On Tuesday, an eccentric CEO went on Twitter to share the following message with his 22.3 million followers:
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
Good one, Elon! That Musk always cracks me up.
You can forgive people for thinking the Tesla CEO was joking when he sent that tweet into the Twittersphere.
After all, Musk is known for taking the piss on social media. He’s joked about Tesla being bankrupt (to the dismay of investors) in the past.
As it turns out, he wasn’t joking this time.
Everything’s ready for the biggest take-private deal in history, Musk assures. It’s just waiting for a shareholder vote to turn the final light green.
Though Tesla shares have done quite well on the open market, it’s also put the company under a microscope.
The company has big, huge, Brobdingnagian plans…
But Tesla’s goals can’t necessarily be achieved by the time it needs to publish its next quarterly figures. It’s not good for company morale to see the share price bounce up and down, says Musk.
Could going private be the right move for Tesla?
Forward guidance for business
Central banks use “forward guidance” to influence market sentiment by dropping hints about the future level of interest rates.
Tesla CEO Elon Musk did more or less the same thing when he sent out that 61-character tweet.
Musk proposed to buy out shareholders at $420 per share, a near 25% premium on the $340 share price. The company’s share price shot up 11% and reached a level just shy of $380.
Can CEOs really use Twitter like that?
Well, Musk can’t tweet “just kidding” now. That would be price manipulation, something he could go to prison for.
Which means he really must have had the money before he pressed “send”.
It does look like Tesla already has the funds ready to go to take the company private, courtesy of the Saudi Sovereign Wealth Fund.
This Saudi Arabian public investment fund has taken a 5% stake in Tesla which coincidentally (if you believe in coincidence) came out just before Musk took to Twitter.
Chinese tech giant Tencent Holdings and Japanese telecom company Softbank, which have both invested in Tesla as well, are other potential backers.
Tesla’s share price has done a lot of zigzagging since the company went public in 2010. Still, its shares have generally performed well.
The company became the most valuable US car manufacturer in April last year. It overtook Ford and General Motors despite having just 1% of their sales.
That’s because a lot of investors consider it the company of the future, even though it’s proved hard for Tesla to meet production targets or turn a profit.
The higher a company’s ambitions, the harder it gets to live up to expectations. It’s made Tesla the most shorted stock, meaning that investors take pleasure in betting against the company.
On Tuesday Musk had his revenge against these short sellers. His tweet about Tesla going private sent its shares soaring. Short sellers lost $1.3bn (on paper) betting the wrong way.
Out of the spotlight
A public listing gives companies access to a lot of dough.
In this sense it might seem strange that Musk is seriously thinking about taking Tesla off the stock market.
The other side of the coin is that publicly traded companies need to be transparent. How much money is it making (or losing)? Where does it invest its capital?
They’re under a lot more scrutiny than private companies which don’t have the obligation to disclose as much info to the public.
Tesla is a long-term play, but stock markets don’t really work like that. They want results now and if you don’t deliver, your share price will take a hit.
The electric car manufacturer is having a hard enough time meeting its production targets as it is. The last thing it needs right now is pesky investors asking for profits!
Musk says the volatility in Tesla’s share price is putting a strain on employees, who are all shareholders in the company.
“It’ll be much easier to build Tesla up without the insane pressure and scrutiny the company is under right now,” Technology Profits Confidential editor Sean Keyes agrees.
“Going private would make a lot of that go away. It probably won’t result in Model 3s on the road much sooner, but it will make things easier for Tesla the business.”
The company will still have to figure out how it can overcome its two main challenges: sorting out production and becoming profitable.
It remains to be seen if Tesla can get a handle on manufacturing, which is of vital importance if it wants to become a mass producer of cheap electric cars.
Though it recently hit a production target for once, it needs to proof it can consistently build more and more cars to keep up with the increasing demand for its electric vehicles.
Musk is optimistic about Tesla becoming cash flow positive in the third and fourth quarter of 2018. But this may still be a big ask for a business that’s made a habit of burning through about $1bn of cash every quarter.
By taking the company private, Musk would get rid of those annoying short sellers, but he will also need to find alternative ways to raise money.
Still, the buoyant stock price seems to be indicating that there’s more value in Tesla than just as a manufacturer of cheap cars. Stepping out of the spotlight to work in relative calm may be the right thing to do for Tesla.
If it can overcome its challenges while it’s in “private mode”, then it’s only a matter of time before Elon Musk announces Tesla’s spectacular return to the stock markets. On Twitter, probably.