If you don’t pay attention to the Twitter rants of many tech company CEO’s, you most undoubtedly have followed Elon Musk, the brazen tech guru behind Tesla’s battery powered automobiles. Mr. Musk has often answered analysts, taunted other analysts or simply gone off the proverbial deep end by saying things on Twitter most CEOs of a public company wouldn’t dream of tweeting.
Much to many people’s surprise yesterday Mr. Musk announced via Twitter his intention to take Tesla private. With that announcement shares in Tesla went up approximately ten percent after trading reopened from the halt due to the pending news. Obviously, many who have short positions in the stock were slightly frazzled by the move. Musk has long criticized those who have been consecutively shorting Tesla. Was this the solution to finally squeeze the shorts? Was Musk’s announcement actually legal under securities laws? Is this a viable option for Tesla? All good questions…..
First, if one wanted to squeeze a short position, any direction the company can take itself that would result in an increased share price would certainly put pressure on a short position. So, from that aspect check the box for finally getting somewhere on the annoying shorts. (But that will most likely be short lived)
Second, the legality of Musk’s tweet based on prior rulings from the Securities and Exchange Commission seem pretty in line with Regulation FD. The company can most definitely utilize Twitter as a form of announcement for company news and statements. This was solidified by other companies in the information age who utilized social media as a form of press release. Gone are our grandfather’s days of actual press releases and filings with the specific regulators. Of course if Musk does not have the financing lined up which he stated in his tweet then the tweet would be an issue in regard to securities regulations. Obviously, if there is a specific piece of news or strategy on behalf of the company, it must file the appropriate filing. But, one would guess all the more reason not to be public right? Third, and more importantly what would Tesla the private company become?
Well, lets kick the rock down the road apiece shall we? Becoming a private company would mean Tesla would not have to disclose important competitive information. Obviously that is a major reason for it to want to be a private company. In the businesses that Tesla is in, keeping information confidential would give it back a competitive advantage over would be competitors. It would no longer have to make the normal quarterly disclosures it now makes about financials, employees, legal issues and most importantly how many cars it produced and delivered. So for starters, it would actually stop the trend of analysts focusing on each and every tidbit of information from the company.
Additionally, it would stop the normal quarterly focus on performance. Public companies have increasingly been forced to plan on a quarterly basis when it comes to their business plans, as their earnings get judged in the current public system; quarter-by-quarter. Focusing a business plan on multi-year strategy that reports quarterly is somewhat problematic. Investor / shareholders do not have the same overall planning interests as management and long term holders. This creates a dichotomy in the underlying plans of the company. Management cannot focus on the long-term goals of building out a strategy and seeing it to fruition, most especially in a technology company, as it needs to refocus each ninety-day cycle and try to please the world. Decisions that can be right for the next quarter may not be right for the next year or several years. Remember, sometimes building something takes time. Most shareholders or investors forget that by the time we have all heard about a company or the company is public it has gone through multiple levels of evolution. But in the information age the new paradigm is to get to the market first and be dominant. Which can sometimes be problematic when focusing on quarterly results.
Tesla, unlike other companies has an audacious plan from a swashbuckling CEO. While most tech companies want to disrupt a market, Tesla is trying to change the use of energy in every day products such as automobiles and homes. No easy task unfortunately. So in order to achieve these goals, Tesla has to have a multi-year plan and not be hamstrung by the focus on quarterly reporting. That also goes to the question of market capitalization and valuation of Tesla and its assets or technology. To structure much needed financing over the years Tesla has had to utilize stock as collateral or currency. So management is always focused on maintaining a decent stock price instead of being focused on executing a long-term business plan. Being private would allow the team to focus on the business not the market prowess.
So all in all, being private would be help Musk and Tesla achieve some good things. But, don’t go celebrating just yet. Many shareholders may not agree that $420 a share is the right premium for them to sell their shares as it is just shy of twenty percent (20%) from the current traded price. Most die-hard Tesla shareholders are looking for a larger return on investment. Additionally, in order to achieve this Musk would have to prove that he could pull off and repay what would may be the largest corporate buyout in history. At the $420.00 figure, this deal would most likely been in the ballpark of $60 billion. But, Musk has taken on the impossible or highly unlikely before. Stay tuned…….