Tesla stock (NASDAQ:TSLA) is still feeling the aftermath of Elon Musk’s bombshell on Tuesday, when he announced on Twitter that he is considering taking Tesla private. Tesla’s shares were already on a roll prior to Musk’s update, climbing 5% amidst reports that a Saudi Arabian sovereign wealth fund has taken a $2 billion stake in the company earlier this year.
Musk’s announcement was met by a surge in the company’s stock price that resulted in TSLA closing the day up 11% and trading at $379.57 per share, as Tesla’s investors speculated about what could happen to shareholders if the company does go private. The CEO clarified in later tweets that current shareholders of the company would be able to keep their positions even as Tesla becomes private. Before markets closed for the day, Tesla also shared a letter that Musk wrote to employees describing his reasons for his initiative to privatize the company.
It remains to be seen if Tesla would be able to hit its $420 per share target, considering that the company’s stock has a notorious reputation for being incredibly volatile. Nevertheless, Baird Equity Research recently published a note stating that Tesla would hit and likely overshoot the $420 mark. In the note, analysts Ben Kallo and David Katter noted that the company’s shares would probably go even higher as investors demand a steeper premium than $420.
“We think some shareholders may demand a steeper premium than the $420 mark, and we think shares could move higher as shorts cover and investors demand a higher price to go private. Based on our recent conversations with investors, we think shareholders will demand a higher price for a potential go-private transaction, which could cause shares to trade above $420, particularly as shorts may cover positions. We expect the stock to move higher as the story develops,” the analysts wrote.
Elon Musk’s letter to employees about Telsa’s possible privatization mentioned that the company works best when it is focused on executing its goals and pursuing its long-term mission, and in a setup when “there are no perverse incentives for people to try to harm what (the company is) trying to achieve.” Musk, who has never been one to back down from what he believes are attacks against his companies, has found himself at loggerheads with critics multiple times over the past few months — in interactions that sometimes end with Musk and Tesla being worse for wear.
Taking the company private seems to be a move that is at least partly motivated by a desire to get rid of short-sellers and other entities that are betting on Tesla to fail. By making Tesla private, Musk is forcing the company’s staunchest short-sellers and critics to cover their positions. Without short-sellers around, there is far less incentive for Tesla’s critics to keep attacking the company.
One such allegation that could have been avoided easily had the company been private is a recent bear thesis that emerged following Elon Musk’s announcement yesterday. In the aftermath of Tesla’s 11% surge, speculations emerged suggesting that Elon Musk probably did not consult the board of directors about his plans of going private. This particular thesis was curbed promptly by Tesla when it released a statement from six members of the board confirming that they are fully aware of Musk’s privatization efforts for the company.
“Last week, Elon opened a discussion with the board about taking the company private. This included discussion as to how being private could better serve Tesla’s long-term interests, and also addressed the funding for this to occur. The board has met several times over the last week and is taking the appropriate next steps to evaluate this.”
If Tesla pulls off Elon Musk’s initiative to make the company private, it will go down as the biggest buyout in history, and by a wide margin at that. At Elon Musk’s $420 target, Tesla would be privatized for about $70 billion. The current record is held by TXU Corp., which was bought by Kohlberg Kravis Roberts & Co for $31.8 billion back in February 2007.
Tesla shares are up around 22% this year, outperforming the 7% gains of the S&P 500 and the 3.7% gains of the Dow Jones Industrial Average.
As of writing, Tesla shares are trading -1.33% at $374.54 per share.
Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.
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I'm confused.
As soon as a successful shareholder vote is held, Tesla will offer to buy shares at $420 for investors who opt out of continuing to own stock
Or shareholders have the option of holding onto their shares and access future gains which may be above the $420 evaluation at some point.
The incentive is that shareholders will have an opportunity to buy or sell shares every 6 months.
Notice that due to the profit sharing package all employees also become shareholders.
This type of corporate structure may work out well for both Tesla and for long term investors.
I'm confused. Is Tesla offering to buy shares at $420 for investors who opt out of continuing to own stock? Or are they saying they will go private when the stock reaches $420?
The main thing to remember here is that there are no "offers" at all, yet. The idea of privatizing Tesla has merely been "floated" for consideration.
Since it's currently a publicly traded company, the board and a majority of the shareholders would all have to agree on such a transition. And that agreement, along with the funding, could radically change any conditions of the privatization. So while the initial sale price of privatized shares of Tesla was floated at $420 per share, even if it were approved (which is still a ways off), that price target could deviate significantly from the initial discussion.
IF it were to go private, it sounds like all of the Tesla employees (since many of them get company stock as part of their compensation packages) and public shareholders would have the option to sell their shares to the new investors at the agreed-upon price (which probably won't be exactly $420 per share, but could be close to that) or remain as shareholders after the stock goes "private" (or even a little of both). After the transition, as shareholders of a privately held company, we would have far less visibility and "say" in how the company operates, but if you trust the board and vision of the company, it could alleviate a lot of the current negative pressures on Tesla from the largest group of short-sellers in the history of the market who are all betting against Tesla and doing all they can to help the company fail, including attacking the company on social media, stirring up crazy conspiracy theories, trying to tarnish the brand, and filing costly lawsuits against the company in a transparent attempt to sabotage their chances for succeeding. That would all pretty much go "poof" once they were private, as the shorts would all be forced to cover their options or other short-selling mechanisms and would lose heavily on those bets.
Some current public shareholders would prefer that individual shareholders be grouped into a management fund if/when the company would go private, thereby giving them an "inside advocate" with better visibility and access to information on the company's plans, milestones, and performance metrics than we would have without the benefit of a fund management team to shepherd our shares and our (literally) vested interests in the company. That fund would also, theoretically, allow the collection of individual owners to have more a collective say on the direction of the company due to pooling all of those small holdings into a large collection of Tesla shares that could theoretically represent a significantly influential block of shares. But whether or not that would happen all remains to be seen.
So those are the options. You could always sell all or some of your shares, or you could go private with them as a tiny fractional private owner, or you might have the option to be aligned with a group/management fund for your shares, or some combination of these...if such a deal gets approved by the board, and approved by the voting shareholders, and approved by the SEC, and fully funded at the required price by the private investors.
So basically...stay tuned!
[Nota Bene: These are the facts as I understand them, but I'm neither a broker nor a financier, so if I got any of my facts wrong, I encourage anyone with better information to set me straight...]
