Unanswered Questions, Nosy Private Investors: Musk Decides Tesla Won’t Go Private

Unanswered Questions, Nosy Private Investors: Musk Decides Tesla Won’t Go Private

Two weeks and two days after Elon Musk tweeted plans to take Tesla private, he pulled a 180-degreee handbrake turn and de-energized the Tesla go-private circuitry. Tesla will remain a public company. What seemed a genius idea to Tesla’s CEO in early August came unglued not long after. The entirety of the go-private money apparently wasn’t there, some board members had doubts, and Musk came to realize that the current lot of pesky investors (including Tesla phanboys) would be replaced by tougher money men who’d have billions in the pot.

For now, Tesla’s main job reverts to getting Tesla Model 3s out the factory gates and into the hands of buyers, while maintaining or upgrading build quality. The Model S is nice, but the Model 3 is what you build a real car company around. Meanwhile, Tesla that climbed after the going-private tween Aug. 7 did the opposite Monday in the week of Friday’s staying-public blog post. Since this involves Musk, Tesla, tweets, and things that were then weren’t happening, there is a possibility the feds will sniff around for wrongdoing. All par for the course.

The Wall Street Journal, 8/27/18: “Mr. Musk seemed to view such a complex corporate transaction as an engineering problem he could solve—much as he had spent time pursuing the idea of a submarine to rescue a soccer team trapped in the waters of a Thai cave.”
The Wall Street Journal, 8/27/18: “Mr. Musk seemed to view such a complex corporate transaction as an engineering problem he could solve—much as he had spent time pursuing the idea of a submarine to rescue a soccer team trapped in the waters of a Thai cave.”

Going Private: a Good Idea as of Aug. 7

A long time ago and yet somehow, still in August, Musk rolled out his proposal to take Tesla private because Tesla stock was worth more than the “ultimate arbiter,” the stock market, believed. Musk’s tweet:

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

At the time, Tesla was trading at $344 a share, making Musk’s stated go-private price a 22 percent premium versus the pre-tweet price. $420 a share times Tesla’s number of shares (the market camp, or company’s worth) would have valued Tesla at $71 billion, about the same as Daimler (Mercedes-Benz) and surpassed only by Toyota and Volkswagen.

Musk said what most executives say when they want to go private: You’re no longer a slave to quarterly earnings reports, each of which should be better than the previous; as a private company, you can focus on the long term, especially if you have investors who think the same way. He was also unhappy with sniping from critics who were also short-sellers, meaning they’re betting money TSLA stock is headed down.

Musk brought in name investment companies to make it happen, including Silver Lake, Goldman Sachs, and Morgan Stanley. Silver Lake had helped take Michael Dell’s eponymous company private after a quarter-century as a public concern. (It may not have been lost on Tesla that Dell later went public again.)

Reality Sinks In: Aug. 8-Aug. 23

The New York Times, 8/26/18
The New York Times, 8/26/18

Right off the bat, Wall Street griped that Musk’s plan was – stop us if you’ve heard this before – longer on promise than detail. Musk did say the Saudi Arabia sovereign investment fund (a fund held by the country to benefit the country as a whole, in theory at least) was ready to step up and handle much of the financing. Plus, the fund already has a 5 percent stake in TSLA shares. The Securities and Exchange Commission reportedly wanted to know the baseis for Musk saying “funding secured.”

Musk liked Tesla fans who hold some Tesla stock now. He also liked the idea of savvier pro investors with a longer-term outlook. But with that comes tougher questions for the boss. According to The Wall Street Journal:

Taking Tesla private also would displace legions of small-fry stockholders—a merry band of electric-car fanatics willing to look past Tesla’s rickety finances and its struggle to master the skill of mass-producing automobiles. Taking their place would be more sophisticated investors tugging on a tighter leash.

Meanwhile, The New York Times, sent four reporters after a up-close story on Musk, Elon Musk Details ‘Excruciating’ Personal Toll of Tesla Turmoil. Musk talked about an “exhausting summer” and said, “It’s not been great, actually. I’ve had friends come by who are really concerned.” The story said Musk’s “Am considering taking Tesla private” tweet was written on an early morning drive (in a Model S) to the airport. Musk said he wanted to offer a 20 percent premium over Tesla’s then-current stock price, which would have made the go-private repurchase $419 a share, then “decided to round up to $420 — a number that has become code for marijuana in counterculture lore.” He also told The Times, “It seemed like better karma at $420 than $419.” The paper expanded on his drug use and possible consequences:

To help sleep when he is not working, Mr. Musk said he sometimes takes Ambien. “It is often a choice of no sleep or Ambien,” he said. But this has worried some board members, who have noted that sometimes the drug does not put Mr. Musk to sleep but instead contributes to late-night Twitter sessions, according to a person familiar with the board’s thinking. Some board members are also aware that Mr. Musk has on occasion used recreational drugs, according to people familiar with the matter.

Automotive News, 8/28/18: “For many investors, Tesla without Musk is like mornings without coffee: Why bother? … And yet, replacing Musk has become a hot topic in the past week …”
Automotive News, 8/28/18: “For many investors, Tesla without Musk is like mornings without coffee: Why bother? … And yet, replacing Musk has become a hot topic in the past week …”

Musk Pulls the Plug: Aug. 24

Other feedback got back to Tesla and the Tesla board. A lot of it was mixed. Some of it was picked up by the media and some of it was generated by the media in other profiles and what-if stories about Musk:

  • Saudi officials were ticked with a Musk tweet that Saudi money would be a big chunk of the go-private funds. Some sources now say the Saudis never made a formal investment offer. Even Saudi money is not infinite. The fund reportedly was considered an investment in a Tesla competitor.
  • Tesla’s board generally backed Musk. But some were taken aback by his penchant for firing off tweets at random hours that upset the market, something seen as unwise even if it’s also seen as presidential. (At least Musk doesn’t tweet in CAPS.)
  • Big Mutual funds holding large shares of Tesla stock might not be able to hold shares in a private company. That meant, for instance, that Fidelity, a big supporter, might have to unload its holdings.
  • One potential investor being lined up was Volkswagen. It then occurred to Tesla that a major investor which is basing its future on electric vehicles is not an ideal investor because it might want to share some of Tesla’s technologies.
  • Automotive News prepared and last week published a story, Could Tesla Survive Without Elon Musk? AN is the industry’s go-to publication for automotive information but it’s also Detroit- and auto-dealer centric. (The issue’s lead editorial said car subscription services such as Book by Cadillac wouldn’t amount to much unless automakers called on the expertise and and customer support of auto dealers.) The paper reported Tesla is searching for a strong number two executive who might run Tesla, possibly allowing Musk to be the Tesla visionary.

Over time, Musk came to see the negatives outweighing the positives. He pulled the plug Friday (Aug. 24) in a blog post, Staying Private. Musk wrote, in part:

Given the feedback I’ve received, it’s apparent that most of Tesla’s existing shareholders believe we are better off as a public company. Additionally, a number of institutional shareholders have explained that they have internal compliance issues that limit how much they can invest in a private company. There is also no proven path for most retail investors to own shares if we were private. Although the majority of shareholders I spoke to said they would remain with Tesla if we went private, the sentiment, in a nutshell, was “please don’t do this.”

So, Tesla ends August the way it began August: as a publicly traded company with an astounding market cap relative to the number of cars it’s selling. TSLA’s valuation is clearly based on investors’ future expectations for Tesla.