Wednesday, 8 August 2018

Investopedia/Jake Frankenfield: What If Tesla Goes Private?

Investopedia
What If Tesla Goes Private?
By Jake Frankenfield | Updated August 7, 2018 — 4:38 PM EDT
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Tesla co-founder and CEO Elon Musk surprised the market on Aug. 7 with his tweet: "Am considering taking Tesla private at $420. Funding secured." Musk's post followed a report from the Financial Times that Saudi Arabia's Public Investment Fund had acquired a $2 billion stake in the company.

Tesla stock had closed on Aug. 6 (the previous day) at $341.99. Following the tweet, Tesla stock shot up to $367.25 before the stock's trading was halted at 2:08 p.m. EDT. Tesla trading resumed at 3:45 p.m., with the price closing at $379.57.

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

    — Elon Musk (@elonmusk) August 7, 2018



It is probably worth mentioning that at the time of writing (Aug. 7, 2018, 4:30 p.m.), Musk is $1.5 billion richer than he was at 5 p.m. just the day before. And his tweet may have cost Tesla short sellers $1.3 billion, per CNBC.

From here, some natural questions follow. Why would Musk want to take his company private? And what will happen if he does?
The logic of going private

In another Investopedia article, Why Public Companies Go Private, we lay out some of the straightforward reasons a publicly traded company would choose to do just that – go private: "An acquisition can create significant financial gain for shareholders and CEOs, while the reduced regulatory and reporting requirements private companies face can free up time and money to focus on long-term goals."

This seems to fit in with what experts are saying about the potential move, and with what Musk himself has said, historically. Bloomberg, in a report following the tweet, quoted Musk as having said in 2015: "There's a lot of noise that surrounds a public company and people are constantly commenting on the share price and value... Being public definitely increases the management overhead for any given enterprise."

Gene Munster, a partner at the venture capital firm Loup Ventures, said that taking Tesla private "makes a ton of sense" for the following reason: "[Musk's] missions are big and make it difficult to accommodate investors' quarterly expectations." It's worth noting here, too, just last week Tesla reported losses, before reassuring investors that the company's "goal is to be profitable and cash-flow positive for every quarter going forward."

In an internal email that Musk sent to Tesla employees on Aug. 7, the CEO confirmed most of this, as he explained his thinking directly. There were three main reasons that being a publicly traded company was less than ideal, he wrote: 1) Being a publicly traded company can be a "major distraction", 2) it subjects the company to the quarterly earnings cycle, thereby compromising long-term strategy, and, finally, 3) As Tesla is the most shorted stock of all time, being public makes them a target of attack.
A 1 in 3 chance

Musk was clear in his email that a final decision has not been made, and, come to think of it, it's not even clear if this move would be possible. In the same article from Bloomberg, Munster said "our guess is there is a 1 in 3 chance that he can actually pull this off." Sam Abeulsamid, an analyst at Navigant Research, told Bloomberg of the move, "I'd like to see where they're going to come up with the money for that... I'm not sure where he's going to come up with the cash."

Still, it's worth talking a little bit about what this move would mean, if it did go through. In the email circulated to employees, Musk lays out his vision very clearly:

    Shareholders would have the option to stay investors, or to be bought out at $420 per share, a 20% premium over Q2 earnings.
    All Tesla employees would remain shareholders, with the right and ability to sell shares and exercise their options.
    Tesla and SpaceX would remain separate entities, but Tesla's structure would look very similar to that of SpaceX, and shareholders and employee shareholders would have the option to buy or sell stock every six months.
    Musk's stake in the company would remain pretty much the same. He owns 20% now, and that would remain pretty much the same after this move.

What Now

Shareholders and investors have responded to the news excitedly, at least for the moment. Tesla's stock shot up even further after the trading halt was removed. It looks as though this move might be possible in the foreseeable future.

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