Why Elon Musk’s Tesla Should go Private and Why it Won’t?

The famous celebrity entrepreneur Elon Musk recently took a page out of Donald Trump’s handbook. Trump has been famous for his Twitter rants. This time it was Elon Musk who tweeted about his intent to take his company Tesla private and set the Wall Street rumor mill abuzz. Tesla is basically a startup company with an innovative product. The company produces luxury electric vehicles. Consumers are very enthusiastic about this product.

Tesla’s vehicles are considered to be very expensive. Yet, there are people who wait for several months to get the delivery of their product.

However, this promising startup seems to have fallen into trouble soon after Elon Musk took the company public in 2013. Tesla shares sold for $17 per share during the IPO. This gave the company a valuation of close to $250 million. In 2018, Tesla has a massive valuation of close to $60 billion! Since the company has grown so big so soon, it has been the target of several stock market attacks.

In this article, we will explain the reasons why going private would be the best thing for Tesla. However, we will also try to understand why going private may not really be an option given the complexities of the situation.

Why Elon Musk’s Tesla Should go Private?

• Competition: Elon Musk and his company Tesla were pioneers when it came to the introduction of electric vehicles. However, this may not remain the case for very long. All major automobile companies including German manufacturers have started investing heavily in electric vehicles. As a result, competition within the electric vehicles space is going to get intense. This is the reason why it is important that Elon Musk and Tesla concentrate on building better technology. Right now the company is caught in the midst of a financial storm. It seems like Elon Musk’s time is mostly occupied by Tesla’s stock market woes leaving no room for innovation.
• Short-Term Orientation: The very trait that made Elon Musk’s Tesla successful is being jeopardized. Tesla is a futuristic company. The vehicles are being created keeping in mind the technology of the future. Hence, for Tesla to be successful, it needs to continue being futuristic. The stock market, on the other hand, has a short-term orientation. The expectations of stock market investors are at odds with the basic business model of Tesla.
• Short Sellers: Tesla is the most shorted stock across the world. The short sellers believe that Tesla is needlessly overvalued and hence want to drive the valuation down. Some are of the opinion that Tesla is a bubble and will eventually go down to zero. Dealing with short sellers has become a daily activity for Tesla. This is not a healthy environment for Tesla to operate in. Hence, going private makes perfect sense.

Reasons Why Tesla Can’t go Private?

Elon Musk and his company Tesla seemed to have gone too far on the public corporation route. Going private is indeed possible. However, it will be a very challenging task indeed. Some of the challenges have been listed below.

• Already Overvalued: As mentioned above, many investors and speculators believe that Tesla is one of the most overrated shares in the world. This can be substantiated by comparison with General Motors.

  Tesla has sold mere 100,000 vehicles in the last year viz.2017 whereas General Motors has sold over 10 million vehicles! Tesla has not been able to achieve a profit till date whereas General Motors has already earned more than $70 billion in profits since it filed for bankruptcy in 2010.

  Yet, Tesla has a market valuation of over $60 billion whereas General Motors is much behind.

  It is true that Tesla’s vehicles are more futuristic. However, that does not seem to justify the sky-high valuation. The common understanding amongst people in that Tesla is an overvalued stock.

  However, if Elon Musk wants to take the company private, he would have to pay a premium on the existing stock price. This would mean overvaluing a stock which is already overvalued. This does not make any financial sense and hence is unlikely to happen.

• Unclear Funding: Elon Musk’s offer of $420 per share seems to have been made without any strong backing. Usually, when a company wants to go private, they make an offer only after they have been able to secure funding.

  It is unlikely that Elon Musk has secured any funding at all. This is because the total value of the deal would be close to $80 billion. Since Musk holds 20% shares himself, he will still have to arrange for close to $60 billion to buy out everybody else’s stake. $60 is a huge amount. This is not the kind of money that banks and private equity firms will be able to arrange at short notice.

  It is unlikely that any single bank will be able to provide so much cash to the firm. Ideally, a consortium of banks would be needed. However, there has been no activity on Wall Street to create a consortium which would take Tesla private.

  Elon Musk has hinted that he will receive funding from sovereign wealth funds. There have been speculations that Saudi Arabia or China might be interested in investing in the firm. However, since it does not seem like the current valuation is justified it is unlikely that these sovereign funds will make such a big investment in Tesla.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.