Tesla CEO Elon Musk announced in the now-famous “420” tweet that he was considering taking the company private.
The news has sent shock waves through Wall Street, cleantech, and zero emissions vehicle circles. Why would a private Tesla be preferable for Musk and other Tesla insiders? Is the reason simply to maintain more capital efficiency? And does a possible private future for Tesla foreshadow an upcoming stock trend for cleantech in general?
Here are the August 7, 2018 Tesla events in quick succession:
¤ Musk tweeted out that he had secured funding for the buyout but offered few details.
¤ The Nasdaq halted and then resumed Tesla stock trading.
¤ The company released its “Taking Tesla Private” letter, indicating that a final decision had not been made about going private.
What’s up behind the scenes with the most famous cleantech company of all?
Issues with Public Companies — First, a Closer Look at Tesla
A privately held company is, in most cases, owned by the company’s founders, management, or a group of private investors. A public company, on the other hand, is a company that has sold all or a portion of itself to the public via an initial public offering (IPO), meaning shareholders have claim to part of the company’s assets and profits.
Public disclosure is different in public and privately held companies. In the US, a public company trades on a US stock exchange and is required to file quarterly earnings reports with the Securities and Exchange Commission (SEC). This information is made available to shareholders and the public.
Participating in public markets is not as beneficial for many firms as it may seem on first glance. In the case of Tesla, being in a public market means that its capital efficiency, which is “the ratio between dollar expenses incurred by a company and dollars that are spent to make a product or service,” has been externally imposed by the market. Public companies build a recognizable product that require capital to expand production, but the market is not always thinking 5 or 10 years out, as Tesla seems to be.
In Tesla’s case as a public company, the quarterly cycle is at least partially pressuring Tesla to resort to short-term thinking rather than planning for its long-term future. Because Tesla’s most valuable asset is its brand, producing cars quickly to maintain consistency with stated production targets may hurt the Tesla brand. It could make the company focus on stock prices in the short term rather than quality and reliability in the long term. It could also pressure or practically force Tesla to pause financing for faster growth in order to show a profit and ease the public market’s concerns.
It would be quite different if Tesla were a private company. Private companies are not required to disclose their financial information to anyone, since they do not trade stock on a stock exchange. If the Model 3 production line were to fall short of goals as a private company, for example, news of the gap might not reach the media or the Tesla tifosi. Furthermore, Tesla’s management could take on more debt with less scrutiny in order to more quickly get to a production capacity of 1 million — or 10 million — vehicles per year.
How the “Going Private” Story is a Stock Trend for Cleantech
Are all privately held companies small? Not at all! The number of very large, privately held companies that made the Forbes 2017 list is pretty amazing. Uber? Private. Mars, Publix, Fidelity, Bloomberg, Wawa, Petsmart, Edward Jones? You guessed it — private. What about the $115 billion conglomerate run by the Koch Brothers that controls a variety of industries, such as refining, chemicals, forest and consumer products, fertilizers, polymers, and so much more? Private.
Cleantech companies, like others, tend to rely on a variety of funding sources. Cleantech companies often also deal in volatile worlds. Their financial viability may rely on the continued presence of subsidies, renewable mandates for utilities, unpredictable changes in the costs of cleantech as well as dirty tech competitors, the pace of their niche market growth, etc. Many cleantech startups deal in these factors, known as intangibles, which creates a grey area around traditional production expectations and future potential. That risk can discount, while the market factors that support their business today could, on the other hand, inflate their value. Some would argue that intangibles greatly disguise the actual cost of a cleantech startup’s worth. All of this uncertainty — especially if it turns to negative spin around a specific company — can make privately held company status more appealing for them.
Public trading is difficult for firms that rely on intangibles, especially when they are small and young. If a cleantech startup centers its profitability goals on intangibles, it is much more difficult for its management to convince investors that it will make good use of its money. This is one factor that has pummeled solar company stocks in recent years, and, indeed, the largest solar panel producer on the planet took notice and went private last year. It’s reported another large on may go private soon.
In the case of the recent Tesla talk of going private, many questions are swirling about whether the necessary funding has actually been secured to permit the transition from public to private company as well as other matters. Morgan Stanley’s Adam Jonas notes that the taking Tesla private move assumes either: (1) it’s on the verge of generating self-sustaining cash flows, or (2) it can tap into a range of strategic sources of capital not previously at its disposal.
The $420 share price Musk indicated as the threshold for private conversion would be a 23% premium over the market price prior to his announcement. Notably, the Tesla stock price must be above $360/share by March 1, 2019, the date for the conversion price for $920 million of its convertible debt due if that debt is to be paid in stock rather than cash. If the stock price does not cross (and stay above) $360, the company will have to repay bondholders with cash instead of shares. If the stock does stays above this level, then Tesla will likely not need to tap the capital markets for additional funds over the coming quarters.
All of this is a material disclosure, regardless of whether or not it’s made on Twitter or elsewhere, and the investing public has the right to know if Musk does indeed have funding lined up for going private. Indeed, the SEC has made subsequent inquiries into Musk’s tweets. The regulator is reportedly looking into whether Musk’s statement on funding was truthful and why the disclosure was made on Twitter. It seems there is still a strong divide between people who believe Musk and those that don’t.
Stock Trends in Cleantech — The Frontier for Natural Resources
It is not surprising, therefore, that, for cleantech firms, participation in public markets and riding the waves from their disclosure requirements is likely to be quite difficult. Upcoming stock trends for cleantech companies point to preference working with a handful of private equity investors. It makes sense. Isn’t it easier to provide detailed information to individuals who have specialized knowledge that enables them to assess a firm’s investments in intangibles? This evolution of cleantech firms and the cleantech market overall has many implications, especially when looking at the cyclical nature of the market.
A decade ago, many investors won in the cleantech market due to online lending, cloud storage, and on-demand services. Now, as consumer and cloud investors turn to what’s sometimes called “Frontier Tech,” dazzling presentations and founders’ charisma are motivating factors to turn the seemingly impossible into what’s possible through science.
But there’s a practicality underlying private investments, of course, and that means digging into technologies underpinning new batteries, photovoltaics, wind turbines, superconductors, and power electronics. The cleantech startups must prove their business models and their capacity to take a product or factory from 1/10th scale to full scale. They need to offer plans and the ability to execute in order to build out factories, supply chains, and distribution channels. Stock trends in cleantech are leading to private company holdings, yes, but investments will continue to require core technology development as a small piece of an otherwise complex, expensive operation.
The “Taking Tesla Private” letter stated that no final decision had been reached by the Tesla board, but they did reveal that they were contemplating how to create the environment for Tesla to operate best. What was termed “wild swings” in Tesla’s stock price distracts the Tesla labor force, “all of whom are shareholders.” The letter concurred with many analysts who have pointed out that the quarterly earnings cycle puts “enormous pressure on Tesla.” The letter also referenced the “large numbers of people who have the incentive to attack the company.”
Robert Mintak, CEO of Standard Lithium, a US-based lithium company, outlines the positives for Tesla should it become a privately held company.
“The benefits of Tesla going private to the EV and energy storage space (lithium-ion battery) cannot be underestimated. The global transition to EV’s will happen with or without Tesla but the success of Tesla is crucial today in so many ways to the entire battery material supply chain. Assuming that the funding commitment is real, that huge vote of confidence in Tesla and by extension, the EV space should resonate across the entire sector including lithium battery material suppliers.”
Cleantech can be capital intensive. Whether it’s driverless cars, AI chips, or quantum computing, large amounts of capital are needed to demonstrate a competitive business and then also keep it competitive. Tesla differs from other cleantech companies due to Musk’s visionary approach to certain business practices, the company’s proven ability to turn technology development into revolutionary transportation, and its positive brand associations, among other factors.
Okay, maybe announcing that Tesla’s next roadster will feature actual SpaceX rocket thrusters was a bit over the top for some private investors. Maybe Musk will have Twitter problems even within a privately held company. Then again, so much of what Tesla has accomplished has ushered in habitus for sustainable transportation. Cleantech startups are watching Tesla’s every move, including the possible decision to enter into privately held status.
Bottom images courtesy CleanTech San Diego
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