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Taking Tesla Private Won’t Banish Elon Musk’s Woes

The Associated Press
JOHN CARNEY

Elon Musk may be considering taking Tesla private for all the wrong reasons.

First, some background to make is clear how strange it is that Musk would want to take Tesla private at all.

Tesla only went public in 2010. What preceded the initial public offering as years of the company constantly needing to raise money and apply for government subsidies, and occasionally flirting with bankruptcy. It was a workplace rife with internal intrigue—Musk eventually usurped the company from the two guys who founded it.

When it went public, Tesla sold 13.3 million shares at $17 dollars, raising a total of $226.1 million. Toyota and Fiat were big investors in the company. On their first day, shares soared 41 percent. The company had a market cap of just under $2 billion.

Just before Musk’s take-private tweet, Tesla shares were trading at around $347 and the market cap had grown to $63 billion. Even at their lowest point in the last 12 months, Tesla shares were worth around $244.

In other words, this is not a company that has had a terrible time on the public markets. Sure there are bearish analysts, skeptical columnists, meddlesome reporters, and short-sellers but Musk does not really have to contend with them. He does contend with them—but by choice.

Yet Musk is convinced that being a public company is hurting Tesla.

Here’s how Musk put it in a blog post:

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.

I fundamentally believe that we are at our best when everyone is focused on executing, when we can remain focused on our long-term mission, and when there are not perverse incentives for people to try to harm what we’re all trying to achieve.
Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible, and where there is as little change for all of our investors, including all of our employees, as possible.

But Musk’s plan to go private—he seems to envision buying out the current shares with either cash or private stakes in a special investment fund that would own Tesla—hardly solves any of these problems.

The new structure—which, by the way, is truly a new structure, something that’s never been seen before on earth—would eliminate short-sellers because there would be no publicly traded equity to borrow and sell. But being a private company doesn’t mean you are exempt from journalism—just as Theranos. Or Uber, which is a private company that recieves lots of critical attention from journalists.

If anything, the novelty of Musk’s private company with public shareholders is likely to invite even more interest from journalists. Even Wall Street analysts could get into the game by advising clients whether or not to exit their stakes in the Tesla Holding Company. Musk is just too interesting to ignore and Tesla’s triumphs or tribulations are to compelling to go unreported.

Tesla Holding will almost certainly still have to issue quarterly reports to shareholders, although those reports might be very boring balance sheets showing how much of a stake in Tesla the holding company owns. But the owners of Tesla Holding may occasionally demand more information about how Tesla is doing. Sure, Musk could probably just ignore them but Musk doesn’t seem to be an “ignore stuff” kind of guy.

It might not even be legal. Similar special investment funds in the past have been limited to qualified investors, the wealthy clients of the investment banks setting them up. Musk seems to think he can offer shares in Tesla Holding to all of the holders of Tesla’s public shares. No one has ever tried that before—and it is most likely in breach of securities laws.

Look at the big picture of what Musk is doing. He is proposing to capitalize his new holding company by offering shares to the public. That typically requires registration with regulators, listing on a public exchange—and that would allow short-sellers to return. Musk seems to be proposing a single-purpose mutual fund.
It’s possible that Musk can get around SEC rules by structuring the stakes in the company in such a way that they don’t count as public securities—perhaps by including contractual obligations that forbid investors from ever selling to anyone but Musk or pre-approved buyers. Still, it’s not clear that that would be legal. It sounds a lot like he is starting a hedge fund that was publicly marketed to retail investors—a no-no under securities laws.

But a closer look at Musk’s statements may illuminate his motivation. At the heart of Musk’s complaint is that short-sales of Tesla shares create “perverse incentives for people to try to harm” Tesla. He appears to think that a lot of the skeptical analysts and meddlesome journalists are somehow beholden or in league with the shorts. If he takes out the short-selling incentives, the rest will fade away.

Musk has in fact accused short-sellers of paying journalists and accused skeptical journalists of bribing sources for dirt and generally being on the side of the shorts.

 

The experiences of Theranos and Uber suggest the hope that going private would silence the critics is misplaced. It’s not short-selling that drives critical reporting.

But if that is how Musk sees things, he’s hardly the first CEO to become convinced that journalist critics were conspiring with short-sellers. Executives or bullish investors often have a lot of trouble coming to grips with the fact that journalists will report skeptically about companies without any corrupt financial incentive at all. Indeed, in every instance I can remember where investors or executives have made accusations that journalists have some “perverse incentive” to criticize a company–and I’ve been accused of that by investors and executives myself–it’s been pure fantasy.

Muck-rakers don’t have to be paid by the shorts—they just like raking muck.

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