20 August 2018

Musings on Markets: “The Privatization of Tesla: Stray Tweet or Game Changing News”

As I look at the list of criteria for a good buyout company, I see nothing that would bring Tesla onto my radar as a potential candidate:

  1. It is a growing company and it needs new capital to not only deliver on its growth promise but to survive for the next few years. If you are more optimistic than I am about Tesla, you may disagree with how much cash the company will have to raise to keep going, but I challenge even the most hardened optimist to tell me how the company will be able to increase production to a million cars or more without investing mind blowing amounts in new capacity.
  2. If markets are punishing Tesla by under pricing the company, they are doing so in a very strange manner, giving it a higher market capitalization than much larger, more profitable automobile companies, ignoring large losses and generally tolerant of Elon Musk’s errant behavior. In fact, if the critique of markets is that they are short term and focused on profits, Tesla would be the perfect counter example.
  3. It is true that there was substantial drama and market volatility around the 5000 cars/week production target, and there may be some in the company who have drawn the lesson that since there will be more production targets to come in the future, the company needs to operate out of market scrutiny. That would be the wrong lesson, since almost all of the drama in this episode, from setting the target (5000 cars/week) to the constant tweets about whether the targets would be met, was generated by Elon Musk, not the market. In fact, a cynic would argue that by focusing the market’s attention on this short term target, Tesla has been able to avoid answering much bigger questions about its operations.
Aswath Damodaran

As usual, Professor Aswath Damodaran has a great follow-up on this story. He’s been critical of Tesla in the past – or, better said, of the nonsensical decisions of its CEO Elon Musk –, but never without reasoned arguments, and this time is no exception.

He also brings up an interesting point that I have briefly considered while reading various analyses on this news, but forgot to mention in my previous post. The best solution out of this mess for Tesla, legal investigation aside, would be an acquisition by a tech giant, most likely Apple or Google. I seriously doubt though that Elon Musk would go along with a plan that would restrict his control over the company, or that Apple’s reserved corporate culture would condone his Twitter excesses.

There is one final possibility that I considered and it is that a corporation with deep pockets would provide the money needed to take Tesla private. Given how much money is needed, the list of potential buyers is small and perhaps restricted to the large tech companies - Apple and Google. While they have the cash and perhaps may even have the interest, Musk's follow up that he would continue to run the company and hold on to his ownership stake strikes me as a poison pill that no corporation will want to swallow.

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