On August 7, Elon Musk proved with a handful of tweets that he’s the P.T. Barnum of our age—the man can sell anything. This time, it was the idea of Tesla Inc (NASDAQ:TSLA) going private.
And as if that’s not crazy enough, there’s a plot twist connecting Tesla stock to Saudi Arabia’s sovereign wealth fund.
Let’s get started…
Fresh off several Twitter fiascos, including one with a British diver who saved those Thai soccer players, Elon Musk casually dropped this little gem:
Investors responded to the unexpected announcement with a seven-percent bump to the TSLA stock price. And then, a few hours later, Tesla’s PR department released an email that Musk had sent to employees. It laid out a few more details. (Source: “Taking Tesla Private,” Tesla Blog, August 7, 2018.)
- Investors can opt out at a premium. The buyout price is 20% above the TSLA stock price following the company’s Q2 earnings call. Granted, that call was a fiasco that drained the share price of some value, but it’s not a bad deal considering that the TSLA stock price was hovering at $370.00 at the time of writing.
- Shareholders will have optionality. Either they can stay with Tesla, in which case they’ll be able to sell shares every six months, or the company will buy them out at $420.00 per share.
- Employees will have optionality. Like a lot of tech companies, Tesla has a workforce that owns part of the company. They too will have a choice if the company goes private.
- Elon Musk will not have a majority stake. Some people are worried that Elon Musk will use this leveraged buyout to amass a majority stake in Tesla. Musk dispelled those fears almost immediately, saying “I own about 20% of the company now, and I don’t envision that being substantially different after any deal is completed.”
- Tesla will not merge with SpaceX. Musk has his fingers in a hundred different pies, so it was possible he would try to merge two of his biggest companies. Luckily for investors, that won’t happen.
The plot twist: when Elon Musk said “Funding secured,” he meant that Saudi Arabia’s Public Investment Fund had bought nearly five percent of Tesla’s outstanding shares. (Source: “Saudi sovereign fund PIF has bought a below 5 percent stake in Tesla: source,” Reuters, August 7, 2018.)
Funds like that have an extremely distant investment horizon, meaning they won’t sell their stake any time soon.
Note: Sovereign wealth funds, for those who don’t know, invest on behalf of a country’s pensions or other such savings. They are some of the biggest investment funds on the planet.
Why Is Tesla Stock Going Private?
Before we get to whether or not this is a good idea, let’s consider why Elon Musk wants to take Tesla stock private. He gave three reasons in his letter.
As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.
The first two reasons—stock volatility and short-term thinking—are common complaints about running a public company. It is also, perhaps, why tech unicorns like Uber and Pinterest are choosing to stay private for longer.
Musk’s beef with short-sellers is less credible. Yes, Tesla had more bets running against it than any stock in history, but to look at the firm’s history and conclude that short-sellers were being malicious is to wear some seriously rose-colored glasses.
There were dozens of reasons to doubt Tesla stock (like comparable valuations of other auto stocks, missed delivery targets, and the SolarCity Corp acquisition, to name a few).
You can disagree with those reasons, as I do, but it’s not like short-sellers were trolling Tesla stock for fun. They sincerely believed it would crash.
Should Tesla Stock Go Private?
On the whole, I think yes.
Tesla is a moonshot goal. When describing the company’s purpose in 2006, Elon Musk said:
The overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution.
(Source: “The Secret Tesla Motors Master Plan (just between you and me),” Tesla Inc, August 2, 2006.)
That’s not your average business proposal. Tesla was never intended to suffer at the whims of the market or be confined to the expectations of three-month increments. Musk always had a more revolutionary purpose in mind.
There are only two ways to run a moonshot business: One is to have a monopolist like Alphabet Inc (NASDAQ:GOOGL) or Amazon.com, Inc. (NASDAQ:AMZN) run it as a loss-leader. The other is to go private.
If it were me holding Tesla shares, I’d take the buyout in a heartbeat. Doing so would give me a decent return that I could re-invest into other great stocks, whereas going private would lock up my investment for six months (at the very least).
But I’m not the one making this decision. You are. All I can do is remind you that liquidity is a friend to the retail investor. Private markets are not.