Tesla has been monumental in bringing electric cars to the mainstream. The commercially viable Model S and Model X, launched in 2012 and 2015, respectively, have not only demonstrated the exceptional capabilities of an electric vehicle but have also won numerous accolades for its innovative design, safety standards and zero environmental footprint. The founder and CEO of the company, Elon Musk, has also garnered significant media attention with Tesla’s success – due to his outspoken nature and eccentric behavior. It’s no wonder, that his decision to take the company private occurred via a tweet, resulting in a rapid surge of Tesla’s shares in the market.
The idea of privatizing Tesla has always been at the back of Musk’s mind. In November 2017, he told Rolling Stone, “It actually makes us less efficient to be a public company.” On 7th August, 2018, he tweeted: “Am considering taking Tesla private at $420. Funding secured”, pretty much out of the blue. The abrupt announcement managed to titillate Wall Street and public investors, sending Tesla’s stock on a joyride. It quickly rose 8% before NASDAQ halted trading in Tesla’s share for almost an hour and a half. The shares resumed trading after Musk’s official email to his employees was released, and closed at $379.57, witnessing an 11% gain during the day.
In his email, Musk cited his reasons to take the company private. He mentioned that becoming a private firm would let Tesla “operate at its best, free from as much distraction and short-term thinking as possible.” Indeed, public firms are known to make decisions that are profitable in the short-term to appease its shareholders. Going private would allow Tesla to take appropriate long-term decisions, and allow Musk to maintain control over every operational decision without having to meet shareholders’ quarterly expectations. According to Musk, it would be “the best path forward keeping the goals of the company in mind.” Experts have also stated that going private would allow Tesla to keep its competitive secrets – without disclosing information that could give competitors an edge.
The past years have witnessed a downfall in Tesla’s revenues. A series of manufacturing challenges have delayed the production of its new Model 3 sedan at its home factory in Fremont, California. This has put Musk under immense pressure to turn his debt-laden company into a profitable high-volume manufacturer. Moreover, European automakers like Audi and Jaguar have announced the launch of their own commercial electric vehicles, propelling the completion even further. With the decision to go private, Musk hopes to take Tesla out of Wall Street’s sight, instead focusing on a period of rapid growth under tight financial constraints.
At $420 per share, the deal is estimated to be well over $70 billion. As Musk owns around 20% of Tesla already, he would require around $60 billion to buy out the remaining shareholders, adding in the $10 billion in debt. If the deal is finalized, it would amount to the largest leveraged buyout in history, surpassing Energy Future Holdings $45 billion buyout of Texas energy giants, TXU, in 2007.
Although Musk mentioned that funding has been procured to initiate the buyout, the source of the financing hasn’t been disclosed yet. Gene Munster, a venture capitalist of Loup Ventures, mentioned that Musk has “one in three chances” of pulling off the privatization at $420. “It could be hard to incentivize the believers to give up their Tesla stock. Many of the public investors cannot invest in a private company, and would be forced to sell. I think a lot of them will not want this, at this time.”