Published on August 8th, 2018 | by Michael Barnard0
Saving Private Tesla: 7 Questions
August 8th, 2018 by Michael Barnard
On August 7, 2018, Elon Musk tweeted a game changer. He indicated that he was working toward taking Tesla private and had secured the funding to do so. It’s fairly easy to guess from this five-day view of Tesla’s stock price when the tweet dropped.
TSLA trading was halted briefly with the significant rise in market capitalization and volume.
Which leads to a set of questions. Is Elon Musk serious? Is it a good idea? Is announcing it on Twitter legal? Who wins and who loses? How will individuals invest in Tesla after this? What could stop it? What’s next? Let’s take these one by one.
Is Elon Musk serious?
Yes, he is. At around the same time as he tweeted, an email was sent to all employees and then later posted to the corporate blog. It outlined the status, the reasons, and for IPO- and Silicon Valley-savvy employees, provided a great deal of reassurance that this was focused on moving the company forward.
Is it a good idea?
Yes, I think it is. Before seeing the email/blog post, I pointed out the four advantages I saw to going private.
First, it’s good for current investors. If they own shares now, they can cash out at 20% above start of Aug 7, 2018 value. Furthermore, TSLA was already close to its historic maximum after the quarterly analyst call and Tesla’s achievement of the key 5,000 cars per week target. Investors, whether they were recent or long-term holders of TSLA shares, will do very well by this. If they had bigger dreams, they can retain their shares in Tesla after it goes private.
Second, it eliminates the Tesla shorter nonsense. There will no longer be that subset of market-driven venality creating a churn of negative PR for Tesla. There will no longer be any short selling opportunity for shorters, so they will turn their sights to other targets and stop paying attention to Tesla. The negative press won’t stop, as shorters were well-aligned with organizations and individuals seeking to impede electrification of transportation and the inevitable shift to an electric economy. The Koch Brothers, the oil majors, and the Libertarian “think” tank content providers will continue to fund and churn out various pieces of nonsense. But they won’t be aided and abetted by the shorters and the shorter-oriented press.
The third is that this would make Tesla a $70 billion private company, which is well under the largest. Both Cargill and Koch — there’s that name again — are well over $100 billion, and Koch is increasingly stuck with stranded assets, hence its ongoing, overlapping campaigns against global warming, renewables, and electric vehicles. Private funding that Koch has lined up is looking for exits in many cases, and shifting to a privately owned Tesla would make sense. That’s part of the story of the $2 billion+ position the Saudi Arabian sovereign wealth fund has in Tesla. The size of the private company, in other words, wouldn’t be a hindrance to raising capital or funding debt. It will increase the cost of acquiring capital and debt according to some analysts.
The fourth is that Musk has significant experience running a successful private corporation — SpaceX. Private is arguably much simpler than public, and if you don’t have to deal with public stock offering compliance, then a subset of your overhead diminishes. One report references a 10% saving there. Instead of quarterly analyst calls, a smaller number of institutional discussions and governance suffice.
These are reasonably well aligned with Musk’s reasoning in the email/blog post. They are obvious in retrospect, bold in strategic execution.
Is announcing it on Twitter legal?
The consensus seems to be that it is. The question comes down to intent and accepted medium. If the intent was solely to pump and dump the stock, then it’s illegal. If the intent was to clearly tell the markets and investors about the intent to take Tesla private, then it is legal assuming the medium is appropriate.
And while many aged former SEC officials are looking somewhat aghast at the choice of Twitter as a medium, the consensus appears to be that as Musk regularly imparts corporate strategy via Twitter, as his following is 22.9 million and as the press watches his Twitter feed like a hawk, this is an appropriate medium. The medium would have to be one that is provably intended to hide the information, not ensure its broad and rapid dissemination. No one can claim that they weren’t given the opportunity as investors to know about this plan.
And given the other preparations that have been made, Tesla’s legal team probably signed off on Twitter as the vehicle for this.
Who wins and who loses?
As stated, investors win. [Editor’s note: However, some investors who wanted to hold the company for much longer but also wanted the high liquidity public stock ownership offers can lose, especially if they feel forced to sell at a lower price than they could have if they held onto the public stock. Shareholders of private Tesla will reportedly have the opportunity to sell shares once every six months or so, but details regarding this and how the company will be valued have not been disclosed.]
Employees of Tesla win as well, I think. The drumbeat of negative “news” goes down while they continue to be equity holders in the company. Their personal wealth goes up just as much as any other investor’s.
People who are focussed, as I am, on the transformation of our economy from technologies causing pollution and global warming to much more benign technologies are winners as well. Musk’s blog lays out the reasons why this is good for the management and future of Tesla, and Tesla is leading the electrification of transportation disruption, which is sweeping the automotive industry. It’s part of his master plan, and this assists with that master plan.
Shorters lose. Bigly. They have already lost billions on Tesla, but shorting has wins and losses and it’s a matter of timing. The biggest shorters with the longest positions have lost the worst, and the shorters who bet on the most recent quarterly analysts call lost large as well. But Tesla is a volatile stock, and there were undoubtedly many counter-investors who did just fine taking short positions at the right time for the right duration. And as has been shown, many of them have excellent communications channels with the Tesla-focussed press to gain the knowledge of when to make their bets. That’s all gone now.
The subsets of the media which received a ton of eyeballs from a steady stream of anti-Tesla news and posts — Seeking Alpha and Business Insider are the most obvious examples — will lose as well. With shorters and day traders no longer obsessing second by second over TSLA, eyeballs for those sites will diminish. (Editor’s note: That could also mean that eyeballs on CleanTechnica will drop. We are not stressed about that, since our core aim is to help society help itself, however that may be as it relates to cleantech news, analysis, and commentary. We only cover Tesla because of its important role in the cleantech transition. You can also support us via a monthly subscription if you are concerned about our revenue dropping. 😉 😀 )
Arguably, stock market analysts, especially the ones on the quarterly calls, lose. Tesla is a halo stock. Being on their calls is a status symbol. Tesla is sexy. If those calls go away, it’s back to a mind-numbing round of discussions of various less interesting company details. But that’s their job. Small loss for them really.
How will individuals invest in Tesla after this?
It will still be possible via a private investment vehicle that Tesla will set up. They need to do this for their employees. Musk asserts that retail investors will have a choice to be bought out or stay in the private investment vehicle. There are various mechanisms for this, but the specific one used is a matter of speculation at this point.
What could stop it?
Okay, that requires some explanation. In 1985, Revlon was sold with the aid of a junk bond king and saddled with $2.9 billion in debt. This caused Revlon grief for years, but what is relevant is that it is a case which has established fiduciary duty for Boards of Directors which require competitive auctions in situations like Tesla’s.
In other words, the Tesla Board of Directors has a legal obligation to ensure that taking Tesla private with the funding Musk has lined up is in the best interests of the shareholders. That’s not Tesla’s best interest. That’s not Elon Musk’s best interest. That’s the shareholders’ best interest.
Now, tweets like Musk’s don’t appear magically without a lot of planning and preparation. He’s on the wrong coast of the USA for that. This has undoubtedly been a subject of strategic discussion with the Board for months and possibly years. Equally possibly, the Board could have already discharged its fiduciary duty prior to the tweet coming out.
If not, then they will be required to basically auction the company off to the highest bidder, regardless of any structures and funding Musk has established today. Watch this space.
This isn’t approved. This has to go to stakeholders for their approval. That will take a bit of time to set up, as voting for shareholders isn’t electronic and formal mechanisms for this are specified under SEC regulations.
And if the Board hasn’t already performed its fiduciary duty and ensured that competitive funding alternatives lead to something in the best interest of the shareholders, that will take a while as well.
In the meantime, the shorters will undoubtedly be attempting to find ways to spin this and short Tesla stock until it disappears entirely.