On the morning of August 7, the media world was rocked with a Tweet from Tesla CEO, Elon Musk that read:
“Am considering taking Tesla private at $420. Funding secured.”
To understand the severity of this comment, let’s start by quickly breaking down the difference between public and private companies.
Public vs. Private
A public company, Tesla’s current affiliation, is publicly traded freely on the stock market. Shares are purchased by a variety of investors with the ability to raise large amounts of capital. Stocks are traded at a certain price per share. For example, Tesla closed on Friday, Oct 12 at $258.78.
In short, the value of a public company is determined by the collective market perception.
By contrast, a private company is owned by a smaller group of individuals, or maybe even one person or entity. Each owner has much larger investments than you would see in a public company.
Going private is traditionally associated with failing companies, when public interest is down, or the organization needs time to reorganize debt before going public again. Tesla has been facing financial woes in recent years, including disappointing sales of the new Model 3 sedan.
Why Would Elon Musk Want to Take the Company Private?
According to an email he sent to Tesla employees, Musk cited the following benefits to taking the company private:
- Avoiding the “major distraction” caused by wild swings in stock prices that currently affects “everyone working at Tesla.”
- The ability to make better long-term decisions to benefit the future of the organization by removing the pressure caused by quarterly earnings cycles.
- Protecting Tesla from the “large numbers of people who have 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 who try to harm what we’re all trying to achieve,” Musk wrote in the email.
Elon Musk Charged with Securities Fraud by SEC
On Friday, September 28, the Securities and Exchange Commission (SEC) charged Elon Musk with securities fraud. They alleged that he harmed investors and caused hysteria in the marketplace with his tweet and subsequent failed privatization attempt.
In a settlement reached between Musk and the SEC, Musk must step down as chairman of the organization’s board. Although he is allowed to remain on as a board member, both Musk and Tesla must pay $20M in fines. Musk will reportedly then purchase $20M in Tesla stocks as repayment.
Musk may not seek chairman reelection for three years, but he can remain on as the company’s CEO. A committee of independent directors was appointed to monitor disclosures and conflicts of interest. A lawyer has also been hired to oversee all of Musk’s public communications, including his tweets.
Despite speculations that the privatization was being at least partially funded by a Saudi Arabian sovereign wealth fund, there has not yet been confirmation that funds were indeed secured to take Tesla private at $420 a share.
What Does this Mean for the Future of Tesla?
How this will ultimately affect the energy company as a whole is yet to be seen, but Tesla stock prices have dropped from $379.57 on August 7 to $258.78 on October 12. And others hint that this may detract investors from wanting to associate with Tesla in the future.
For now, the organization and its leadership will be watched with a careful eye. Now the question remains: will the judgment and criticism spark or stifle innovation?