Why would Musk make Tesla private? - August 19, 2018

Why would Musk make Tesla private?

Elon Musk announced on Twitter this month that he’d like to take Tesla private. Many believed that he was bluffing to teach investors with short interests a lesson. That might have serious (even penal) consequences. This week he published a long post on Tesla’s blog to clear some things up about his plan. It makes sense, but it’s still risky.

At the beginning of the month Elon Musk announced that he wants to make Tesla private again at $420. That’s a rather high price, considering that at the time of his announcement a stock was only worth $363. This was not only strange because of the high price itself, but also for the number 420 being a symbol of smoking weed.

Why is it a good idea?

But it seems that Elon Musk had no secret messages, he really wants to make Tesla private again. It makes sense. As a publicly traded company Tesla continuously has to report its results about cars built and sold, how they see their competitors and their future plans. If they went private, they wouldn’t have to do all this, so their biggest competitors would know a lot less about them.

According to Musk, there’s also enormous pressure on Tesla to meet investors’ expectations. The founder believes that this isn’t good for the company. On the long run a slower growth and perfecting manufacturing methods would benefit them better. (Although, sometimes Musk himself makes bold promises on his own.) These are all serious reasons for Musk to make Tesla private again.

What could go wrong?

The worst thing might be if the Tesla CEO only tweeted his idea to raise stock prices. A quarter of all stocks are held in short positions (which means that many investors are expecting Tesla’s prices to fall soon). With his announcement Musk surely scared people holding short interests, as prices started to rise soon. Stocks jumped 10% that day but went back since then.

Changes in Tesla share prices

Click on the image to see it in full resolution

But if Musk only did this to influence stock prices, well, that may even be illegal. If it turns out that him (or someone close to him) used the positive market atmosphere after his tweets for trading, that would be problematic. According to NBC’s legal experts, authorities probably won’t do anything about his tweets, especially if the deal goes through. But if he fails to fulfil his promises, "there could be potential civil litigation by all shareholders".

What about funding?

At the moment that’s not likely, as it seems that Musk is serious about his plans. He published a long post on Tesla’s blog about the background of his idea. He also describes why he thinks he will have the funding to go through with it. He wrote that he’s in talks with Saudi Arabia’s sovereign wealth fund since the beginning of 2017. The “fund has approached me multiple times about taking Tesla private”, he wrote, adding that their reason was “the important need to diversify away from oil”. This same fund already bought 5% of Tesla, but they still want to move forward with privatization. “This is why I referred to “funding secured” in the August 7th announcement”, writes Musk who is also in talks with other investors.

According to Financial Times (article behind paywall) Saudi Arabia’s sovereign wealth fund might be more interested in Tesla’s solar panel and battery technology than vehicles themselves. Anyway, Musk is still determined to go on with his plan and he’s still looking for options and ideas on how to take Tesla private. If they manage to create a plan approved by the board, it “will be presented to Tesla shareholders for a vote”.

Until then, we all have to wait to see if this potentially $70 billion deal can go through, but Musk doubts it will take that much money to make his dreams come true.

Update: Since publishing our post, Elon Musk announced that considering all possibilities and consequences, it's better for Tesla to remain a publicly traded company. This means that he's plans of taking it private are canceled.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.