At first, everyone thought it was just a weed joke. “Am considering taking Tesla private at $420,” Elon Musk tweeted Tuesday afternoon. “Funding secured.” But it didn’t take long before that assumption went up in smoke.
The news sent shockwaves through the financial system, with Tesla’s shares finishing up 11 percent. Less than 24 hours later, experts are still scratching their heads, wondering how Musk could pull off what could be the largest management-led buyouts in history. Taking a roughly $60 billion company private is a tall order, even for a CEO with a reputation for defying the odds. And doing it in the way Musk has laid out — creating some sort of “special purpose fund” in which current shareholders could keep their investments in Tesla — is almost completely unprecedented, securities experts and auto analysts told The Verge.
Musk will need to present his buyout offer to Tesla’s board, which will then need to do its own due diligence, before putting the whole matter to the company’s shareholders. He’ll need to secure an enormous sum of money, which comes with its own share of pitfalls. And he’ll need to make good on his promise to investors who want to keep their stake in Tesla through the creation of some sort of financial product that most experts say doesn’t really exist.
“I do not know how he thinks that’s going to work,” said Stephen Diamond, who teaches securities law and corporate governance at Santa Clara University’s School of Law. “I haven’t seen this before.”
Musk argued that Tesla would be “way smoother [and] less disruptive as a private company,” much like his private space flight company SpaceX. But it’s also true that Musk never really settled in his role of CEO of a public company. “He does not appear to enjoy running a public company or really appear to grasp some of the responsibility you have when you finance a company with other people’s money,” Diamond said.
Going private could also help Tesla avoid some scrutiny from the Securities and Exchange Commission, which has investigated the company for its Model 3 claims and more recently has been looking at a whistleblower’s allegations of factory mishaps.
That’s not to say that Tesla couldn’t still face legal inquiries. Experts have noted that Musk may face criminal and civil penalties, as well as lawsuits from shareholders, if it turns out that he has not secured the funding to take Tesla private.
Tesla’s board of directors need to approve the buyout first before shareholders can vote on the proposal. And they would be obliged to get the best price for the company, which would mean considering other potential offers. Otherwise, they risk being accused of skirting their duties, which could open up the company to lawsuits from enraged investors.
Tesla’s board has been criticized as insufficiently independent to make these types of decisions. In June, shareholders voted down a proposal to remove Musk as chairman and three other board members. That proposal was brought by the CtW Investment Group, which works with pension funds for unions. The group said board members Antonio Gracias and Kimbal Musk, Elon Musk’s brother, were too close to the CEO to ensure needed independence. The third, 21st Century Fox CEO James Murdoch, lacked relevant experience and has been implicated in scandals at Fox and News Corp., the group said in a letter to Tesla shareholders. Glass Lewis & Co., the world’s second biggest proxy advisor, sided with CtW in opposing their re-election.
If the board forms a committee to consider a buyout, Diamond said, they must include their most independent members. They’ll need to hire their own team of lawyers and bankers to assess the offer, and there will need to be a “significant vote” by shareholders in order to approve Musk’s offer, he added. Musk will likely want to avoid a repeat of the SolarCity buyout, which spurred an investor lawsuit claiming the board lacked independence to approve the $2.6 billion deal.
Tesla’s board sounded noncommittal in a statement released Wednesday morning. “Last week, Elon opened a discussion with the board about taking the company private,” the board said. “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.”
The board will be looking for reassurances that Musk indeed has secured the funding for a buyout. In a subsequent tweet, he wrote, “investor support is secured.” No other details were provided beyond that, and a Tesla spokesperson declined to clarify those statements.
Musk owns 22 percent of the equity of the battery-powered car company. He may be a billionaire, but he certainly doesn’t have $50 billion (the amount experts predict would be needed to complete the buyout) just lying around the house. No banks have gone on the record yet to say they’d loan him the money. Saudi investors bought $2 billion worth of Tesla shares yesterday, but that’s a far cry from the staggering sum needed to take Tesla private.
Most likely Musk will have to borrow the money, which means Tesla will have to pay off debt. And Tesla is a company with severe cash restrictions. The company has never been cash flow positive, although Musk has promised it would be in the latter half of 2018. But it raises serious questions as to whether Tesla can generate the cash needed to fund this massive buyout.
“The whole premise from the beginning is that with each successive product, they would generate enough cash that would be used to fund the development of the next product,” said Sam Abuelsamid, senior analyst at Navigant Research. “The problem is all those products have lost money, and so they keep having to go back to the capital markets to raise more cash, keep the lights on, but also fund the next generation of products.”
Taking Tesla private will mean “the investor base they have has to be willing to put in that cash,” Abuelsamid added. “It’s iffy.”
And then there’s Musk’s unusual promise to investors: stay investors in a private Tesla, or get bought out at $420 a share. “My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium,” he wrote in his email to employees.
Experts say this makes little sense. Diamond said it was difficult to envision how Musk could keep his promise to shareholders while taking the company private, and others agreed. “It’s hard to parse,” said Gregory Shill, associate professor of law at the University of Iowa, who teaches corporate governance and securities regulation. “If they all remain, he doesn’t get to do the deal. Why is he making the offer if his sincere hope is that all shareholders remain? In some ways it’s a zero-sum game: in order to take it private, you need to have people sell.”
Musk signaled that Tesla would issue stock privately if he proceeds with the buyout of the electric car company, and pointed to SpaceX’s relationship with Fidelity Investments as a roadmap. How exactly that would look is unclear, but the Fidelity Growth Company Fund recently disclosed that it held about $107 million of SpaceX, according to Bloomberg. The Boston-based company also holds shares in other private companies like Uber, Lyft, and Airbnb.
Under US securities laws, a closely held company can issue stock to an unlimited number of sophisticated investors without going through the registration process required for a public offering. Current Tesla shareholders could be moved into a mutual fund, where would then become a minority stakeholder in the company.
Musk could also create a new public company that serves as a parent to a private Tesla, but then that company’s fortunes would be linked to Tesla’s and would still be subject to public scrutiny and disclosures Musk has said he wants to avoid. He would be back where he started. “None of it really makes sense,” Shill said.
There’s little precedent for what Musk is considering with Tesla. Both Chrysler and General Motors temporarily went private as part of their bankruptcy reorganization nearly a decade ago. The closest analogy is Michael Dell’s effort to take his struggling computer business private in 2013. Forbes called it “the nastiest tech buyout ever.” But that deal only cost a measly $25 billion. If Musk has his way, taking Tesla private would cost almost twice that amount, and could prove to be far nastier.