It’s a bit of a coincidence that I wrote about the dearth of public companies this morning and Tesla goes and announces it’s considering going private.
Dell as a test case for going private
The company I used in the earlier post was Dell. Here’s what Fast Company said about Dell’s going private five years ago that is relevant to Tesla:
If Dell was trading at an all-time high, Dell wouldn’t be going private. It’s this low stock price that has created this opportunity. As expected, some investors aren’t happy. There are a lot of homeowners who aren’t happy with the decline in their home values as well. Today’s price is today’s price. Why should Dell pay a premium to buy itself? The “market” has set a price–Dell is taking advantage of that now.
Are there risks to going private? Perhaps. But, perhaps there’s a greater risk to not taking advantage of this rare opportunity to silence the critics, get out from under the Wall Street microscope, and let Dell go do what its customers are expecting and needing it to do. Should Dell decide to go public again, perhaps Wall Street and the analysts will recalibrate their thinking about what Dell is really doing for its customers. For the past few years, this seems to be a real challenge for them.
As a CEO, you probably get sick of explaining yourself to a disparate set of shareholders who may not share your vision for the future. Maybe those investors are agitating for change that you don’t want. That was where Michael Dell was, dealing with Carl Icahn, In Tesla’s case, it’s shortsellers like David Einhorn that have got Elon Musk wound up.
With both Dell and Tesla, you have founder CEOs who probably think of their company as “my company”. When they raised funds through an IPO, it was a trade-off because they needed the money to expand more rapidly. But now the downside is more readily apparent. As Fast Company put it with Dell:
- Public companies are under the gun every quarter to perform to externally set expectations or see their stock price get hammered.
- Many companies strive to manage the stock price which tends to make them myopic, focusing on short-term and near-term not long-term.
- There are onerous and costly disclosure and compliance requirements imposed by the Securities and Exchange Commission (SEC) plus the burden of Sarbanes-Oxley compliance, the latter certainly having inherent challenges and significant costs given Dell conducts business in about 184 countries across the globe.
No wonder many companies are going private.
So how has it worked out for Dell?
Well, Dell is going public again. The announcement came just a few weeks ago. Founder Michael Dell owns 72% of the company right now. And his principal private equity partner Silver Lake Partners has another 24% stake. Dell issued a tracking stock in 2016 in order to help finance its $67 billion takeover of EMC. So the company today is not comparable to the one from 2013.
But shares have doubled since that time. And the company reported a quarterly adjusted EBITDA of $2.38 billion in the last quarter. That’s the figure PE companies care about because it gives them a sense of how much debt the business can withstand.
To me, it looks like Dell has done well during its five years as a private company. And it is arguably looking to cash in and reduce its debt load at the right time in the business cycle.
What about Tesla then?
Elon Musk is probably looking on that scenario with envy. He figures that he could give up having to worry about quarterly earnings calls and shortsellers and all the other problems that go with being the CEO of a public company. If he can find ‘patient capital’ in the form of a PE company that has a longer time horizon, perhaps Tesla would do better. That’s his thinking.
There are a number of problems with this though. First is the fact that Tesla is not a mature company throwing off cash the way Dell was when it went private. Tesla is still burning cash. And it either needs that burn to go away or have access to external funding.
Second, this is a good time to go public and cash in on a leveraged company like Dell. But from an investment perspective, it’s not a good time to leverage up and go private because deal valuations are extraordinarily high right now.
Third, Elon Musk only owns 20% of Tesla. He does not have anything like Michael Dell’s control over his company where Dell was always a majority shareholder. So he is very much dependent on other people’s money to make his electric car dreams a reality.
The terms Musk wants to offer
Here’s how Musk wants to structure this deal:
First, I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.
Second, my intention is for all Tesla employees to remain shareholders of the company, just as is the case at SpaceX. If we were to go private, employees would still be able to periodically sell their shares and exercise their options. This would enable you to still share in the growing value of the company that you have all worked so hard to build over time.
Third, the intention is not to merge SpaceX and Tesla. They would continue to have separate ownership and governance structures. However, the structure envisioned for Tesla is similar in many ways to the SpaceX structure: external shareholders and employee shareholders have an opportunity to sell or buy approximately every six months.
Finally, this has nothing to do with accumulating control for myself. I own about 20% of the company now, and I don’t envision that being substantially different after any deal is completed.
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.
Translation: Musk wants the upside of having access to other people’s money but wants to mitigate the downsides. He thinks that offering a significant premium to shareholders will get rid of the squeaky wheels and give him a better operating environment in which to achieve longer-term results.
I think this is an intriguing experiment and will leave my conclusions open until I have a chance to see the finer details. I am sceptical though because of Tesla’s cash burn, the company’s inability to meet targets and Musk’s recent personal volatility.
Make no bones about it though. This is a very different deal than what Michael Dell was proposing, which was a truly about taking his company private. Elon Musk is not buying out shareholders and getting a PE company onboard because no PE company would do for him what Silver Lake did for Dell since Musk is burning through capital.
And I do wonder how serious these plans are. Is this just a gimmick, a marketing ploy to stop the shortsellers? I wonder.
On the broader issue of innovation though, I do think the Tesla and Dell cases point out the flaw in the argument that fewer private companies inherently means less innovation. In both cases, it had nothing to do with stopping innovation. One could make the opposite case, really. It was about how today’s publicly-traded companies are forced to make short-term decisions that impede longer-term objectives, merely to hit numerical financial targets for shareholders who may or may not be fully vested in the long-term outcomes of the company. That’s a scenario where innovation can be stifled to meet the clamour of those crying ‘shareholder value’.
To be continued