Elon Musk likes control. He’s liked it since his early days with Zip2, founded in 1995, and X.com, founded in 1999, which eventually became PayPal. He only took Tesla public in 2010 because of financial pressures, according to Ashlee Vance’s Elon Musk, a biography published in 2015. (Musk has rated the book “mostly correct.”) Musk’s long-standing antipathy toward publicly traded companies may explain why he wants to take Tesla private.
“For Musk,” Vance wrote, “going public represented something of a Faustian bargain.” Though an initial public offering can raise a substantial amount of capital, it comes at a cost. As a public company, there are many eyes on Tesla: shareholders, short investors betting against the company, regulators, and reporters. And as a public company, Tesla must show us all its accounting every quarter. Musk sees this all as a risk for his many visions of the future.
In 2013, Musk sent an email to SpaceX employees with the subject line “Going Public,” which is reprinted in full in Vance’s book. In it, Musk explained he didn’t want to take SpaceX public until the Mars transport system is in place. “Some at SpaceX who have not been through a public company experience may think that being public is desirable,” he wrote. “This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy.”
He cited his experience at Tesla and SolarCity — at the time, Musk was the chairman of SolarCity, which Tesla acquired in 2016 — as evidence. Those companies went public, he explains, “because they didn’t have any choice.” Both companies needed to raise capital. But there were pitfalls, Musk wrote. For instance, public companies can become the “target of the trial lawyers who want to create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price.” Minor setbacks result in “a spanking,” he wrote.
Yesterday, Musk announced on Twitter that he is “considering” taking Tesla private for $420 a share, in what Bloomberg calls “the largest leveraged buyout in history.” (Or it will be if it is leveraged, or based on debt. It is theoretically possible that someone just cuts a check for more than $60 billion.) He expanded on his tweet in an email to Tesla employees, which the company published on its blog. Taking Tesla private, Musk says, would relieve the “enormous pressure” of quarterly earnings reports.
In his email, Musk said Tesla was “the most shorted stock in the history of the stock market.” That created “incentive to attack the company,” he wrote. “Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.” Tesla will not merge with SpaceX, Musk’s rocket venture, he wrote.
Going public means something else, too: financial disclosures. If real Gs move in silence, like lasagna, public companies move like belled cats. “Musk prefers to operate in secrecy,” Vance wrote. Musk told Bloomberg News in January 2015 that “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.”
This finance fight starts with an abstraction: Tesla stock. Musk is correct to point out that public companies’ stock price fluctuate with overall economic trends. Tesla’s actual ability to manufacture and sell cars is part of the share price, of course, but investor sentiment also matters. And people have a lot of sentiments about Elon Musk.
Musk is a remarkably polarizing figure: fans generally view him as a brilliant visionary, while detractors see him as an out-of-touch billionaire who overworks his employees and doesn’t deliver on his promises. The long versus short fight in the Tesla shares has a similar dynamic to the fan versus hater confrontations online. If you own Tesla shares, you’re making a bet that the shares will go up in value, that the company will prosper. If you’re shorting Tesla, you’re betting the company will at least stumble, if not fail outright.
Musk often uses his Twitter feed to taunt shorts. Last weekend, he tweeted, “Dang, even Hitler was shorting Tesla stock…” along with a Tesla-themed Downfall meme video. In May, he tweeted, “Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time.” He has punned, badly, on short-shorts.
Short-sellers have borrowed 33.8 million Tesla shares, Bloomberg wrote, citing IHS Markit. So the possibility of the company going private meant about $783 million in losses for the short-sellers yesterday as Tesla stock rose on the news. In fairness, the stock had already been rising. As the Financial Times reported, a Saudi Arabian sovereign wealth fund had bought $2 billion worth of shares, making it one of Tesla’s largest investors. (Musk, the largest investor, has about 20 percent of the outstanding shares.)
At least some of the shorts remain undaunted by the possibility of a private Tesla. Gabe Hoffman, a general partner at Accipiter Capital Management, told CNBC, “I’m adding to my short as we speak.” Jim Chanos, founder of Kynikos Associates, told the network, “The short position is the best thing the stock has going for it. ‘Musk vs The Shorts’ is a far better narrative than ‘Tesla vs Mercedes / Audi / Porsche.”
Why are the shorts enthused? Well, there has been some concern about Musk announcing the deal via Twitter, which is an unusual move. Tesla has, in a regulatory filing, directed investors to Musk’s Twitter account at least once, in 2013, but the SEC requires a simultaneous press release. Musk tweeted at 2:08PM ET; the email was posted more than an hour later. The SEC may be interested in that delay, Michael Liftik, a former deputy chief of staff at the commission, told The New York Times. SEC investigations are not, to my knowledge, among Musk’s previous complaints about publicly traded companies, but they are nonetheless an expensive and time-consuming possibility.
Another potential hazard is the wording of the tweet, which reads in its entirety: “Am considering taking Tesla private at $420. Funding secured.” Those last two words could also attract regulatory attention, according to a report in The Wall Street Journal. “If Tesla doesn’t move ahead with a deal, or if the funding isn’t set, regulators could probe whether Mr. Musk made a false statement that caused the price of his company’s stock to skyrocket about 11 percent.”
Any risk of SEC investigation for one tweet occurs because public companies attract more scrutiny. Let’s let the SEC handle the SEC’s business and move on to a more practical concern: can Musk actually do it?
Musk has not disclosed where he’s getting the money, and several banks’ officers have told The New York Times and CNBC they hadn’t talked to Musk. SoftBank did meet with Musk in April 2017 about taking Tesla private, according to Bloomberg, but that didn’t work out. Let’s assume the money exists and reporters just haven’t found it; Tesla’s board says Musk began talking with them about taking the company private last week.
Musk owns a fifth of the company’s outstanding shares, so he can’t just wave his hands and do the deal. The next move, according to The Wall Street Journal: “If it goes forward, an independent committee of Tesla’s board will have to evaluate the deal, using its own lawyers and investment bankers, to determine whether the transaction and the price are in the company’s best interest.” That may mean entertaining competing offers.
Musk also tweeted that he wants current shareholders to remain on board in a “special purpose fund.” That may not be possible in quite the way Musk is envisioning it, according to reporting from The Wall Street Journal. “It’s hard to parse,” Gregory Shill, associate professor of law at the University of Iowa who teaches corporate governance and securities regulation told The Verge. “If they all remain, he doesn’t get to do the deal. Why is he making the offer if his sincere hope that all shareholders remain?”
Whether or not it’s possible to take current shareholders of Tesla to a private structure, the sentiment is curious. Musk doesn’t mind the investors; it’s everyone else he can’t stand. He’s at least been consistent: Elon Musk doesn’t like publicly traded companies.