Streetwise Professor

August 7, 2018

Always Remember–Elon Rhymes With Con

Filed under: Economics,Energy — cpirrong @ 6:26 pm

Today on Twitter Elon Musk floated the possibility of taking Tesla private.  Perhaps coincidentally, it was revealed that the Saudis have accumulated a stake in Tesla worth a couple of billion.  Adding two and two, many have leaped to the conclusion that the Saudis will be in essence the private equity firm behind the deal, perhaps as part of some futuristic hedge against the end of oil.

As with all things Elon, look for the con.  Case in point.  He hyped the Tesla takeover of Solar City as the creation of a visionary vertically integrated clean energy company.  I saw it as a way of preventing an embarrassing bankruptcy of Solar City, and of bailing out Musk relatives using Tesla shareholder money.  The wind-down of Solar City’s business pretty much has proven me correct.  And  all talk of the visionary vertical integration strategy has ceased.  Indeed, the lack of discussion of the solar business reminds me of the old expression “don’t speak ill of the dead.”

So what’s the angle here?  I conjecture as follows.  Tesla is still losing money hand over fist.  It is burning less cash–but only because it has slashed expenses and capex–which puts a crimp in its growth plans.  And “burning less” is a relative statement–it is still a world class incendiary.

In the past Elon has fed the cash machine with stock and bond sales.  But he has publicly stated repeatedly that no future capital raises will be necessary.  It is clear, however, that such promises are not credible.  He has also promised that profits are just around the corner.  But that promise is also hardly credible, especially after serial failures to deliver on past promises.

This puts Elon in a bind.  He needs money, but a capital raise would (a) hammer is already tottering reputation, and (b) more seriously, create a huge risk of shareholder lawsuits and an SEC securities fraud case.

Further, it is clear that Elon finds many aspects of running a public company distasteful.  He particularly hates analysts (stock analysts, not psychiatrists, though maybe he hates them too!) who question his judgment, his statements, and sometimes his sanity.

He also hates short sellers.

So how to escape these problems? Easy–go private! Especially if the world’s deepest pockets are behind it.  No need for a public capital raise.  No more pesky outsiders questioning his competence, strategy, or behavior.  No more short selling a-holes.

The trifecta.

Of course, maybe Elon is just attempting to goose the stock price and inflict some pain on the shorts.  But if this is the case, he is digging his securities fraud hole deeper.

As for the Saudi angle.  A big bet on Tesla would be a rather foolhardy way to hedge against the end of oil.  It is a hedge rife with idiosyncratic risks–Tesla’s mercurial CEO being just one of them.  A more diversified strategy–investing in battery technology, and cobalt mines, and the like–would make more sense.

It will be entertaining to watch this spectacle unfold.  The one thing I can be sure of is that the story that Elon tells will not be the true story.  So look for the angle, and watch for the con.  My conjecture is plausible, but it is not the only possible scenario.  But whatever scenario plays out, it is likely to be as crooked as a dog’s leg.

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  1. Why the Saudis? Because Qatar is busy buying Rosneft! [–rimshot–]

    Comment by M. Rad. — August 7, 2018 @ 7:14 pm

  2. At the current moment in time, the Saudis have a problem. They own a huge, dry, waterless country and the oil under it is running dry. They also have huge reserves of money, but they don’t want to keep these as money in case someone steals them.

    So, why not cozy up to a maker of solar power (they have lots of sun, and lots of open, sunny desert with next to nothing living on it) and also try to buy into his battery-making expertise? If the gamble pays off, then they have a new cash cow after oil.

    Comment by Dr Dan H. — August 8, 2018 @ 8:28 am

  3. I have looking forward to your post in response to this (unsurprising) announcement. For once I concur with your analysis. Tesla has me in mind of De Lorean, and Musk of Richard Branson i.e. great at PR but forever tip-toeing on the verge of bankruptcy with his various businesses.

    The Saudis and Musk, a match truly mad in Heaven…

    Comment by David Mercer — August 8, 2018 @ 11:46 am

  4. I would be expecting “I’ll buy some of that too” Mayasashi Son to be on speed dial for this.

    Comment by srp — August 8, 2018 @ 5:42 pm

  5. I believe any LBO is highly dependent on cash flow, which with Musk is all out-going. There are no “hidden” assets to strip away, so how’s he planning on this working. The Saudis can’t be si stupid to just front him the money. Or can they?

    Comment by The Pilot — August 8, 2018 @ 6:38 pm

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