Is Elon Musk going insane? Or has Elon Musk started believing his own press releases? Those suggestions come from two different news articles analyzing the fallout from Tesla CEO Elon Musk’s suggestion to take Tesla private, and his subsequent interview with the NY Times in which he admitted this year has been the most excruciating of his career, and that the worst is yet to come for him personally.
It brings to mind a scene from The Revenge of the Electric Car where Musk was explaining to the camera (hence to film-maker Chris Paine) that the phase he’d just gone through drove him insane. The phase in question was when they had serious trouble assembling Tesla Roadsters quickly enough, with enough quality, to keep the customers happy. During that phase there was a layoff (that set free some Tesla engineers to launch other companies), financial problems, and the near bankruptcy of Tesla Motors.
That phase is in the distant past, and the company has gone through several tense phases since. In the current phase, Tesla is the most-shorted stock on the stock market (a fact that is weighing heavily on Elon Musk) and Tesla’s staff is working hard, inhumanely hard I believe, to get Tesla Model 3 production working enough to deliver on the promised $35,000 Tesla Model 3. The company has had to debug production bottlenecks and face mountains of criticism.
Promised Tesla Model 3
Tesla long promised the Model 3 would have a base MSRP of $35000, and at first the company promised a 100,000/year production rate by the beginning of 2018. When Tesla Model 3 reservations wildly exceeded expectations, the goals were upped to a 500,000/year production rate. The reality of what occurred is more than a little different.
A couple years ago Elon Musk explained that as a CEO he likes to set the goals high – aspirational goals, he calls them – knowing the company will not meet those goals. But isn’t there a fiduciary duty for executives of a public company to make truthful statements? Don’t shareholders launch lawsuits in cases like this? What do stock analysts do if a company repeatedly does not perform to the expectations set by management? Do securities regulators (the SEC) have anything to say in such a case?
The reality is that — Tesla has so far focused on manufacturing the higher margin Model 3’s, because these have a higher profit margin — and that the sales rate reached the 70,000/year mark in June 2018, and the 171,000/year mark in July 2018. In other words, the production bottlenecks seem to have been cured, the production rate is getting up to where it should be, several months later than predicted.
To get to this point Elon Musk paid deeply as a person. He famously “slept at the factory” for long periods both in Fremont and at the Reno Gigafactory, to directly participate in figuring out production solutions. The NY Times article describes several stints of not going outdoors for days at a time. It also mentions a different girlfriend than Amber Heard, so at a personal level this cost him at least one relationship.
The fateful tweet
On August 7, Elon Musk posted the following tweet. In the NY Times interview it’s said Musk wrote this while driving to the airport from his Los Angeles home, in order to spend a long day first at the Gigafactory then in Fremont or Palo Alto, working on business.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
This is not how companies announce a plan to go private. First, the amount is more than strange because of the marijuana conation (in the article Musk had to explain that he does not smoke marijuana because of how it saps willpower). Second, a deal like this is worked through corporate processes — the Board was reportedly blindsided by this — and must be simultaneously accompanied with notification to the SEC — the SEC was not notified, nor was this tweet reviewed by anyone other than Elon Musk.
At first it was not known where the money would come from. Then it was revealed that Tesla has been in negotiations with the Saudi Sovereign Wealth Fund. Uh?? Say what? Such a deal would require the funder(s) to buy shares in Tesla, so this means Tesla is negotiating with oil billionaires to buy a large stake in Tesla to help it go private? Then it was revealed the funding is not certain, and instead the companies are working through a long list of questions, and of course there are US Government agencies whose approval (or not) is required for foreign investment.
A huge flaw in the plan may be the fact that 60% of Tesla’s shares are held by “institutions” (e.g. mutual funds). Such investors often cannot hold shares of private companies, and would therefore have to sell off their holdings. This could concentrate Tesla ownership in the hands of some folks like the Saudi Sovereign Wealth Fund that might not be the best ownership.
Musk claims that the Saudi’s are seeking to diversify beyond petroleum investments. The fund has already purchased a 5% stake via the public stock market.
There seems to be two primary goals: a) eradicating the effect of short sellers on Tesla, b) allowing the company to operate without meeting quarterly milestones.
News reports are suggesting the Tesla Board is seeking someone to take on some of Elon Musks duties, to relieve his burden.
The process of going private
Elon Musk posted the following on the Tesla blog:
Following the August 7th announcement, I have continued to communicate with the Managing Director of the Saudi fund. He has expressed support for proceeding subject to financial and other due diligence and their internal review process for obtaining approvals. He has also asked for additional details on how the company would be taken private, including any required percentages and any regulatory requirements.
Another critical point to emphasize is that before anyone is asked to decide on going private, full details of the plan will be provided, including the proposed nature and source of the funding to be used. However, it would be premature to do so now. I continue to have discussions with the Saudi fund, and I also am having discussions with a number of other investors, which is something that I always planned to do since I would like for Tesla to continue to have a broad investor base. It is appropriate to complete those discussions before presenting a detailed proposal to an independent board committee.
It is also worth clarifying that most of the capital required for going private would be funded by equity rather than debt, meaning that this would not be like a standard leveraged buyout structure commonly used when companies are taken private. I do not think it would be wise to burden Tesla with significantly increased debt.
Therefore, reports that more than $70B would be needed to take Tesla private dramatically overstate the actual capital raise needed. The $420 buyout price would only be used for Tesla shareholders who do not remain with our company if it is private. My best estimate right now is that approximately two-thirds of shares owned by all current investors would roll over into a private Tesla.
What are the next steps?
As mentioned earlier, I made the announcement last Tuesday because I felt it was the right and fair thing to do so that all investors had the same information at the same time. I will now continue to talk with investors, and I have engaged advisors to investigate a range of potential structures and options. Among other things, this will allow me to obtain a more precise understanding of how many of Tesla’s existing public shareholders would remain shareholders if we became private.
If and when a final proposal is presented, an appropriate evaluation process will be undertaken by a special committee of Tesla’s board, which I understand is already in the process of being set up, together with the legal counsel it has selected. If the board process results in an approved plan, any required regulatory approvals will need to be obtained and the plan will be presented to Tesla shareholders for a vote.
We wish we could share in this confidence.
Bottom line is there are many hurdles that have to be jumped before Tesla can go private. Therefore Musk may not be able to pull it off, and Tesla might remain as a public company.
Elon Musk as Tesla CEO
To think that Elon Musk is the only person who can lead Tesla is ridiculous. A lot of our collective hopes are riding on the success of Tesla. In the current phase, when clean energy technologies and policies are coming under greater attack, a company like Tesla, that is largely mission-focused, looks like our best hope for solving environmental and climate woes. But does that mean Elon Musk is the correct person to lead the company?
The Tesla Board previously voted strongly in favor of that opinion.. January 23, 2018: Tesla puts golden handcuffs on Elon Musk for at least 10 years of leadership .. meaning that Musk’s current compensation package is a $0 salary, and a huge stock payoff if the company grows to an insanely huge size. They want Musk to increase the Market Cap to $650 Billion over the next 10 years.
Today? The Board might be looking to oust Elon Musk completely, or at the least rein in his actions. Who would blame them? Musk’s tweet has been damaging to Tesla … and it’s not just this tweet, but the whole thing of driving the company at an inhumane speed. What is the human cost to the employees? And, at the bottom line, in corporate results, is it appropriate to continually overstate goals that then are not met? And if Elon Musk’s behavior is getting more erratic, due to the stress, doesn’t that put Tesla at risk?
- March 2013: Tesla Motors reports massive losses for 2012, profitability in 1st quarter 2013
- April 2013: Was the Tesla Motors claim of profitability for Q1 2013 an April Fools Joke?
- January 2015: Tesla Motors requires 10+ car factories, 10+ gigafactories, by 2025, to meet Musks projections
- April 2015: Tesla Motors nearly died in 2013, sought Google buyout
- May 2015: Tesla Motors runs huge loss to build up car & battery production capacity
- June 2015: Tesla Motors doesn’t look like company gobbling at the public tax dollars trough
- July 2015: Tesla Motors will fly high unless it fails to reinvent the world, says dueling stock analysts
- August 2015: Tesla’s cash burn rate a speed-bump on the road to success, we hope
- August 2015: Is Tesla losing $4000 per car sold? Nope, it’s capital investment for future sales
- January 2016: Tesla Motors expands production 2.5x, from 20k to 50k per year, since 2013
- February 2016: Tesla Motors ready to be profitable again now that Model X is in production
- February 2016: Tesla’s Model 3 will be successful because the Model S is excellently successful – supposedly
- July 2016: Tesla’s second master plan is the most audacious thing I’ve ever read – Musk has topped himself
- July 2016: Tesla Motors to reach 120,000 cars per year production in 2016
- June 2017: Tesla Motors could be profitable today, at the cost of a slower business plan
- July 2017: It’s Tesla Model 3 day, it’s not the second coming of Christ, but is it close?
- February 2018: Tesla Motors versus the other Car Makers and the future of the Car industry
- February 2018: Tesla delays deliveries angering large number of fans, destroying credibility?
- February 2018: Tesla Motors running at a loss for another quarter doesn’t mean Tesla’s imminent collapse into bankruptcy
- June 2018: Tesla layoffs seen by The Market as a big non-issue
One aspect of Tesla’s history the last few years looks like this. This company is constantly running at the edge of collapse. We appreciate that Tesla has huge goals and has to move very quickly. But what is the cost of running this way for so long?
The Tesla short sellers would not have a leg to stand on if Tesla’s financials were in better shape.
Sources and summary: https://greentransportation.info/news/2018/08/elon-musk-overworked.html
Elon Musk blog post: https://www.tesla.com/blog/taking-tesla-private
Elon Musk followup blog post: https://www.tesla.com/blog/update-taking-Tesla-private
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