Elon Musk’s Funding for Tesla Wasn’t So Secure
(Bloomberg Opinion) -- Traditionally, when the chief executive officer of a public company announces that he is planning to take the company private at $420 per share, and that he has secured funding for that offer, that means a couple of things. First of all, it means that he plans to make a firm offer to the board of the company to buy all of the shares that he doesn’t already own, for $420 per share in cash. Second, it means that he has enough money—or has agreements with someone who has enough money—to actually pay for those shares.
Last week Elon Musk tweeted “Am considering taking Tesla private at $420. Funding secured.” He followed it up by tweeting more definitively that “Investor support is confirmed. Only reason why this is not certain is that it’s contingent on a shareholder vote.” Tesla Inc. has about 170.6 million shares outstanding, of which Musk owns about 33.7 million, meaning that he’d need about $57 billion to buy all the shares he doesn’t already own at $420 per share, plus perhaps another $10 billion to pay off bonds that come due on a change of control. And Musk’s tweets kicked off a week of speculation about where he had gotten the $60 or $70 billion he’d need for this deal.
Today he posted an “Update on Taking Tesla Private” – on Tesla’s blog, not on Twitter – that sort of answered the question: He didn’t have the funding! In two senses. First, he never had any firm commitments from anyone to give him the money. Instead he’s had some nice chats with Saudi Arabia’s Public Investment Fund:
Going back almost two years, the Saudi Arabian sovereign wealth fund has approached me multiple times about taking Tesla private. They first met with me at the beginning of 2017 to express this interest because of the important need to diversify away from oil. They then held several additional meetings with me over the next year to reiterate this interest and to try to move forward with a going private transaction. Obviously, the Saudi sovereign fund has more than enough capital needed to execute on such a transaction.
Recently, after the Saudi fund bought almost 5% of Tesla stock through the public markets, they reached out to ask for another meeting. That meeting took place on July 31st. During the meeting, the Managing Director of the fund expressed regret that I had not moved forward previously on a going private transaction with them, and he strongly expressed his support for funding a going private transaction for Tesla at this time. I understood from him that no other decision makers were needed and that they were eager to proceed.
I left the July 31st meeting with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving.
How secure was the Saudi funding? So secure that preliminary non-binding abstract discussions of a hypothetical deal continue:
Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.
Also it’s a little funny that after peddling conspiracy theories about how fossil-fuel interests are sabotaging Tesla, Musk is looking to sell the company to Saudi Arabia. (To be fair, Musk is also “having discussions with a number of other investors, which is something that I always planned to do since I would like for Tesla to continue to have a broad investor base.”)
But there is another, subtler sense in which Musk hasn’t secured his funding. It’s not just that the Saudi PIF hasn’t signed a detailed binding termsheet committing it to put up the $70 billion that Musk would need to buy Tesla. It’s also that he doesn’t even want the $70 billion:
Reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.
It seems that Musk’s offer to buy Tesla at $420 a share would be contingent on a large majority of shareholders turning it down. That is not how takeover offers usually work! Like, usually, if you offer to buy my shares for $420, and I agree to sell you my shares for $420, then you are happy and you give me the money and I give you the shares. Here, Musk’s offer to buy everyone’s shares for $420 seems to require most of the shareholders saying no.
Where did that two-thirds estimate come from? Well, not from talking to the shareholders, at least not before Musk tweeted about “Funding secured” and “Investor support is confirmed.” Which is good, because having those conversations with those shareholders would have been super-illegal! As Musk recognizes, now, in his blog post, which I suspect more lawyers have seen than had seen those tweets:
The only way I could have meaningful discussions with our largest shareholders was to be completely forthcoming with them about my desire to take the company private. However, it wouldn’t be right to share information about going private with just our largest investors without sharing the same information with all investors at the same time.
Will a majority of Tesla shareholders approve of Musk’s “going-private” plan but turn down his offer of money, preferring to stay in the stock as it goes private? Well, I dunno, maybe. His shareholders do seem to be loyal. Certainly Musk’s super-fan retail shareholders would if they could, but it is still not at all obvious that Tesla will be able to turn itself into a private company that is still open to public retail shareholders. The basic structure of U.S. securities law is that companies can sell shares to the general public if and only if they comply with the requirements of being public companies. Musk doesn’t think that those laws should apply to him, but I am not sure that the regulators will agree.
Meanwhile Tesla’s biggest institutional shareholders include Vanguard Group and BlackRock Inc., both of which do a lot of index investing and might have trouble holding nearly as many shares in a private company. They also include T. Rowe Price and Fidelity, both of which do notably invest in private companies. But those private investments are at an entirely different scale from their public investments. Fidelity, for instance, owns about $180 million of stock in Uber Technologies Inc., another buzzy controversial company with a $60 billion-ish valuation that happens to be private. That’s less than one-twentieth of the $4 billion it has in Tesla. Its appetite for a private Tesla might be closer to its appetite for private Uber than for public Tesla.
So the funding is perhaps somewhat less than secured. But you can see where Musk was coming from. “Taking a company private” is a term of art, and it might not be obvious to everyone that it means buying out all of the company’s stock for cash. It might not be obvious how much funding you need to secure to say that you have “funding secured” to take an $80 billion company private, or how many contingencies you need to satisfy before you can say “Only reason why this is not certain is that it’s contingent on a shareholder vote.” Musk legitimately might not know these things, might not understand how the things he tweeted might be misleading. That wouldn’t even really reflect badly on him. He’s a smart guy who has a lot on his plate and who has not focused extensively on the nuances of securities law and corporate structuring. It was just some tweets.
But here is the thing. Other CEOs don’t always know this stuff either. They might muse vaguely about going private to their investment bankers or lawyers, who would explain the process and options to them. Or they might even muse about it to their boards, who would hire advisers and explore the possibility with them.
But they wouldn’t muse about it in public. They have lawyers. They have corporate communications policies. They have structures in place to prevent their random whims from causing damage. Any disclosure about a potential transaction will be made in a carefully lawyered press release, published outside of market hours, that emphasizes that nothing has been finalized and that any deal is uncertain and will be contingent on funding and board approval and many other conditions. Responsible CEOs do these things in order to minimize the disruption to their shareholders, to allow them to be fully informed before they make any trading decisions. They don’t just tweet it casually in the middle of the trading day.
But if you do decide to just tweet your every random thought without consulting anyone, then any errors are kind of on you. It is not really an excuse to say that you didn’t mean to mislead anyone, that you thought that what you were saying was right, that it made sense to you. Because every other public-company CEO cares about this stuff, and tries to avoid saying untrue material things in casual public communications. If you don’t care, if you are just reckless about your public announcements of material information, then you should expect that to eventually go wrong.
Here is the other thing about Musk’s plan to go private while keeping all the same shareholders. It makes no sense. Usually when a CEO wants to take his company private, it’s because he wants to change something. One thing that usually changes is leverage; a going-private transaction normally involves borrowing a lot of money to juice the equity returns of the company, something that is obviously not a consideration here. (“I do not think it would be wise to burden Tesla with significantly increased debt,” blogged Musk, correctly.)
But traditionally the main thing that changes is what is called, in the lingo, “the separation of ownership and control.” A public company is owned by a lot of diffuse semi-anonymous investors who do not have a concentrated interest in the success of the firm, and managed by a CEO who is effectively a hired employee of those shareholders. When it goes private, though, those shareholders are replaced by a few big shareholders. One is, typically, the CEO, who normally increases his ownership share in a going-private transaction, giving him a greater financial interest in the success of the company. (Again that is not applicable here; Musk already owns 21.9 percent of Tesla, has a huge financial interest in its success, and has said that he does not “envision that being substantially different after any deal is completed.”) The others are, typically, the CEO’s private-equity backers, who take large equity positions, get board seats, and generally act like focused careful owners of the company. It is a shift in ownership structure, from the hands-off passive investors in the public markets to hands-on active private-equity investors, on the theory that the hands-on investors will do a better job of monitoring and incentivizing management and will make the company more profitable.
That is obviously not Musk’s plan, since he wants to keep a widely diversified shareholder base, including most of the shareholders who own Tesla as a public company. Also he does not … seem like a guy who is looking for more monitoring and incentives from his board of directors? His theory in going private seems to be that he wants his shareholders to be even less involved than they are now.
Musk’s initial explanation last week gave three reasons for wanting to go private:
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 one is specious: If you’re a long-term holder of Tesla, the stock will be worth what it’s worth in the long term. If you find the short-term price fluctuations distracting, just don’t look at them! Avoiding that distraction by getting rid of the ability to buy or sell Tesla stock seems like wild overkill.
The third one is also specious: Yes, public markets allow anyone who wants to sell Tesla to sell it, but they also allow anyone who wants to buy Tesla to buy it. People who dislike Tesla can go short, people who like Tesla can go long, and—pretty obviously, judging by its $60 billion market capitalization achieved without ever making a profit—the latter effect dominates. Going private will shut out short sellers, but it will also shut out true believers who want to buy more stock. And as far as I can tell Musk has no evidence at all for his theory that short sellers are somehow doing something to attack or sabotage Tesla. Remember he has the same theory about fossil-fuel interests sabotaging Tesla – but wants Saudi Arabia involved in the buyout.
But Musk’s second reason – “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” – is the silliest. Where does that pressure come from? Are there gamma rays of short-termism wafting through the public markets? If being public creates pressure to make short-term decisions, then surely that pressure has to come from public-market shareholders. There is something about those public shareholders – who tend to be relatively diversified, relatively hands-off, relatively passive and to have quarterly performance pressures from their own investors – that makes them concerned primarily with the short term. Whether or not you believe this, you can’t solve it by taking a company private and keeping all the same shareholders. If Tesla’s big shareholders – T. Rowe and Baillie Gifford and Fidelity and Tencent and Vanguard and BlackRock and Capital – are all myopically focused on the short term, then going private and keeping them as shareholders won’t solve anything. If they’re not, then there’s no need to go private.
The thing is that all of Musk’s enemies are imaginary. I mean, they exist, but they don’t matter. There are short sellers who think that Tesla is overvalued, and they short the stock, and they tweet about it. Musk owes them nothing and can ignore their tweets, as virtually every other public-company CEO does. There are Wall Street analysts who ask questions that Musk doesn’t like, but he can ignore their questions, and sometimes, quite rudely, does.
What matters, for a public-company CEO, is what his shareholders think. He is answerable to them. If they care only about short-term results, if they demand immediate profits at the expense of long-term sustainability, if they can be easily swayed to back an activist’s proxy fight or a hostile takeover, then maybe he should go private. All of those are ridiculous things to think about Tesla’s shareholders. The evidence for that is not only their unfailing loyalty to Musk, but also the fact that he wants to go private and bring them along. The shareholders are not the problem with being public, and there are no other problems.
“The stock market has been kind to Elon Musk,” James Mackintosh wrote last week. If Musk wants to find a widespread pool of investors willing to take a gamble on his vision for Tesla, he has found them. The obvious mechanism for finding a large group of investors to buy shares in a company without expecting to control that company is also the correct one: You list the shares publicly, and let the people who want to buy them, buy them. You don’t need to travel to Saudi Arabia to find someone who’ll put money into Tesla without demanding any control rights in return. They’re right there in front of you. They’re the people who already own the stock.
If this were a romantic comedy, that would be a satisfying ending. Musk would turn to his loyal best friend, the public market, see the love in its eyes that he had never noticed before, and embrace it as the music swelled. But the point that I want to convey here is that this is not a romantic comedy. This is a highly regulated stock market! There are rules here! You can’t just wing it! The public market is kind and forgiving and long-suffering and infatuated with Musk. But there are some things that it won’t tolerate.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the 3rd Circuit.
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