NEW YORK: When you think of companies going private, your first thought isn’t of tech firms with no earnings and a $65 billion valuation. But from now on it will be, after Elon Musk’s latest bombshells.
Tesla Inc.’s founder took annoyance with short sellers and his campaign against supposedly myopic thinking to new heights Tuesday, tweeting that he has financing to take the electric-car maker private for $420 a share. The ensuing rally burned bears to the tune of $800 million.
As a market operator, Tesla is a study in extremes. Its 47% annualized gain since 2010 has done nothing to quiet an exceedingly vicious war of words between Musk and his detractors. Musk gets many things a growth company wants from public markets: a sky-high stock, loyal shareholders, capital to expand. But they’ve never been enough to give him peace of mind.
“Tesla is trading greater than 100 times next year’s earnings, assuming they’re profitable and they don’t burn through their cash. In whose imagination is that not assigning value to innovation?” said Malcolm Polley, who oversees $1.2 billion as president of Stewart Capital Advisors LLC in Indiana, Pennsylvania. “What more do you want, a million times earnings?”
Musk outlined a proposal to take Tesla private in a deal that based on its current equity and debt may exceed $80 billion. Most of the specifics were left out, including where $66 billion in funding would come from for what could be the largest leveraged buyout in history. The stock rose 11% Tuesday to $379.567 and was trading at $377.01 at 4:40 am in New York.
It’s true that Musk has enemies. Shares borrowed to sell short stand at 33.8 million shares, according to data compiled by IHS Markit, making it one of the most bet-against firms on US exchanges. Jim Chanos, the world’s most famous bear, is a frequent public detractor, as are a cadre of Twitter attackers who parse every release for signs of exaggeration.
At the same time, he’s shown little inclination to make things easy on himself. In recent weeks he called a British cave diver in the Thai rescue mission a paedophile and portrayed a former battery factory employee as a saboteur. The billionaire was urged last month by shareholder Baillie Gifford & Co. and bullish venture capital firm Loup Ventures to focus on execution.
One result of the friction is the shares’ extraordinary turbulence. Ninety-day historical volatility in Tesla’s stock is more than three times that of the Nasdaq 100 Index, a gauge not exactly known for its tranquillity. At various times this year, Tesla has been up 24% and down 19%, and its average daily change is 2.5% compared with 0.7% for the S&P 500.
“In early stages, an idiosyncratic and often bizarre entrepreneur like Musk is critical to getting the company going and grabbing the attention of the media and Wall Street,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland. “But there comes a time when you need to make a transition to a more traditional managerial style. Musk didn’t want to make moves toward that, which meant he’d either be replaced or take the company private.”
The rationale for privatization plays to a host of voguish themes. While bashing short-term thinking and short-sellers, he would also have a role in the contraction of public listings on US stock exchanges that has become a cause for concern in some circles. Tesla could be a reverse unicorn, a company that found immense value in public shareholders then left them.
“The reason for doing this is all about creating the environment for Tesla to operate best,” Musk, 47, wrote in an email to employees. Wild swings in the stock are a “major distraction” to workers and that being public “puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
A possible analogue to Tesla’s proposal is Dell Computer, which cashed out investors for $25 billion in October 2013. Founder Michael Dell and Silver Lake Partners touted a private ownership structure in which it would be “even more flexible and entrepreneurial” with the ability “to serve our customers with a single-minded purpose and drive the innovations that will help them achieve their goals.”
But in crucial respects Dell was different. Tesla’s stock was up 10% prior to Tuesday, boosted by signs it was making good on a delivery schedule for electric roadsters that have won near-unanimous praise for their innovation. Dell, sitting on an ageing product line in a shrinking market for personal computers, lost almost a third of its value in 2012 amid stiffening competition in mobile and cloud computing.
Another possible comparison for Tesla could be to the cohort of technology mega caps that are almost synonymous with the stock market’s success since 2009. While Musk may be right about how quarter-to-quarter scrutiny stifles experimentation and penalizes long-term plans, it’s hard to argue it has been a prohibitive handicap for any of the Faang block of Facebook Inc., Amazon.com Inc., Alphabet Inc., Netflix Inc. and Apple Inc.
“Musk wants to do all the great innovation, but the innovation that, say, Steve Jobs did, didn’t only change the world but was also highly profitable,” said Matt Maley, equity strategist at Miller Tabak + Co. “The difference between Tesla and tech mega caps that everyone loves is that they make a lot of money on certain things and they can go spend on what they think is going to be the next best thing. Musk is saying, ‘I don’t have the money to do it, you just have to trust me.”’