Never Mind, Tesla’s Not Going Private
(Bloomberg Opinion) -- Tesla Funding Watch 2018.
So who are these people?
I worked with Silver Lake, Goldman Sachs and Morgan Stanley, who have world-class expertise in these matters, to consider the many factors that would come into play in taking Tesla private, and to process all the incoming interest that we received from investors to fund a go-private transaction. … My belief that there is more than enough funding to take Tesla private was reinforced during this process.
That is from Elon Musk’s blog post on Friday announcing that he will not be taking Tesla Inc. private. It hasn’t even been three weeks since he tweeted that he was considering it, and that the price was $420, and that he had “funding secured,” and that he was going to let all his public shareholders come with him if they wanted, somehow, and lots of other exciting stuff. Everything was pretty crazy for a while, but a short while; by Aug. 17 — just 10 days after his initial tweet — I was writing that “everyone seems to have stopped pretending that Musk might take Tesla private.” Now Musk has stopped too. He wrote on Friday that “most of Tesla’s existing shareholders believe we are better off as a public company” and that going private “would be even more time-consuming and distracting than initially anticipated.” So, never mind.
But who are those people? “All the incoming interest that we received from investors to fund a go-private transaction”? Like these are apparently people who, when Musk announced that he wanted to take Tesla private at $420 a share, picked up the phone, dialed … the switchboard? … at … Silver Lake? … ??? … and said “hey can I talk to whoever is doing the Tesla thing?” And then they said “put me down for a million dollars” and the person was like “sure okay done”? I am sure they are all disappointed that their inbound interest didn’t work out, but such is life in the uncertain business of imaginary going-private transactions.
But I have an amazing tip for them: If you want to buy a non-controlling minority stake in Tesla, you can just do it! You can just go to your broker and give her the million dollars, and she’ll go out and buy the stock for you! On the stock exchange! Because it’s public! You don’t need to ask Musk, or Silver Lake, or anyone; you can just do it. And here is the best part: You don’t even have to pay $420 a share! It closed on Friday at $322.82. You can save almost $100 per share off the price that you were … calling up … Musk … and … volunteering to pay.
It is a bit of a puzzle, but the puzzle is not that hard to resolve: The people who called up Musk’s representatives and offered to invest in a going-private transaction for Tesla didn’t exactly want to invest in Musk’s going-private transaction. From the Wall Street Journal’s account of the almost-buyout:
On Monday and Tuesday, advisers from Goldman and Silver Lake plowed ahead on a deal that might work.
By Wednesday evening, they had a presentation for Mr. Musk, proposing a roster of deep-pocketed investors, including Volkswagen and Silver Lake itself, that had agreed to contribute as much as $30 billion, people familiar with the matter said.
They weren’t the kind of investors Mr. Musk had in mind. He was deeply suspicious of rival car companies, believing they wanted to piggyback on what he called the “Tesla halo.” He also was lamenting a loss of small investors, who had been his most vocal champions.
Finally, the deal team advised him, the money would likely come with strings attached: The new investors would want a lot of say in the company, and each would likely want to hammer out terms of their own.
Thirty billion dollars is a surprisingly respectable number, though still only about half what you’d need to actually offer $420 a share in cash to every Tesla shareholder. But it’s not clear that Musk was able to raise even a dime to back his buyout vision, the one where Tesla would be owned by a dispersed bunch of passive small investors who would leave him alone to pursue his own idiosyncratic vision — but would also somehow be private. (Even Musk’s supposed anchor investor, Saudi Arabia’s Public Investment Fund, doesn’t seem to have been entirely comfortable with his approach; Bloomberg reports that “the Saudis were unhappy about Musk detailing his talks with the Kingdom’s sovereign wealth fund in an Aug. 13 blog post.”) There might be enough funding — well, half of enough funding, anyway — to take Tesla private, but there doesn’t seem to be any funding to do the deal that Musk actually wanted to do. And when he could raise money only for the other deal — a slightly more traditional going-private deal in which large strategic and private-equity investors would write large checks in exchange for significant stakes and control rights — he dropped it.
And the most interesting and novel element of Musk’s plan — his proposal to give all of Tesla’s shareholders the opportunity to keep their shares in the new private Tesla — wasn’t a plan at all. “There is also no proven path for most retail investors to own shares if we were private,” admitted Musk in his staying-public blog post. The stuff about giving all shareholders a choice to stay in the private Tesla: That was just stuff he wrote, stuff he thought would be nice, but not something he actually had any plan to deliver.
One sometimes gets the sense that Musk does not fully think things through before tweeting about them.
Anyway. The words and sentences in Musk’s never-mind blog post are pretty weird, but the overall effect is normal and correct. Tesla, obviously, should not go private. Musk, just as obviously, should not go around pretending he’s going to take Tesla private if he isn’t; it’s distracting for employees, disruptive to the stock price, and not especially legal. His Friday announcement reads as though Musk listened to his lawyers (about the impossibility of rolling retail investors into a “private” Tesla), and he listened to his shareholders (about the pointlessness of going private), and he sensibly dropped the whole thing. In a fully explained blog post, not a tweet! After market hours! It’s all very grown-up and responsible. The last time we talked about Tesla, I argued that it would be a lot easier and less distracting for Musk to just try to be a normal public-company CEO than it would be for him to persist with his bizarre going-private scheme; perhaps he has come to the same conclusion.
So it seems a little cruel and unnecessary to talk about the Securities and Exchange Commission’s inquiry into these events. And I have a feeling we’ll have to talk about that a lot in the not too distant future. “Funding secured,” Musk tweeted. “Investor support is confirmed,” he tweeted; “Only reason why this is not certain is that it’s contingent on a shareholder vote.” “Shareholders could either to sell at 420 or hold shares & go private,” he tweeted. “Would create special purpose fund enabling anyone to stay with Tesla,” he tweeted. In a series of tweets and, eventually, a blog post, Musk made it sound like there was an actual plan to make a cash offer to shareholders to buy their stock at a premium. The stock, predictably, shot up on those announcements. But none of them were true: Funding was not secured, investor support was not confirmed, the plan was contingent on far more than a shareholder vote, and there was no plan to let shareholders choose to stay in the new private Tesla. It was just an idea he thought would be cool, with no real plan to achieve it. If the idea had involved cars then, sure, go nuts, tweet all you want, I guess. But when it involves taking the company private, the SEC tends to take an interest.
Here is my model of activist hedge funds:
- In every activist situation, the activist hedge fund argues that the company’s chief executive officer is lazy, inept and self-dealing, wasting shareholder money to aggrandize and entertain himself, and that the shareholders must impose discipline on management and demand a return of some of their capital.
- In every activist situation, the CEO argues that the activist is a greedy tourist who knows nothing about the business and who is interested only in short-term rewards, and that the activist’s proposal will destroy the company’s culture and ability to innovate and ultimately damage its long-term value.
- Sometimes the activist is right.
- Sometimes the CEO is right.
Look, it’s not much of a model. In particular it doesn’t tell you anything about who, in any particular situation, is right. Still there are worse models. If your model leads you to conclude that activists are always right, or always wrong, then your model is too blunt. If activists were always wrong, they would not have a business. If activists were always right, then they’d keep expanding their business until they started being wrong.
Here is a fascinating New Yorker article by Sheelah Kolhatkar about Paul Singer’s hedge fund, Elliott Management, and its head of activism, Jesse Cohn. It is full of details about how activist investing, at least at Elliott, works. Cohn, for instance, when he calls the CEO of a company he is targeting, will “follow a script, which he has taped next to his desk.” And here’s how Singer thinks of his work:
At a conference in 2016, Singer described his approach as “buying a bond in a company and being in a multi-year struggle where we say, ‘Our bonds are senior to yours.’ And they say, ‘No, you’re not.’ And we go back and forth yelling about that for a few years.”
Here, meanwhile, is how Jonathan Bush, the founder and former CEO of medical billing company Athenahealth Inc., who was ousted by Elliott, viewed Elliott when they first approached him:
Bush told me that, when he began to research Elliott online, the experience was like “Googling this thing on your arm and it says, ‘You’re going to die.’ ”
Great line! But here’s the thing. Bush — yes, a nephew and cousin of the presidents — first heard from Elliott while he “was standing at the stern of his luxury catamaran, the Zenyatta,” just having finished “a three-day race with his company’s sailing team,” which he described as “a drinking team with a sailing problem.” Sailing, and the amount of time and energy Bush devotes to it, feature prominently in the article. Here’s a description of the forty-five-page deck that Cohn presented to Athena’s board of directors:
One slide juxtaposed a time line of Athena’s financial results with images from Bush’s Instagram account. Interspersed with drops in Athena’s stock price were pictures of Bush sailing to the Bahamas five times in three months; Athena employees on a party bus just before the company announced disappointing earnings; and Bush wearing a ridiculous costume. There was nothing sordid, exactly, but some photographs on the account — such as one not included in the presentation, which showed Bush at a resort in the Bahamas looking hungover in front of a sign that read “Exercise makes you look better naked, so does Tequila. Your choice.” — were publicly available and painted a picture of a less than responsible C.E.O.
“Bush told me that he had expected Elliott to engage in ‘character assassination,’” writes Kolhatkar, “but hearing that his personal life was being used as a weapon against him was upsetting.”
Here is Kolhatkar on the broad social impact of activist investing:
The idea that companies exist solely to serve the interests of shareholders — rather than also to serve workers, customers, and the larger community — has been dominant in the business world in the past thirty years. As the field of activist investing becomes increasingly crowded, many investors are going beyond their original mission of finding ailing or mismanaged companies and pushing them to improve. ... Often, activists advocate for measures that drive up the stock price but can have negative effects in the future, such as the outsourcing of jobs, the elimination of research and development, and the borrowing of money to buy back a company’s own stock.
But that general story can’t tell you how to evaluate any particular case. If an activist says that a CEO is lazy, inept and self-dealing, and the CEO argues that he is pursuing a long-term vision and that the activist will destroy value by pushing short-term measures, you have to evaluate the specific details of the case to decide who’s right. But if the activist says that a CEO is lazy, inept and self-dealing, wasting shareholder money as he entertains himself, specifically by going drinking and sailing all the time, and the CEO’s response is basically “I can’t believe you keep talking about the sailing, that’s so mean,” then I tend to sympathize with the activist.
Here is a story about “the world’s first public bond created and managed using only blockchain,” a World Bank issuance in Australian dollars. There’s the usual blather about how blockchaining the blockchain will make everything more efficient, but this paragraph caught my eye:
“I am delighted that this pioneer bond transaction using the distributed ledger technology, bond-i, was extremely well received by investors,” said Oteh, referring to the deal acronym, standing for Blockchain Operated New Debt Instrument as well as a reference to Australia’s most famous beach.
My skepticism about the transformative power of the blockchain was reduced by about 20 percent when I came to that acronym. Nothing legitimizes a financial technology like an overelaborated acronym! I feel like the stages of financial-technology development are:
- Think of a thing, talk about it, do random one-off small experiments, etc.
- Market the thing using a ridiculous acronym.
- Competitors give the thing other, even more ridiculous acronyms. (Crypto Operated Publicly Available Computer-Assisted Blockchain-Administered Notes Auction! Distributed Investment Technology Crypto-Hashed Public Ledger Authorized Issuance of Note Securities!)
- The thing becomes common and standard and people start calling it by a normal lowercased name (“blockchain bond” or something) and everyone is a bit embarrassed by the acronyms.
In my own investment banking career, I built “mandatory convertibles,” but I thought often of the giants who came before me who called them — I am not kidding — “FELINE PRIDES.” So I kind of know how the blockchain bond people will feel in a few years. “What were we thinking putting the word ‘new’ right in the acronym,” they will probably ask each other, if this thing takes off, which I am now more confident that it will.
Is advertising illegal?
- Advertising is an anticompetitive practice that harms consumers and helps entrench monopolists.
- Nonetheless we have historically allowed advertising because it had the important benefit of giving consumers information about products that they couldn’t otherwise get.
- Now, with Google, they can get the information elsewhere, so most advertising is useless and should be banned as a form of monopolization in violation of the antitrust laws.
I do not think that this argument is particularly convincing, but never mind that. I just cannot resist arguments of the form “You know that thing you like? That thing is an antitrust violation!” Of course you may be familiar with it from the notion, which we talk about a lot around here, that index funds might violate the antitrust laws. The theory there is that by owning large stakes in companies that compete with each other, index funds — and other diversified institutional investors — reduce the pressure on those companies to compete with each other, and create incentives for them to instead cooperate to keep prices high. Not everyone is convinced by this argument either.
But the essential aesthetic appeal of these arguments, to me, is that they claim that some basic element of modern capitalism, something taken for granted as essential and inevitable and normal (index funds, advertising), is actually a disguised form of monopoly. If you abstract away from the actual economic and empirical and legal arguments and just focus on the underlying structure of those claims, you can see why people might want to believe them. People are uneasy about the modern dominance of corporations, about the amount of control corporations seem to have over their lives. And that does kind of feel like an antitrust issue. It’s intuitive to think that the hidden chains of ownership that connect big corporations to each other might be … bad, or that the optimized algorithmic tools of persuasion that those corporations use to influence our decisions might be … bad. Exactly what “bad” means there is a bit nebulous, but perhaps it can resolve into “a violation of the antitrust laws.” If the bigness and connectedness and influence of big business aren’t antitrust problems, what is?
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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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