Published on August 15th, 2018 | by Maarten Vinkhuyzen0
Pros & Cons Of Tesla Going Private — #TeslaPrivate
August 15th, 2018 by Maarten Vinkhuyzen
Written by Zach Shahan & Maarten Vinkhuyzen
Since Tesla CEO & Chairman Elon Musk tweeted out a note that he was “considering” taking Tesla private, my mind has been racing through the pros and cons of such a change. Add me to the thousands or millions of others in this same boat. While we’ve hosted many an interesting discussion about the pros and cons, however, we haven’t actually published an attempt at a comprehensive summary of these pros and cons.
Actually, we haven’t seen such an article published anywhere.
After considering the matter at length, below is an article considering the pros and cons for Tesla itself (including its mission to accelerate the transition to zero-emissions transport and sustainable energy) as well as for TSLA shareholders. That said, we surely missed some points, so feel free to chime in down in the comments.
The FUD — my God, the FUD!
Smear campaigns centered around fear, uncertainty, and doubt (FUD) are nothing new. This old tactic surely dates back thousands of years, and it is a full-grown cottage industry in certain segments of society. I thought it — combined with poor media coverage and lousy understanding of Tesla — had been annoying and something that needed a bit of debunking in years past, but it has been totally off the rails this year. Actually, perhaps more accurately, it has come across as much more organized and influential.
Overall, there are a lot of powerful people and businesses threatened by Tesla, so Tesla smear campaigns and hilariously stupid (but effective) FUD are not going to go away whether Tesla is private or public. However, being on the stock market exposes Tesla to a great deal of financial market manipulation, which means a continues formula of FUD, FUD, FUD.
This FUD hurts Tesla’s reputation with customers, but it also hurts Tesla employee morale and recruitment, analyst ratings, and Tesla’s ability to raise money if needed (and, especially, raise it cheaply).
CleanTechnica commenter Carney3 summarized it well earlier today:
“The stock price directly affects the company’s ability to borrow money and sell bonds. It personally affects the financial situation of the employees, and morale matters. If the price gets low enough, it can begin to harm recruitment, retention, ability to get favorable (or any) deals with suppliers, and even harm sales as potential customers begin to fear for the company’s survival and the availability of parts and service. This in turn can create a self fulfilling prophecy and death spiral. This is what happened to Fisker, and since you mentioned Apple, what nearly happened to Apple as well.”
Simply extricating itself from this parasitic and harmful stock market and the related financial press could be a big boon to Tesla staff morale and productivity, Tesla’s C-Suite focus, and the Tesla brand among normal consumers.
How much will going private dissolve the Wall Street + financial press hit jobs? That’s hard to say, but presumably quite a lot.
Quarterly targets vs. long-term planning
It is nothing new to Tesla — short-term, quarter-to-quarter thinking has plagued public companies for decades. Such thinking kills long-term vision and planning. It’s a particular challenge for a rapid-growth company like Tesla, though, since the company is focused on pumping as much revenue as possible (and perhaps extra financing) into new factories, new stores, new service centers, new product development, etc. The stock market is a bit impatient and rags on companies that do this quarter after quarter, year after year, even if it’s clear that the company’s assets and market share are growing all the time.
Our article “Why Tesla Is A Potentially Very Profitable Company — Tesla Bankwuptcy Explained, Part 2” explains this in greater detail, showing how Tesla invests revenue plus new capital into the company’s next products. All the analysts know the theory of the “contribution margin.” Nevertheless, many keep reporting on “Tesla losses” with a number for every Model S or X sold. Instead, they should explain the difference between a profitable product and a profitable company.
As a private company, Tesla will likely feel much more empowered and comfortable fully playing the long game, maximizing 10-year growth and development instead of quarter-to-quarter analyst expectations.
As a private company, Tesla could feel the freedom to concentrate its reporting more on the progress of its long-term goals and projects, and less on the quarterly finances. Many thought the questions asked by Galileo Russell on the Q1 conference call to be the most interesting and important questions. Every quarter, we could have a conference call like that, basing the discussion around the Tesla Progress Report. The earnings report can just be filed by the SEC for the few nerds who can’t help themselves, like Maarten Vinkhuyzen.
Contrary to popular belief, getting new capital, either equity or debt, is probably easier as a private company.
Hostile takeover? Meh
I can’t really say how much validity there is to a concern about a hostile takeover, but this has been widely discussed and doesn’t seem to be an impossibility. Basically, the concept is that an outsider without the best intentions or approach in mind could slowly accumulate shares of the public company until that outsider is the ultimate insider and can thus do what it likes to the firm. There has been some concern that this is what Saudi Arabia’s sovereign fund was commencing.
The idea is that some group that wants to destroy Tesla can buy a controlling interest and then tank the company, that it can create a bankruptcy via mismanagement. But this would be destroying an investment of $50–70 billion and it is extremely unlikely that any group thinks the demise of Tesla is worth that much money.
Another point to consider for a hostile takeover is Musk. If an outsider wants to buy Tesla to just slow it down or use the technology in its own industrial business, will Musk stay with the firm? What is Tesla worth without Elon Musk. Again, this would be a huge destruction of capital, so is very unlikely to happen.
To summarize, we don’t personally buy that theory, since we think the rich Saudi Arabians just want to remain rich for decades to come and see Tesla as one key avenue to help them diversify their assets, hedge a bit, and multiply some of their cash money in the years and decades to come. However, we’ve got an open mind and are including it here because of the thin possibility and because of how much attention some people are giving this.
In case you’re still confused about how this fits into the “Pros” section, the idea put forward regarding private ownership is that the shareholders that take the company private will become more fixed in place and Tesla will gain the right to refuse any subsequent share purchases for any reason its board of directors see fit. (That’s not the case on the stock market, where anyone can buy, buy, buy as long as they have the money to do so.)
By the way, a hostile takeover from Saudi Arabia might not even be a legal possibility.
3) Saudis cannot own more than 50% for 2 reasons I see. 1) Change in control likely disallowed by bond covenants and 2) US gov may limit foreign ownership of strategic assets, tho not clear if this is case here.
— Andrea James (@AndreaSJames) August 14, 2018
So, on to the next topic.
With more focus on the progress of Tesla’s goals and less on the results of the past quarter, a better evaluation of the choices the management has to make is possible. With the number of shareholders Tesla will likely have, directly or indirectly, through a “Special Purpose Vehicle,” Tesla will likely be forced or choose voluntarily to keep producing quarterly reports. But these can be an addendum to the progress report, which is the really important report for the shareholders that are looking at the 2–5 year horizon and the 10–20 year goals.
Manipulated and misleading public “oversight” is a problem, but legitimate, “crowdsourced,” insightful public oversight can help a company. Tesla is likely better now as a result of some oversight from the public market. Having some stock market standards forced up it has likely helped the company to be more efficient and more cautious at times. Less scrutiny from the current analysts will produce less information in the press about Tesla’s financial results, which may have some downsides. The 10–20 largest shareholders have their own analytics departments, but the smaller shareholders are mostly dependent on the reporting in the financial news media.
Less liquidity for shareholders
This is especially a problem for retail investors. The lack of liquidity could be a major problem that forces a lot of us “little guys” out of the stock. Aside from pushing out people who can’t necessarily hold until the next time there’s an opportunity to sell, it may also be impossible or very difficult to increase Tesla shares. Again, that hurts little guys who can only add shares gradually as they have extra cash on hand.
Less free publicity
The amount of free publicity a share gets is often one of the main reasons for a company to go public. With its tweeting CEO and groundbreaking products, this might be less of a problem for Tesla.
There is no rational alternative for the exuberance of share valuation of popular stocks on the markets. The bean counters charged with determining the value of the shares traded in the closed market will likely be too low, and grow more conservative with the passing years. That could create the chance of an exploding share price at the moment of re-entering the public market, and the IRS asking why the share price was so artificially low the preceding years.
It’s unclear if Tesla would be more or less open with certain information as a private corporation. Whereas Tesla is forced to share some numbers as a public corporation, it is also hesitant to share things that could be spun negatively by people who want to scare the market and push down the share price. Without any pressure on the company’s valuation and thus workforce and shareholders, Musk might be more inclined to share monthly sales data, product development, factory plans, and so on. Or not. Before the IPO in 2010, Tesla did share more sales and production data with the public. It stopped doing this because of the inability of the press to interpret the figures correctly. If I get another opportunity to ask Musk some questions before the privatization possibility moves forward, perhaps I’ll ask him about this.
Addendum: The following video clip is one of the best I’ve seen in the major press about this topic. The analyst believes Tesla is better off public, but doesn’t go very far explaining why. More importantly, he highlights that the real story is that Saudi Arabia wanted to invest for a while and got brushed off by Musk, and that there are great signs of value that are being more or less ignored amidst all the media FUD bonanza around Tesla. By the way, based on some of his comments, we have to wonder if he isn’t reading CleanTechnica. But considering that Elon Musk is, perhaps that’s a given. 😉