With just a few Tweets, Elon Musk announced that he intends to take Tesla private. The move came less than a week after the company’s Q2 earnings call, where Musk doubled-down on his promise to bring the company to profit in the second half of 2018. With Musk steadying his hand, it seemed he was pushing forward a “new era” for Tesla, one that aims for mild profitability, rapid growth, and continuing innovation. What’s changed?
“Grandiose promises were replaced with reachable projections, relentless growth was met with fiscal responsibility, and shaky improvisation gave way to clarity,” written in last week’s post-earnings column.
Over the last few years, Musk has often wondered aloud how Tesla would be different if it weren’t public. In Rolling Stone’s cover story of Musk last fall, he stated, “It actually makes us less efficient to be a public company.” Musk also told Bloomberg in a 2015 interview that there is “a lot of noise” when a company is public.
Would Tesla have existed without going public in 2010?
Short Answer. No.
Long Answer. Maybe.
When Tesla went public in June 2010, the company needed the cash. They were aiming to push the Model S into production and needed every dime to hire factory workers and renovate the factory. Going public for Tesla worked. The company was able to move the Model S into production and was delivering a few hundred vehicles per week before raising more money from the capital markets.
Since going public, Tesla has raised nearly $10B through debt and equity offerings (Not including the acquisition of SolarCity’s debt). It’s a sizable amount, but it pales in comparison to some private companies. For example, Uber, Lyft, and WeWork have all raised billions in the last few years. Uber has raised over $21B since its founding in 2009, Lyft has raised $4.9B since its start in 2012, and WeWork has raised $6.9B in the last 8 years.
Before Tesla went public, Musk had to pour his fortune into the company just to convince others to invest. In the past eight years, the private markets have gained a tremendous appetite. No deal is too big. No ask is ridiculous.
Who wants in on “Private Tesla”?
A lot of names have been floating around in the past day. Who’s backing Elon’s private deal? The Saudi Wealth Fund? Tencent? Softbank? Google? All of the above?
In 2016, Softbank created a $93B Vision Fund. The fund has been making massive bets everywhere, Uber, Flipkart, WeWork, NVidia, and many more. Participating in “new Tesla” wouldn’t be out of character and it would be hard to see the company passing on one of the largest private deals in history.
The Saudi Wealth Fund and Tencent both recently made sizable equity positions in the company. Tesla going private could afford them a chance to grab a board seat and a larger share of the company. The Saudi Wealth Fund announced their sizable stake yesterday morning and Tencent announced theirs in March 2017.
Google? Did I just throw them out there? The company already owns a chunk of Musk’s SpaceX and in Ashlee Vance’s 2015 biography of Elon Musk, it was revealed that Google mulled acquiring the company for $6B in early 2013 (Tesla was worth $3-4B at the time). Google’s parent company has over $100B in cash on hand, so a sizable investment into Tesla is certainly doable.
Outside of those specific entities, its worth noting that Tesla could draw significant capital from Silicon Valley. While most private equity in the valley goes to companies far smaller than Tesla, it wouldn’t be shocking to see venture firms and fellow billionaires take a position in Tesla.
So what does “Private Tesla” really look like?
In Musk’s perfect “Private Tesla” scenario, he envisions all current investors to keeping their shares with the company. But how would that really work? Musk claims that it would be structured similarly to SpaceX, which allows employees and investors to buy or sell stock every 6 months (or other liquidation events, ie. investments). That structure gives Tesla much tighter control of the share price, preventing volatility.
Highlighted in a report from The Information, current SpaceX shareholders receive a disclosure packet, along with updated financials, every 5-9 months. The process allows the company to set their own share price, after gauging outside and inside interest in acquiring or selling shares. SpaceX currently holds a valuation of $28B.
“We can afford to be picky (with investors). There’s a lot more people wanting our stock than we are willing to sell. It’s a great place to be in.” – Gwynne Shotwell, COO of SpaceX (CNBC, May 2018)
With Tesla being private, the company would forgo reporting quarterly earnings, most SEC filings, and annual shareholders meetings. Additionally, Tesla would have more flexibility in their accounting practices and reporting and less regulatory concerns. Essentially, as Musk as stated, the company would be able to operate more efficiently.
Only time will tell if Musk can pull off “taking Tesla private”. Given the size of the private markets and Musk’s drive to reduce distractions within the company, Tesla could certainly end up going private. I wouldn’t bet against Musk, just a personal rule, and it wouldn’t be out-of-character for Musk to pull off the impossible.
Great reads:
Tesla board curbs critics’ doubts as Elon Musk’s privatization plan starts forming (Teslarati)
Elon Musk: The Architect of Tomorrow (Rolling Stone)
Google almost bought Tesla when it had just two weeks of cash left (The Guardian)
How SoftBank Is Reshaping Global Tech (The Information)
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I tend to believe going private is a bad idea for Tesla; the lip service to keeping current shareholders just doesn't make logical sense to me-- presumably this fund to allow unqualified investors (and qualified ones in excess of the limit) just begs to create issues. Not providing quarterly data also seems somewhat counterproductive-- even if you are looking at the long-term picture, having fixed milestones really makes it easier to see where you have been and where you are going.The simplification issue (at their scale) is better served by getting Elon the hell out of the President position, and having an independent structure for managing corporate matters. I view their current concept as being more like outsourcing that corporate role to a third party managing a fund.As for the volatility-- that is the price of liquidity. Does it make sense that a company goes up in value 1.5% one day, and down 1.5% the next day... no, but those movements are what creates volume and the volume creates liquidity. The shorts are no more parasites than long day traders.I'm torn if I would stay in the company if they went private. $420 locks in much of the upside for the next year or two, but obfuscates the 10-year investment thesis.
No independent structure is going to be able to manage Tesla in a vigorous manner similar to that of one of the brightest engineers of our time with vision... unless you want to stop most innovation and growth to that of a Ford - with relevant reduction in market value (and following win of parasites who postulate its soon demise).
The value at which company is going private doesn't matter that much for the long-term investors who are going to stay - no matter if it's 350 or 500 USD/share. If the current plans are going to be executed (of which I bet most will be - not necessarily on time but well ahead of the competition) the company is going to be valued a lot higher.
Most analysts forget/dismiss/underestimate crucial Tesla technological advantages (batteries, software, own hardware, etc), importance of own network of super/destination chargers, pace at which it can adapt to anything that is required (concentrated power) and disadvantages of other vendors (deeply rooted animosity to fully electric cars and anxiety about cannibalising own ICE models).
I think Elon just sent a tsunami of pain over shortville.
On 13/07 Tesla had 34.72 million shares short (now probably even more, it's according to marketwatch - I don't know any other up to date source) which are worth 14.58B USD at 420USD/share, which means investors had 205.31 million shares of 170.59M outstanding - in case of going private even if ~17% of investors decide to sell at 420USD, the cost of going private is basically 0 - no new investors required (it's the only way to force shorts to cover).
Now shorts are scrambling to decrease the share price and erode trust in Musk and Tesla management board,
adding even more to their positions to incentivise investors to sell instead of holding the stock when it goes private, which makes the whole operation much harder to perform (the more the current shareholders decide to sell, the higher the cost for the new investor) and decreases cost of covering short positions.
Musk hopes that *all* current investors stay - even if ~17% of them leave, cost is still ~0 (wholly covered by shorts).
I tend to believe going private is a bad idea for Tesla;.... getting Elon the hell out of the President position, ... The shorts are no more parasites than long day traders...
Looks like you are the sort of investor Tesla needs to shed. Remember to ask for at least $420usd when you sell off to those trying to cover their shorts.
