Elon Musk wants to take Tesla private at $420 per share, an amount that would value the company somewhere in the neighborhood of Ford and FiatChrysler combined. His plan would also enable current public shareholders to retain their shares in an unspecified vehicle or fund that would limit sales to every six months. Such a deal would force investors to make a choice: accept an immediate cash premium over their investment or make a substantial bet on the vision of its founder.
The markets and some analysts have cast doubt on whether this plan, which would be the largest leveraged buyout in history, will even take place. Even so, the announcement raises important governance questions that will be particularly salient for investor decisions about whether to accept the buyout, but also matter if the company remains public.
Question 1: What rights would remaining public shareholders have in the newly private company?
The stated purpose of the transaction would be to insulate the company from the “wild swings” and “perverse incentives” of the public markets, yet the plan also envisions retaining current investors. This raises concerns that the company values external investment capital but not the accountability that comes with accepting public funding. Investors should closely scrutinize how their voting rights would change under the new structure, especially since the six-month lockup would prevent orderly exits in the case of a major negative event.
Question 2: How will the company assure investors that the board will hold the CEO accountable for strategy, execution and performance?
Analysts and investors have questioned the independence of the Tesla board, which includes close business associates and the brother of Elon Musk. These concerns increased with the 2016 acquisition of Solar City, a troubled company in which Musk held a major stake. Though the transaction raised numerous potential conflict of interest concerns, the board appeared to do little to exercise oversight of the deal, failing even to convene an independent committee to study the purchase.
More recently, there is little indication of any board concern over Musk’s erratic public behavior, one example of which was an uninvited intervention into the rescue of a Thai soccer team from a flooded cave, and crude remarks about one of the rescuers. Musk eventually apologized, but investors concerned about “key man risk” should expect the board to demonstrate the same concern.
This is especially true in the context of the method the company selected to disclose this information about plans for a possible buyout (tweet and email). Was the disclosure approved by the board? Was it reviewed by counsel? Who did Musk consult before choosing to communicate material information through social media?
With an exit from the public markets, the board may become the sole entity that can exercise oversight over management. Shareholders should expect that the board can demonstrate by its actions that it has the qualifications and the independence to ensure management accountability.
Question 3: Why will a private Tesla be more empowered to execute a long-term strategy than a public Tesla?
Companies adopting governance policy changes that reduce shareholder accountability commonly cite the need to empower management to think for the long term by insulating the company from short-term market pressures. Most companies also understandably resent short sellers with an incentive to “attack” the company.
While there is often merit to these concerns, shareholders should carefully consider whether they apply in the case of Tesla. Although the company has never made a profit, investors have entrusted the company with a rich valuation even relative to future estimates for profitability.
Investors raise concerns not so much about the company’s strategy but about its failure to deliver on its current production targets for the Model 3. The core investment issues about Tesla are not long-term vision but the short-term mundane details of manufacturing and supply chain management.
The discipline of the public markets is particularly well-suited to driving management to resolve precisely these kinds of concerns. In particular, institutional investors will insist that the board be able to explain why it thinks it has the ideal management team in place given the company’s current circumstances and how it will ensure that this continues to be true.
If the company believes that its long-term vision is being hampered by investor pressure, shareholders should ask it to articulate how that vision would be better served without shareholder accountability, and what assurances Tesla can provide shareholders that it will manage concerns about production.
Question 4: How will the company address concerns about social responsibility?
Tesla was founded as a mission-related company. Its goal of mass electrification and automation of transportation has implications for climate change, mobility, urban planning and many other social and environmental issues. Tesla’s sustainability narrative is a major part of its outsized appeal to investors, employees and customers. However, the company has also been criticized for certain aspects of its corporate social responsibility.
The company has attracted scrutiny of its safety practices, but has provided far less assurance about its safety practices relative to others in the auto industry. These concerns heighten regulatory risk and reinforce concerns about the quality of its manufacturing capabilities.
Moreover, the manufacture of batteries raises numerous sustainability concerns, including the use of conflict materials, the local environmental impact of battery manufacture, and the working conditions for production and supply chain workers, especially in developing countries.
Tesla investors are engaging with the company on these issues, which have the potential to undermine both the company’s brand and investor confidence in its operational management. Investors should consider how the absence of these outside voices may impact the company’s commitment to improvement in these areas.
Question 5: What risks or benefits should shareholders consider when locking up capital for six months?
The six-month lock-up envisioned in Musk’s plan lies between the liquidity and orderly price discovery of the public markets and the stability of the private markets, where companies can be assured of their investor base. A six-month lockup would not allow the investor to respond in a timely fashion to material market events, while potentially exposing the company to widespread periodic selloffs if the company’s circumstances change materially.
Because the proposed structure is highly unusual, shareholders should examine the company’s disclosure about its evaluation of the risks and opportunities related to their approach. Investors need to assess whether the loss of liquidity and the other risks that investors may encounter are adequately compensated by the $420 share offer. Shareholders will be interested in which of these issues were considered by the company in setting the deal’s price.