Does going public stifle innovation? Musk has the answer
Elon Musk has just announced that he intends to take Tesla private and has secured the funding required to buy back shares from stakeholders in his US$82 billion company.
The 47-year old entrepreneur announced his intentions via a series of tweets, explaining that he’s be willing and able to pay US$420 per share (currently trading at US$380 per share) to go private.
Am considering taking Tesla private at $420. Funding secured.
— Elon Musk (@elonmusk) August 7, 2018
Musk owns just south of 20 percent in the company, says he isn’t going private to gain a controlling stake in the business. “I don’t have a controlling vote now & wouldn’t expect any shareholder to have one if we go private. I won’t be selling in either scenario.”
However, he also made it clear that the final decision is yet to be made since a vote of the shareholders is necessary. “Only reason why this is not certain is that it’s contingent on a shareholder vote,” Musk said in one of his Tweets.
Soon after, he published a blogpost with a copy of a memo sent to employees about why he’s thinking of going private.
“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,” said Musk.
Musk, who also runs SpaceX, the space exploration company, believes in focusing on big, long-term goals.
Being public subjects Tesla to the quarterly earnings cycle and puts enormous pressure on the company 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 no perverse incentives for people to try to harm what we’re all trying to achieve,” explained Musk.
Does going private help tech giants?
Michael Dell, CEO of Dell Technologies did the exact same thing way back in 2013. The only difference is, he was interested in having a controlling stake in the business.
“After mixing in his 16 percent ownership, valued at more than US$3 billion, and another US$750 million in cash, with US$19.4 billion from Silver Lake and a consortium of lenders, he now controls a 75 percent stake in the Round Rock, Tex. company. The only investor conversation he has to have, he says, is with ‘self’,” wrote Connie Guglielmo back then.
In 2016, Dell bought EMC (and its majority share in VMware) for US$67 billion in order to bolster its offerings – something that would’ve been very difficult to do if the company was still public.
However, it all seems to have paid off the for the company. Recently, in its Form 8-K filing with the US Securities and Exchange Commission, it announced great results and painted a bright future for Dell.
“During Fiscal 2018, our net revenue increased by 27 percent. Our operating loss increased 1 percent during Fiscal 2018, primarily due to higher operating expenses from the EMC acquired businesses, mostly offset by an increase in gross margin,” clarified the filing.
The SEC filing also disclosed that cash provided by operating activities was US$6.8 billion during Fiscal 2018 and attributed the increase in operating cash flows during Fiscal 2018 to improved profitability, including the incremental profitability from the EMC acquired businesses, and ongoing working capital initiatives.
In terms of business performance, Dell has become the leading enterprise server vendor, with 19.1 percent market share last quarter (by revenue), with server revenue growing a huge 50.6 percent year over year.
“Not only are cloud giants scooping up servers by the bucketload, but Dell even grew the “old” PC segment by 6.4 percent last quarter, having taken market share for 21 straight quarters,” said The Motley Fool.
Strength in these core businesses has led to strong overall performance for the Dell conglomerate.
When the company went private back in 2013, Michael Dell said:
“Under a new private company structure we will have the flexibility to accelerate our strategy and pursue organic and inorganic investment without the scrutiny, quarterly targets and other limitations of operating as a public company. Our 110,000 team members worldwide are 100 percent focused on our customers and aggressively executing our long-term strategy for their benefit.”
Today, the company is ready to go public once again, as a result of the deals it struck while it was private. It seems like it worked out for Dell.
Tesla’s goals suggest going private is good
At the shareholder’s meeting in June, Musk said that the Model Y crossover, the Tesla semi truck, and the new Roadster sports car should all reach consumers around 2020, but avoided specifying when or how he’d begin production.
The company also has plans to open its own body shops across the country, and Musk hopes same-day repair will be possible in some locations.
He also said that Tesla will continue to work on the reliability of its autopilot device over the next six to 12 months.
Tesla is adding autopilot capabilities for both lane-changing and navigating on-and off-ramps for highways, and drivers should soon be able to test the feature.
The company has also signed an agreement with Chinese authorities to open a new car plant in Shanghai, and expects to produce 500,000 vehicles for the domestic market. However, he hasn’t mentioned how much needs to be invested into building this facility.
All this indicates that the company has big plans and long-term goals for the company, many (or all) of which it will struggle to justify to shareholders in quarterly earnings calls. Going private, therefore, seems like a great option for the company and is expected to help keep Musk’s employees focused on what really matters.
2 December 2022
1 December 2022