Followers of Elon Musk must have known that the Tesla chairman and chief executive’s controlled performance during the company’s Aug. 1 earnings conference call — in which he apologized for insulting two Wall Street analysts on an earlier call and generally kept his emotions in check — wasn’t sustainable.
Those expecting Musk to pop another seam were proven right on Tuesday. That’s when he launched a stock market frenzy by announcing, via Twitter, that he is considering taking the electric vehicle company private at $420 a share, a premium of more than 22% over its closing price the day before, adding: “Funding secured.”
Tesla shares took off, trading was suspended for an hour and a half, and by the day’s close they had gained 11% on the day to $379.57 a share.
At Wednesday’s open, questions were swirling about whether Musk was for real, whether he really had funding for a buyout that could cost $60 billion or more — making it the largest such buyout ever — or whether he was toying with investors, especially short-sellers who lose money when a stock goes higher. If he was floating a vapor deal, especially if he doesn’t really have secure funding, he could be vulnerable to huge lawsuits from investors and a sharp inquiry about stock manipulation from the Securities and Exchange Commission.
The most important questions, however, concern what Musk and Tesla would gain from returning to private ownership after having been public for more than eight years, during which the company has raised more than $5 billion from the capital markets.
We think that, if anything, going private increases the risk that Tesla will disappoint its followers, especially buyers of its cars.
Yes, it’s likely that a private Tesla would be relieved of most of its public disclosure obligations. The company would probably be able to cease making some of its quarterly and annual public disclosures, which are typically scrutinized by investors and analysts with the intensity of Talmudic scholars. But it probably couldn’t go completely silent, as some of its public debt would remain outstanding. Moreover, Musk’s speculation that its current shareholders could continue to invest through some sort of pooled fund raised the possibility that the SEC might consider it still under a public disclosure mandate.
It’s certainly the case that Tesla would no longer be subject to the benchmarking of a public share price. That’s important because the real-time judgment levied by the stock market seems constantly to get under Musk’s skin. “The reason for doing this is all about creating the environment for Tesla to operate best,” he wrote in a message to employees issued shortly after his going-private tweet.
In the message, Musk said that the “wild swings” in Tesla’s stock price can be “a major distraction” for employees, who receive stock as part of their compensation, and further that short-sellers as a group “have the incentive to attack the company.”
There’s not much evidence for the first assertion. It’s not as if Tesla’s line workers spend their days with eyeballs fixed to CNBC screens; they seem more concerned about safety conditions on the factory floor, which have come under intense criticism. The Tesla employee who seems most distracted by the stock price is Elon Musk, as shown by his relentless grousing about short-sellers.
The fact is, healthy companies and their CEOs almost never complain about short-sellers. It’s much more common for CEOs of troubled companies to blame short-sellers, as a distraction from the truth. That’s because there can only be two outcomes when shorts pile into a stock. Either they’re right about its latent problems, in which case the problems will come out sooner or later (case in point: Enron); or they’re wrong, and the shorts themselves will pay the price, big time.
In other words, a healthy company will wave off attacks by shorts. A healthy company also will know that a large short position can presage a bull run, because eventually short-sellers will have to cover their positions, which requires buying. That’s especially so if management knows that the underlying business is healthy and thus there’s nothing to the shorts’ attacks. If anything, Musk’s paranoia about short-sellers helps to makes the shorts’ case that Tesla’s business is in trouble.
On the opposite side of the ledger, Musk may come under much more intense pressure for Tesla to perform once it’s controlled by private investors. We’ve often repeated the adage that for a company, “private investments are expensive money but smart money, while public shareholdings are cheap money but dumb money.”
Tesla and Musk have, on balance, benefited from the stupidity of the stock market. The company currently has a public market capitalization of $63 billion (the going-private transaction at $420 a share would jump that up to more than $70 billion). That’s more than General Motors, Ford or Fiat Chrysler, even though those traditional automakers sell millions of vehicles a year and Tesla’s output as of 2017 was in the tens of thousands.
Despite a string of dismal financial reports, Tesla shares, although range-bound between roughly $250 and $380, are still relatively buoyant — reflecting faith, so far unfulfilled, in Musk’s ability to deliver on his production promises.
Having to make regular public disclosures imposes a level of discipline on any public company that it may not have while operating behind closed doors. On the other hand, Musk often has operated Tesla as if it’s a private company anyway. The best example of that was his 2016 merger of Tesla with SolarCity, his financially strapped solar energy installation firm.
The transaction made no financial or strategic sense for Tesla, but it relieved Musk of the burden of SolarCity. An independent board of directors would have nixed the deal out of hand, but Tesla’s board, as we pointed out at the time, was not independent in any conventional definition of the term. The seven Tesla directors then included Musk and four others close to him: Brad Buss, the former chief financial officer of SolarCity; Antonio Gracias, a member of the board of SolarCity and Musk's company SpaceX; venture investor Stephen Jurvetson, a board member of SpaceX; and Kimbal Musk, Elon Musk's brother. The board approved the deal.
The Tesla board, which now has nine members, said Wednesday that it has been in discussions with Musk about going private and will now turn its attention to the details, such as they are. But is it really “independent”? In addition to Musk, his brother Kimbal, Gracias and Buss, it now includes publishing executive Linda Johnson Rice, Murdoch family scion James Murdoch, technology investor Ira Ehrenpreis (who also invests in SpaceX), and auto and tech executive Robyn Denholm. Jurvetson is on a leave of absence because of questions raised about his personal behavior at his venture firm.
Although Musk owns only about 22% of Tesla stock, he doesn’t seem to have been subject to any control from his board of directors, or they would have placed a gag on his Twitter account, the source of offensive and in at least one case potentially slanderous remarks about those he thinks have thwarted him
One of the enduring problems with Tesla has been Musk’s apparently short attention span. Job one for the company is getting its new Model 3 sedan rolling off its production line at the mass-market price of about $35,000 that Musk has long said would signify the company’s maturity as an automaker. It’s still struggling to achieve the promised output, but Musk keeps interjecting new projects into Tesla’s portfolio, such as a sports car and semi-truck said to be in the offing, though without firm deadlines. The massive complexity of taking the company private now won’t help to focus his or anyone else’s attention on production.