Moneybox

It’s Not a Crazy Idea for Elon Musk to Take Tesla Private

Elon Musk giving a speech.
SpaceX CEO Elon Musk speaks at the International Astronautical Congress on Sept. 29, 2017, in Adelaide, Australia.
Mark Brake/Getty Images

Here’s what can happen in the space of a single hour in the middle of the trading day: News can emerge that Saudi Arabia has quietly amassed a huge stake in Tesla. Elon Musk can tweet about taking Tesla private, possibly violating securities laws by doing so. Trading in Tesla stock can then be halted, with the stock up $25 per share to $367, pending clarification with respect to what on earth is going on. Oh, and the seriousness of the whole saga can be called into question thanks to Musk’s decision to announce that he was considering taking his company private at exactly $420 per share, which caused a lot of people to think that he was making some kind of pot joke.

The clarification did finally arrive in the form of a press release written by Musk. The press release cleared up some things (no, this wasn’t a pot joke; yes, Musk is serious) and did nothing to clear up others (like, crucially, where the money would come from). Taking Tesla private at $420 per share would cost north of $80 billion, which is a lot of money even by Saudi standards. Still, the investment does make some kind of sense for Saudi Arabia, in terms of helping to diversify its asset base away from oil. If electric cars end up making gasoline obsolete, then at least Saudi Arabia would have a very large stake in the world’s buzziest electric car company. Add in a few other large institutional investors and a dollop of extra debt, and it’s at least within the realm of possibility that Musk could have the requisite financing.

But why does it make sense for Musk? Mainly, because he would be able to concentrate on running Tesla, the company, without worrying about the Tesla share price. Public companies in general, and Tesla in particular, tend to get conflated with their stocks: If the stock is doing well, then the company is doing well, and vice versa. What’s more, attacks on the stock from short sellers, of which there have been many, are tantamount to attacks on the company. It’s highly distracting for a CEO, who ends up spending a lot of time worrying about the public perception of the company, at the expense of time spent actually running the shop.

If Tesla goes private, it would behave much like other large private companies—pre-IPO Facebook, for instance, or today’s Uber. Shares would exist and would trade; they just wouldn’t trade on a public exchange, and they would be impossible to short. Musk says he wants existing shareholders to be able to hold on to their shareholdings instead of being forced to convert them into cash, but details on that front are still extremely murky. Musk’s idea seems to be that public shareholders could convert their existing shares in public Tesla into shares in private Tesla via some kind of semipublic special-purpose feeder fund that would exist only to own a stake in Tesla. (Musk seems to think that such a fund already exists for SpaceX; it doesn’t.)

Once the press release was out and the company’s shares started trading again, the market greeted the announcement with a big thumbs-up: The stock is now back near its all-time high, closing just below $380 per share. Investors like Musk’s plan because if they buy at these levels and sell at $420, they will make a hefty profit. What’s more, what’s bad for the legion of Tesla short sellers is by definition good for anybody who holds the stock. And the shorts are in a very tough position, since there’s a very real chance that as the details of Musk’s plan emerge, the stock will only go higher. Much of Musk’s erratic behavior in recent months can be traced back to his war against short sellers, and one obvious advantage of this plan, for Musk, is that he would be able to strike a decisive victory against them and send them packing once and for all.

As for the price: In a world where Morgan Stanley claims that Waymo, the self-driving car subsidiary of Alphabet, is worth $175 billion before it’s made a single dollar in revenue, putting an $80 billion valuation on Tesla is not entirely ludicrous. It’s hard to get to that sort of number using the kind of valuation methodologies that other car companies trade on, but Tesla has never been a normal car company, and betting against Musk has never been very profitable. In fact, assuming that Musk is telling the truth when he says that he has all the necessary financing lined up, the main risk to his plan is that shareholders will consider the $420 price too low and will vote against Tesla going private, even if they too might prefer to own a stake in a private company.

If big shareholders do really have the option to remain invested, though, it’s easy to see how they might prefer a life that doesn’t involve having to battle short sellers or worry about stock market volatility. It’s far from being a done deal yet, but by the end of this year, it’s entirely possible that Tesla will be one of the most valuable private companies in America, overtaking Uber and up there with the likes of Cargill and Koch Industries. In order to get there, however, Musk is going to have to reveal his financing consortium. Who is willing to put up tens of billions of dollars to buy Tesla at an $80 billion valuation? We’re probably about to find out.