It was the tweet heard round the world. Yesterday, Elon Musk tweeted that he was considering taking Tesla private at $420 per share. Predictably, Tesla shares shot up as financial experts pondered whether announcing this intention over Twitter constituted an SEC violation. (Probably not.)
But whether or not it was the right move to announce it on Twitter, taking Tesla private is certainly a smart move for the company, if Musk can pull it off. At a $420 share price, the move would cost $72 billion, which is a lot more than even the very wealthy Musk has. But he tweeted later in the day that investment for the deal was already lined up.
As he explained in a letter to employees that was published yesterday, taking Tesla private would save it from the ups and downs of the market, and from the need to manage toward quarterly goals in order to satisfy investors and stock analysts.
But most important, it would save Tesla from the short sellers. Short selling, for the uninitiated, means buying the option to sell a stock at some future date at or around today's price. If the stock price goes down, you get to keep the difference between today's price and the future, lower price, and so you win. If it goes down a lot, you win big. If it goes up, your option becomes worthless so you lose whatever you spent on that option.
Short selling is thus a way to place a bet that a company's stock price will fall, and over Tesla's lifetime, a lot of very wealthy investors have placed that bet. It seemed like a no-brainer. In 1975, John DeLorean set out to revolutionize the motor industry, only to have his company tank a few years later. Now here came another outsider attempting to disrupt the industry, even though his experience was in software, not automobiles. Not only that, he was going to sell electric cars, which had never captured more than the smallest fraction of the market. And he'd be competing in a very tough industry against long-established companies from Asia and Europe as well as the United States. He even named the company after Nikola Tesla, a brilliant innovator who died penniless. What could possibly go right?
But then, of course, things did start going right. The first models rolled off the production lines. They instantly became a highly desirable status symbol (not to mention a great way to get around). Tesla captured a significant portion of the US luxury car market. Then it announced the Model 3, its most affordable car to date, and demand went through the roof. Naysayers said the company couldn't meet its production goals for the Model 3, but it recently started doing just that.
$10 billion in losses?
For the short sellers, there's a lot of money at stake here. Collectively, they stand to lose more than $10 billion if the stock continues its climb or the company goes private. That's a lot of money and a lot of motivation to try and force the stock price to fall. Many suspect the short sellers are doing just that by spreading gloom and doom about Tesla, as high-profile short seller Jim Chanos did yesterday when he went on TV news programs to predict that Tesla would not succeed in its attempt to go private.
It isn't the first time short sellers have sought to bring down a company they'd bet against. In The Divide, author Matt Tibbai tells the story of Chanos' attack on Fairfax Financial, a Canadian insurance company. Chanos' agents peppered regulatory agencies with accusations that Fairfax Financial had done wrong. He said that bad press about a company such as Fairfax could become "self-fulfilling," as the collective bad ink turned the markets against Fairfax. He and other short sellers very nearly did bring the company down, driving its share price lower and lower until Fairfax sued which sent many of them running for cover.
Are similar tactics at work against Tesla? I have to suspect yes, given all the negative stories that came pouring out just as the company finally started ramping up Model 3 production. You can see why: With the mass-market Tesla finally being delivered to the masses, the narrative that the company is about to implode starts looking very thin. So it was possibly the short sellers' last, best chance to badmouth Tesla into oblivion.
It hasn't worked. But it certainly has damaged the brand. I have an acquaintance who, like me, is an EV driver. In the past, she'd often told me she dreamed of buying a Tesla someday. But last time we talked about it, she said she no longer wanted one--she had heard that the company wasn't doing well and she worried it would disappear and leave her with a car that could never be brought to a dealer for servicing. I'm sure there are tens of thousands all over the country who feel the same way, having noted all the headlines about Tesla's imminent demise.
That's the kind of damage short sellers can inflict, and it's far worse, and longer-lasting, than a dip in the share price. If the Tesla becomes private, there will no longer be a market in Tesla stock options, so there won't be any reason for short sellers to continue to attack it. That's why Musk is right to take the company private if he can. If doing so also creates a $10 billion loss for those who sold his company short, that's just a pleasant side benefit.
Musk notes on Twitter that with his mind made up and funding secure, the only thing that can prevent Tesla going private is if enough shareholders vote against it. Persuading shareholders to block the deal is therefore the last hope for short sellers to avoid huge losses. It might be a bit of a challenge though. The short sellers have been saying all along that Tesla stock is overpriced and destined to lose value--but if that's true, then agreeing to the deal and accepting $420 per share is the smartest thing those shareholders can do.