to, or even below, the $20 billion mark. That may be a hard pill to swallow for the firm and backers like SoftBank, which has reportedly pushed WeWork to consider delaying its stock offering. 

But it could prove the most logical outcome for the company’s long-term prospects—especially considering WeWork has reportedly set up a $6 billion bond debt deal, partially backed by JPMorgan, that is contingent on its ability to raise $3 billion through its IPO. The inability to secure that financing would undoubtedly hamper the company’s prolific growth in the near-to-medium term.

Though WeWork has the most to lose from a faulty public debut, it’s also a huge test for JPMorgan and its resurgent IPO underwriting business. It’s no secret that the investment bank has developed close ties with Neumann and his firm—and beyond bagging lucrative fees associated with underwriting the IPO, a successful WeWork could prove a valuable customer for JPMorgan for years to come.

“This is the type of business where liquidity is going to be important [in the future],” Rao says of WeWork. “It’s going to require a lot of investment, so they’ll need a big basket of liquidity behind them.”

In other words, JPMorgan has some work to do.

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