Cox: Disruption flops will spare old-line targets

By Rob Cox
June 2, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Investors have bet on plenty of highly valued startups promising to disrupt the established corporate order. But like discarded thoroughbred horses once upon a time, many of these so-called unicorns, probably including blood-testing upstart Theranos, will wind up in the glue factory. A wave of what might be called “gluenicorns” might be good news for the public companies they threatened to destroy.

The now heavy bleeding of credibility at Silicon Valley-based Theranos, founded by Stanford University dropout Elizabeth Holmes, has coincided with two big traditional rivals, Quest Diagnostics and Laboratory Corp, enjoying a gallop in the stock market. There are probably explanations besides the tribulations at Theranos at work. But the correlation is noteworthy.

More than 200 unicorns – private companies valued at $1 billion or more – were spotted by VB Profiles earlier this year, including 21 worth more than $10 billion. Jim Breyer, the venture capitalist who turned a $13 million investment in Facebook into billions, forecast a success rate of around 10 percent for these enterprises at a Breakingviews event in February. For their old-line targets, that’s a welcome outlook.

The Theranos saga increasingly looks like a case in point. Holmes’ vision, hatched as an undergraduate at Stanford, was alluring: to make diagnosing a wide variety of ailments as simple as a thumb-prick at a local pharmacy – far less painfully and at a far lower price than similar services provided by the likes of Quest and LabCorp.

Holmes attracted investment in the secretive Theranos at ever-increasing valuations, rising to $9 billion in 2014 – about the same as the market capitalization of both publicly traded rivals at the time. But the thesis began unraveling last October after the Wall Street Journal reported that the firm’s technology wasn’t living up to its promise. Unflattering news has continued to flow since then.

This week, Forbes downgraded its estimate of Holmes’ wealth, tied to her 50 percent stake in Theranos, to zero from $4.5 billion. The magazine, which keeps track of the world’s richest people, said Theranos is realistically worth $800 million, largely on the back of the $724 million the company has raised over the years since it was founded in 2003. Because outside investors hold preferred shares, on those assumptions Holmes’ common stock is essentially worthless.

Meanwhile, Quest and LabCorp shares have each risen 28 percent since Feb. 9, the day before the Journal reported that Theranos was in danger of losing its most important customer, pharmacy chain Walgreens. All told, the two companies have added some $5 billion of market capitalization.

It’s too simplistic to say that Quest and LabCorp simply gained value as Theranos lost it. In the year after June 2014, when Fortune magazine hailed Holmes as the next Bill Gates or Steve Jobs, both stocks modestly beat the S&P 500 Index. Their operations are far broader than just blood testing, and the analysts and investors who follow them care more about buybacks and dividends than “being able to do good,” as Holmes put it to Fortune.

Yet the evaporation of a huge threat to a big slice of their business may have liberated both from a sort of valuation overhang. Others could experience something similar, should their single-horned challengers stumble. It’s too late, of course, for newspaper publishers and recorded-music companies. And traditional automakers like General Motors might need more than a setback to Google owner Alphabet’s self-driving car ambitions to regain their glory days.

Among the more apt examples is Regus, the Luxembourg-based operator of 3,000 business centers around the world. WeWork, its hip rival, targets the millennial startup generation with free beer in shared offices.

Regus is growing net income at about 6 percent a year, reaching an estimated 169 million pounds ($244 million) next year, according to analyst forecasts on Eikon. It sports a roughly $4 billion market cap. Contrast that with WeWork, which raised $430 million in March at a $16 billion headline valuation.

WeWork’s ambitions seem to go beyond the normal corporate wish list. To ensure its office spaces aren’t simply bland facsimiles of Hilton Garden Inn business centers, it employs designers – 150 of them – who create environments for fitter, happier and more productive employees. “We provide everything you need to make a life, not just a living,” it says.

Regus may never be able to replicate the cool factor of WeWork. And plans at the firm founded by Israeli entrepreneur Adam Neumann to expand into residential living may warrant a premium to dowdier Regus. But as the unfolding Theranos story suggests, should WeWork fail to deliver Regus shareholders may just be the lucky beneficiaries. They may not be the only ones to see a silver lining if Breyer’s 90 percent unicorn extinction rate comes to pass.

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