Tesla’s stock price has had its ups and downs this week. The first major change in stock price in this sporadic week followed one of Elon Musk’s tweets, as usual.
“Am considering taking Tesla private at $420. Funding secured.”
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
Musk’s letter and plans
This tweet was followed by a letter Elon Musk published on Tesla’s website and sent to all its employees on Tuesday.
“Earlier today, I announced that I’m considering taking Tesla private at a price of $420/share. I wanted to let you know my rationale for this, and why I think this is the best path forward.”
$420 a share, times 170 million shares, is $71.4 billion, so Musk would need roughly 72 billion dollars to buy out the shareholders and take Tesla private. But what does it mean for a company to go from public to private?
The differences between a public and a private company include the number of members required to start the company, the number of company directors, and the biggest difference is that a public company is listed on a recognized stock exchange and its stock is traded publicly while a Private Ltd. company is not listed on a stock exchange and is held privately by its members. Privatization is when private investors or another privately held company buys out the shareholders of a public company, taking the company private. In Musk’s letter, Tesla’s stock’s swings seem to be the main reason he intends to take Tesla private.
“First, a final decision has not yet been made, but the reason for doing this is all about creating the environment for Tesla to operate best. As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.
Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term. Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company.”
Tesla vs SpaceX
This is not the first time Elon Musk has considered taking Tesla private. Tesla was taken public in 2010 and in 2013, Musk wanted to take it private in a partnership with Google but that didn’t work out. SpaceX, one of Musk’s other companies, is privately held, with no plans to go public, and Elon used it as a point of comparison in his letter.
“SpaceX is a perfect example: it is far more operationally efficient, and that is largely due to the fact that it is privately held. This is not to say that it will make sense for Tesla to be private over the long-term. In the future, once Tesla enters a phase of slower, more predictable growth, it will likely make sense to return to the public markets.”
Tesla’s stock swings this week
Tesla’s stock saw a big increase following Musk’s tweet, jumping from its highest on Monday which was $352.46 to its highest on Tuesday which was $379.57. Yet since Musk has tweeted that fund was secured, many believe he has shown no evidence to support that and started questioning it which led a plunge in the stock price, only two days later, reaching $346.87 a share at its lowest and about $360 at its highest on Thursday.
Yet another lawsuit
Elon Musk already holds the most of Tesla’s stock, about 20%. And Musk’s highest measured net worth is $24.6 billion. Yet he says he has the funds to take Tesla private. Musk and Tesla are being sued by investors over Musk’s tweet for influencing the stock’s price. In Kalman Isaacs’s, one of the shareholders, complaint, he said:
“Musk’s statement that he had secured funding was especially material and significantly moved the market, because Musk has not secured financing, and has issued false and materially misleading information into the market, short sellers of Tesla stock were forced to cover their positions by purchasing shares at artificially inflated prices after 12:48 pm on August 7, 2018. Obviously, all purchasers of Tesla securities were injured as well.”
Currently, the U.S. Securities and Exchange Commission is looking into whether Musk’s claim to have the funds was true and why he chose to announce taking Tesla private on Twitter instead of making a formal filing.
Tesla suffered the biggest loss in its history in the second quarter of 2018 of about $717.5 million, yet promised to turn a profit in the second half of 2018. Was this part of the plan or does Musk truly have the funds to take Tesla private?