Elon’s $420 a share bubble has burst: Why Tesla isn’t going private anytime soon

LONDON — It has emerged Elon Musk was shooting from the hip when tweeting about taking Tesla private with "funding secured". He now faces serious legal consequences. – Alec Hogg.This is The Rational Perspective. I'm Alec Hogg. In this episode: why Elon Musk's Tesla isn't going private any time soon. Earlier this week, Elon Musk's biggest fan in the investment world urged Tesla's founder to stop his ideas of taking the company private. Catherine Wood of ARK Invest reiterated her bullish earlier projections in an open letter on the Monied Managers website where she reckons the company's shares are actually worth anything from $700 to $4,000 and that you'd see that in five years time. Musk, you may recall, threw any number of cats among Wall Street's pigeons at the beginning of this month, tweeting that he intended taking the company private at a price of $420/share. After peaking fractionally below $380, the price has since fallen back to its current $320 below the pre-tweet level and a long way from the funding secured share price that he was talking about..___STEADY_PAYWALL___.But so far, those who bet against Musk have been the big winners with disclosed short sellers of Tesla's stock making over $1bn in profit since Musk's bombshell tweet. These cynics think Miss Wood's valuations of up to $4,000 are a figment of an alternative reality but where they do agree with her (although, for different reasons) is that it's very unlikely that Tesla will be going private any time soon. The main reason for this is Saudi Arabia's Public Investment Fund – that organisation on which Musk pinning his buyout hopes – doesn't actually have the money to help him out and even if it wanted to pay $100/share more than the current share price, they can't do it. Here's energy analyst Dr Ellen Wald, President of Transversal Consulting.."The big question is really, "Does the PIF even have enough money to make this investment to take Tesla private?".Wait. This is important because I thought that this fund was massive and had endless money.."Oh, well it is massive but they've made a lot of investments and they have a lot of their money tied up in non-liquid assets. So, right now, they own most of the Saudi National Petrochemical companies (SABIC) and apparently, they'd like to sell that to their national oil company ARAMCO to gain more liquidity to make more investments. So, the money is actually really tied up and so they're going to have to either put more money in or they're going to have to sell some of their assets to do this potential Tesla deal.".That's fascinating. Do you have a sense of how much cash they have – how much liquid money they have?."Not at the moment. It's really unclear because they can always put more in it seems, if they want but their budget is skyrocketing and so they're using a lot of their money to fund their government and to fund their budget, so it's really an issue of 'can they do this', and there are some sources that the Saudi PIF is not necessarily all-in on this Tesla deal.".Dr Wald was talking to Bloomberg's Lisa Abramowitz and to reinforce her view, the London Financial Times reported this morning that the Saudi Public Investment Fund has lined up a consortium of global banks to lend it $11bn, simply so that it can meet existing obligations. This is quite clearly not the white desert charger readying itself to ride to Elon's rescue. That's the last news that Elon Musk needs right now because a buyout by the Saudis seems to be the only elegant way out of some very serious legal issues that his tweet has landed him in. Professor John Coffee, Head of the Centre for Corporate Governance at Ivy League College Columbia's law school is an expert in securities regulation and white-collar crime, so what does he think Tesla's founder's legal priorities should be right now?."Well, he needs to reach an agreement with his board and he needs to reach an agreement with the SEC, and he needs very much to shrink his shareholder base. To do a private transaction, he has to get a number of shareholders on record of Tesla below 300. Currently, there are around 1,150 so it's a 75% shrink. That's going to be hard to do. Simultaneously, he can't do this transaction if the SEC is suing him and I think what the SEC really wants from him – which he probably should give without a fight is some kind of an agreement about how he will make future statements about the company and this proposed transaction." Plus, I think the SEC is going to insist that you enter an agreement but you won't make further statements on Twitter without at least first clearing them with your general counsel and the board of investors want full information. .A Twitter statement – limited as it is to something like 140 letters – really can't explain the complexity. His statement that his funding was secured was an extreme overstatement and it's partly the product of having to compress what he was saying into a tiny number of letters. Thus, I think he needs to make a fuller statement and then add social media statements afterwards, but start out with something that you disclose to the SEC, to the markets generally, and in a corporate press release.".So, professor, there is a difference of course between 'best practice', which is something you've just described and something that is legally required, and something that would be against SEC rules. You've served as a member on the SEC Advisory Committee and I'm interested Professor, as to whether you would be telling that actually, they need to rethink disclosures on social media.."Well, I think social media is useful. No-one wants to keep it off of social media but that's not inconsistent with having simultaneous statements. Make your statement on social media to that audience but the rest of the market – not all of which goes to social media – is entitled to some disclosure that's filed with the SEC or something that's put on the corporation's website where everyone knows they can go. Selective disclosure is problematic.".What should the board do when the board is made up of different principles? Let me start with the most visible member to the audience and that is James Murdoch – of course, affiliated with Fox and perhaps Disney. How should a board member like James Murdoch act and react to all of this?."Well, of course there is a committee that doesn't include him. They've appointed a committee to engage in valuing the company and I think everyone should be focussed on the need to come up with an independent investment banker and an independent law firm that helps this committee decide what the fair value of the company is. The price cannot be $420 just because Mr Musk said that. The company has got to sit down and evaluate their current value, looking at all the current factors, and looking at professional help from investment banking firms. Once they do that, they might well decide they're worth more because the premium that Musk was offering was only 20% and frankly, most 'going private' transactions see something like 30% premium.".John, what's the board's duty to investors right now, after that incident with the New York Times?."Well, I think right now, the company has so many problems with their burn rate on cash flow that they've got to make sure they can communicate clearly, that they are viable, and that they are not burning money at such a negative cash flow that they can't afford to issue new debt. They already have $10bn in debt outstanding and the idea that you can triple that is something of a fantasy.".Within the board, I guess it's a smaller, more focussed board and I guess its friends of Elon. Are they getting enough advice now and how does the board interact with their independent law firm?."Well, they need to choose the independent law firm. They have one. They really have two law firms because they have one handling the possible litigation and another dealing with valuing the company but the committee needs both an independent investment banker and an independent law firm that will be there focussed on 'what is the fair value of this company today', what do we need to know, and how do we negotiate with Mr Musk? It is not their job to sit down and say, "Yes" to Mr Musk. It is there job to say, "The fair value of this company given all the options in front of them is at least X and therefore, we want you to improve your offer"..Is this board independent of Elon Musk, John?."Well, I must say that they have more relationships with him over a 20-year career than any other board I can think of right away. It's kind of an incestuous relationship because people even on the committee have previously been employees of Mr Musk at other firms.".What would you do then? What would be the John Coffee action for this board? They're going through all the right things. I get that but what is the next creative step for a board to get control of an uncontrollable founder/CEO?."Well, I think the first thing would be to establish a protocol. You will make no more statements about the company or this transaction without first having them cleared by our general counsel and by the law firm representing the independent committee. We want to make sure we don't get the obligation to fight the SEC and private losses because you are too impulsive and saying things to quickly and too glibly.".What will be the lasting impact on this in Silicon Valley? I mean I know Tesla's unique but we've had a few other entrepreneurial tech types feeling like they play with their own record book.."I'm afraid that all depends on why this is a success or a failure." This is still a 'to be resolved' drama. Every day is like a kaleidoscope. This changes in terms of whether people have losses or whether they have gains, whether the burn rate is so high nothing seems feasible, or whether the board should be staking more than $420. This has to play out and I think settling with the SEC so that you no longer have them over your shoulder, putting a cloud on the transaction and then, coming up with a valuation that you're comfortable with. That can't be just, "We're going to do what Mr Musk offers"..Tesla's SEC investigation?.Professor Coffee was being interviewed on Bloomberg Surveillance by Tom Keene and Jon Ferro. Okay, so what exactly is the US's regulator (the SEC) investigating? Here's another leading corporate governance expert, the co-director of the University of Pennsylvania's Institute of law and economics, Professor Jill Fish.."The tweets have gotten a tremendous amount of attention. They've obviously had a huge effect on the stock price and so I think it's absolutely expected that the SEC would want to probe into this and find out exactly what Elon Musk knew at the time that he made the statement, what his purpose was in making the statement, and what exactly he meant by those keywords 'funding secured'..Based on your experience, if you were called in to offer legal counsel, what would you say to members of the Tesla board?."I guess I would want to have an understanding of the situation. I think it's really a very rapidly evolving situation. We, as the public aren't sure at this point exactly what the status of the deal is or what the status of the negotiations are. I learned last night that Goldman and Silver Lake were involved in this, so my first step would be to find out what's going on, how far along things are, and what the status of the various players are.".One thing that I'm struggling to understand is how long an investigation like this would go on by the SEC and what the potential consequences are. Could you shed some light there?."Well it's very hard to predict because we don't know what the SEC is going to find. I think the SEC's first priority is to make sure that the public, the capital markets have accurate information and so I think the purpose initially is to clarify the situation, to find out whether any corrective disclosures are necessary, and to move very quickly on that. I think at this state, it's much too early to try to understand. Are they going to bring in enforcement action? Is there a possibility of some sort sanction etc.? We just don't know.".If that's the case (and I'm trying to understand when I talk to investors in Tesla, analysts), they say, "Well, there's this SEC risk." How big of a risk is it if the investigation might take a very long time? It might just result in a hand-slap of a fine.."I think in terms of affecting whether Tesla goes private, the SEC investigation is a limited risk. I think it could upset the applecart so to speak but I don't think the SEC investigation would prevent the company from going private. I think with respect to Elon Musk's personal situation, a lot of that is going to depend on these unknowns on what his intent was, whether there was some sort of purpose to deal short-sellers and manipulate the market or whether he just got ahead of himself in the SEC's view.".Professor Fish, is it legal for the CEO of a public traded company who also owns nearly 20% of a company's stock to put out a specific stock price for a 'take private' deal unless they have a committed and/or some kind of documented evidence that such a conversation or negotiation is taking place?."Well, you put it very bluntly and that's kind of a hard statement. I think they're a bunch of questions that I would ask or that the SEC would ask in terms of determining legality but I think the way the tweet was framed in terms of his intention or his goal at a specific stock price; I don't think that's necessarily problematic. One of the things that we've seen with Elon Musk's tweets (and it goes back before this specific incident) is that he's pushing the envelope. He's using Twitter to communicate information more rapidly in a style that's really unconventional compared to your typical CEO but I don't think that's something that's necessarily illegal. Frankly, I think it's something the markets may have to adjust to as information becomes more time-sensitive as we start to see greater use of social media etc.".Legal opinion on Musk's Tesla Tweet.So Professor Fish is a little out on a limb here, thinking that the world will have to adjust to the likes of Elon Musk rather than the other way around. Tesla's founder is sure to like that little bit of news. She was talking to Pimm Fox and Lisa Abramowitz on the Bloomberg PNL podcast but not every legal expert sees it that way. Here's another law professor. This time, it's Charles Whitehead of Cornel.."So, there are a number of things on the securities, the capital markets side – not just private litigation but an SEC investigation and the uncertainty around that is one of the reasons why I suspect you see this depressed stock price. You also have real questions about the board of directors. One of the questions that will potentially come up is whether or not the board was properly overseeing the management of the company. Not just based upon the tweet but more generally based on the recent New York Times interview with Elon Musk where he talks about just how overextended he is. I think a board, particularly when you're dealing with such a charismatic founder as Mr Musk, presumably is aware of the fact that he's overextended. .You hear about three or four days in a factory and not seeing sunlight and you ask yourself whether or not the board was properly exercising their oversight function in preventing something like this from happening and not stepping in to try to help right the management structure. So I can't pinpoint any one area because I think there are a whole range of issues but if you were to ask me to draw on one, it would probably be on the securities side. The SEC potential litigation as well as the private lawsuits. It really does go into this question of 'what do we mean by secured funding'. A word to the wise: if you're going to announce a 'going private' transaction, don't do it via Twitter. .You tend to have a lot more of a focussed analysis of what we mean and what we actually want to describe in terms of secured funding but that's how it's referenced. The NBO is a complicated transaction. It's got all sorts of conflicts and so to announce it in a limited disclosure without a lot of background to it is a real problem. On the securities side, the short-sellers clearly have an issue and they're going to argue that this was done in a way to prop up the price using materially inaccurate information. The shareholders more generally…people that may have transacted in securities may also sit. Forget short-sellers. People decided to go ahead and sell or buy stock, depending on which side they were and depending upon when it happened vis-à-vis the tweet, may also have claims against the company..Fascinating stuff. On his show – The Cable – Bloomberg's Jonathan Ferro pulled in some senior colleagues: Cameron Crise and Damian Sazawal to discuss the whole Tesla story, starting with Musk's newest fight with sleep activist and HuffPost founder Ariana Huffington. Let's eavesdrop.."What would a show be at the moment Cameron, without talking about Tesla – the CEO taking on digital media mogul Ariana Huffington over the weekend who urged him to take some time off and then he wrote back on Twitter at 2:30am saying, "Ford and Tesla are the only two American car companies to avoid bankruptcy. I just got home from the factory. You think this is an option. It is not." 'I'm talking about bankruptcy is probably not the way the board wants him to go with his conversations at 2:30.".That horse bolted on April 1st, right with his little joke. Do you remember?."We've talked about it before.".So, my question… I don't care what Ariana Huffington thinks.."Neither do I." .My question is: what exactly is Mr Musk supposedly doing at the factory say at 1:00 in the morning? Is he doing a paint job in the tent? Is he screwing on one of the touchscreens? I mean mate learn to delegate..I spoke to Chris Writer who runs our coverage of autos in Europe, knows most of the CEO's and I asked him, "Does anyone leave the factory floor at 2:30?" He said, "The only person that was anywhere close to doing anything like the working week of what we would expect Elon Musk is apparently doing, was Sergio Marchionne and he wasn't doing that." I asked Mr David Welsh who runs our auto coverage out of Detroit whether anyone in Detroit is doing the same thing. Is Mary Barrett doing that? Is Mr Hackett doing that? Guess what? No, they are not. So, what's he talking about?."Listen, the guy has done more than the three of us have but it's important to recognise that the skill set required to bring a new product to market is not necessarily the same skill set that's required to run a profitable business. Musk has shown that he is able to get new products to market but he's also shown that he can't run a profitable business and he's not terribly unique in that regard. I read a piece. I can't remember who wrote it overnight – someone going through the history of the auto industry and how Henry Ford obviously a visionary of the auto industry. The only reason to look forward was profitable and because he had these other guys basically running the business for him and Musk doesn't have that. Musk, for better or for worse, is like Steve Jobs or a Bill Gates in the early days of Microsoft. He's the sort of totemic figurehead.?."Cameron, that's a great point. I mean, who else is going to run this company better than he right now?."Anyone with any ability to run a manufacturing business.".I don't know about that. He's a little bit of an eccentric but at the end of the day, you leave me on a deserted island and you look for the guy with the biggest bat and when investors are reducing their positions in Tesla; that's something that I take note of. Yeah, I'd be hard-pressed for anybody who can really run the company better than he at this point.."I couldn't disagree more because he has not got experience of running a complex manufacturing process. That emerged a year ago when he talked about 'all robots were kind of a bad idea'. Now, if your argument is 'could anyone make the company's market cap as high as his, that's a separate question and I would answer that he is uniquely positioned to maintain a high market cap. Then again, he's also uniquely positioned to benefit from a high market cap via the escalators…remember that sexy $2.5bn options contract he signed.".Let me ask you this question now. There has been key man risk at Tesla for a while; that if Elon Musk stepped down many people would have considered that stock negative. Are we at an inflection point whereby if the board replaced Elon Musk, that actually this could be Tesla-positive.."That's a very good question. I think on balance, probably not yet but we're probably approaching that level and that's a function not only of news-flow but also of price. Obviously it's a lot easier to make that call if the stock goes to 100 than if it sticks on a three-hand. I also think the attitude of institutional investors will be different from that of retail because retail investors and Tesla – judging from social media – are essentially a cult. I don't think there's any other way to describe it. Whereas the institutional guys want to see the company make money..That's the thing. He has managed to take some of the largest institutional pools of wealth out there and convinced them that his vision is something to be invested in.."That's true, Damian. Just to wrap up. Final question to you Damian, you've covered many credits in a lot of crazier situations than I imagine Tesla is in right now – believe it or not – in emerging markets. Are we at the point where the board needs to step in and do something?".For Tesla, you mean. I think they do. They have to show that there is some sort of corporate governance there. Absolutely, they have to show that this is a real company, a publicly-owned/shareholders rights have all that good stuff. I think that you're right in the theme that this is a cult following and people are invested in Elon Musk more so than they're invested in Tesla.."But you'd have to say the board shouldn't be part of the cult following, Cameron.".Yeah but that would help if there weren't people on the board whose last name was Musk and whose first name wasn't Elon. Yes there are independent directors but there are also shall we somewhat less independent directors..Yes indeed. Don't you just love it when well-informed journalists relax and start sharing their backstories? The obvious conclusion from all, Elon Musk's troubles seem to have only just begun and they're certainly not going away anytime soon. This has been the Rational Perspective. Until next time, cheerio.

Elon’s $420 a share bubble has burst: Why Tesla isn’t going private anytime soon

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