After two days of confusion, it appears Elon Musk’s plan to take Tesla private may be beginning to take shape. CNBC is reporting that Tesla’s board is planning on meeting with financial advisors next week to finalize a formal review plan for Musk’s proposal.
Musk first announced plans to take the company private midday Tuesday on Twitter. He simply tweeted, “Am considering taking Tesla private at $420. Funding secured.” The stock immediately shot up before trading was halted. The company then posted an official blog post elaborating on Musk’s reasoning for the move.
Yesterday, Tesla’s board issued a short statement saying they first heard of Musk’s plans last week and was taking the “appropriate steps” to evaluate Musk’s plan. The new CNBC report claims that Tesla’s board plans to ask Musk to recuse himself from next week’s discussion. Musk’s brother, Kimbal Musk, presumably will also recuse himself from the discussion. Kimbal Musk was notably excluded from the board’s previous statement. Elon Musk recused himself from the board’s review of the SolarCity acquisition in 2016.
“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.” – Statement from the following members of Tesla’s Board of Directors: Brad Buss, Robyn Denholm, Ira Ehrenpreis, Antonio Gracias, Linda Johnson Rice, and James Murdoch
While Elon Musk has claimed that funding is “secured” for the company to go private, he has yet to reveal financial backers. There’s a flurry of speculation surrounding the backers’ identities, ranging from Google to The Saudi Arabian Wealth Fund. Musk’s bid at $420/share values the company at $70B, excluding the company’s debt. Short sellers and skeptics alike have been rebuffing the notion that a financial backer even exists. The board’s move to formally review the bid seems to poke holes in that theory.
“What the board is doing is exactly what boards are supposed to do… They’ll evaluate the proposal from Musk and whoever is this investor and they’ll make their recommendation,” said Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management, which owns positions in Tesla.
“We’re estimating about a $20B cost to buy out the weaker shareholders, and I think they can get that money very easily,” he added. Gerber said he was shocked at the level of skepticism surrounding Musk’s deal and that his firm was confident in Musk’s financial backing.
Musk’s motivation to go private surrounds the company’s ability to think long-term, operate more efficiently and remove the distraction of a volatile stock price. While taking the company private would achieve those goals, the stock has been anything but stable since his announcement, trading at record-level volume on Tuesday and Wednesday.
Tesla’s stock was down nearly 5% during the day today and is up 2.5% after-hours on this news.
(Update: Comments from Ross Gerber were added in the sixth and seventh paragraphs)
Disclaimer: Christian Prenzler does not have a position in Tesla Inc. or any of its competitors and does not have plans to do so in the next 48 hours.
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To sell short, one has to borrow the shares that one wants to sell. The short seller must pay interest on the borrowed (and sold) shares until the buy to cover order has been executed.
To Clarify a valid stock owner whom intends to hold their position long term may allow their shares for a cost to be used by another. This other player sells the stock at the current rate with an expectation that the stock will go down. However regardless of stock going down or up the person whom borrowed the stock must repay the person they bought the stock from with a stock. While they are in this position the person is considered to be playing the market on margin and are required to pay interest against the value of their margin until it is covered. The borrower covers this margin position by buying the same number of borrowed stocks back from the market to cover their position. Shorting stock can be a very useful tool in your investing strategy, but it is quite dangerous as it can result in huge losses. Example I own 100 shares of Fabulous valued at $1000. You borrow my 100 shares to sell fabulous short at a rate of 5% and hoping fabulous tanks you hold on to it for as much as a year (highly unlikely) and so you must pay me 5% or $5000. Then say Fabulous is not so great after all and it tanks to $500 a share and you finally buy 100 shares to cover your debt to me. This means you make 50,000 and I have my shares officially back. However this also means I lose $50,000 as I could not officially sell my shares to cover get out a fabulous while on loan. On the other hand Fabulous is even better and goes up $500 per share very rapidly before the person borrowing covers their position, so they lose $50,000 before my share is officially returned to me. In practice people whom dabble in this area selling short and in loaning their stock often have standing orders to minimize losses and with computer based trading these order can be quite affective almost all of the time. However there is still risk that a condition arises where stock value changes in a big jump all at once (say bankruptcy, buyout, ...) and thus even with standing orders it does not matter as the market for that stock had a material change. This risk is compounded as the window for an event representing risk gets bigger the higher the percentage of short against a company. Why because if you need to rapidly cover your risk along with n number other people you might not be able to, which is why people often look at number of shares shorted against average number of trades per day to define how long in theory at current average transaction rate it would take for shorts to cover. In the case of standard short activity this is a fairly good metric, in the case of 30%+ of total outstanding shares being shorted this is not as accurate as the short trades themselves make up a significant number of the transactions.
So many short sellers are claiming to be profitable on Tesla this year and this is completely possible. If the trader had say borrowed the stock and sold it at say 360 and later covered their position at 300 (completely feasible this year) they would have $60 per share at the cost of say they had a 5% margin $18 per share. Yes quite lucrative and yet quite risky. However with the internet and people trading on what is seeming public news would allow many to push disruptive information to scare people to sell to drive down stock value. Equally shorts could double down and borrow even more to try and put more put more supply on the market than demand driving stock price down. So why would people do this to Tesla, well Tesla as innovative and impressive as it is - is trying to break in to a saturated market that requires ridiculous capital to even compete add on top of that these products cycles are long meaning product inception to production and selling is measured in years - if requires a new factory it is easily over 3 years during which time companies financials will well basically look horrible. This gives people an easy ability to develop negative views/ press while trying to make money selling short.
Another reason people might sell short and spread bad press. They are heavily invested in Oil and traditional manufactures or their supply chain. Historically these players bought out early on before being publicly traded to maintain status quo, which could not be done this time. They could have bought up the public shares, but this would not have stopped the company nor been a certainty to give them the leverage to slow Tesla down enough to remove the threat. However I could imagine elements from these industries selling short as a means to try and disrupt the company and cause failure, to leverage their relationships in media and other venues to drive messaging, and finally to buy voices on anonymous sites that supposedly post thoughtful analysis about stocks to publish more content of a skeptical nature. All of this if done just in the right manner is completely legal and not even actionable through civil courts, which in my opinion is much the same as these same parties posting numerous complaints about the recent tweets. Some of this is quite possibly a last desperate push as many short sellers have yet to cover and so if they borrow more now they can make money at current volatility levels to help cover their yet to be documented losses (shares yet to be covered). If the buyout is approved and officially announced trading on the tesla will continue until date of buyout, but would anyone sell your stock for less than buyout offer (e.g. $420 per share) not likely. So shorts will need to cover their positions and the new floor price will be the buyout strike price - meaning $420 per share would become their best case scenario and much more likely will be significantly higher given the amount that needs to be covered.
No matter what happens this is going to be very interesting to watch and I can imagine some people are buying now for the potential profit that could be made on a short squeeze. Me I think the announcing via Tweet is unconventional and possibly done to pressure the board in to rapid action on previously shared material to minimize time for shorts to cover. However when people through at around legal and market manipulation and call for blood from the SEC and throw around questions about SEC partiality to the elite, I think elite or people like Elon got to these places by being very smart and taking chances. Meaning I believe he had fully researched this and thus would not have made a statement like this if he could not back it up, so unorthodox yes but given corporate wide email this type of information was going to hit the news on that day regardless. So I expect these actions are within the rules just barely or at least arguably so.
I don't think I understand how shorting stock works. A short goes to his stock broker and makes a deal to sell stocks to him at to-days price and then waits for the stock to go down in price, purchases the stocks and sells them to his broker at the agreed price. Or if the broker doesn't actually want the stocks wouldn't the investor simply receive or pay the price difference in which case no stocks are actually purchased or sold? Seems to me most deals would go down with no stock actually traded.
To sell short, one has to borrow the shares that one wants to sell. The short seller must pay interest on the borrowed (and sold) shares until the buy to cover order has been executed.
Shorts help to avoid bubbles in stock market. But they also carry his own problems and can tend to corruption as the market they criticize.
As for where that money will come from, I suspect SpaceX has it sitting in their cookie jar that is filled with prepaid flight cash.
