by Ian Harvey
August 09, 2018
Elon Musk is in trouble again over the tweet about the future of Tesla Inc. (NASDAQ:TSLA), which caused Tesla stock price to jump. But it could have huge implications for the billionaire.
He went so far as to suggest a price of $420 a share, valuing the company at some $70 billion. He said he had the necessary financing arranged.
Of course, Tesla’s shares immediately jumped by 11 percent; which caused a halt in trade for a portion of the day.
This has now been brought to the attention of the US Securities and Exchange Commission in regard to the truthfulness of the statement in the tweet.
The SEC has since made inquiries to Tesla to find out whether Musk’s tweet was truthful and why he chose to announce such a move on Twitter instead of through a regulatory filing. Musk could be held legally liable if regulators determine he was intentionally trying to boost the stock price with his tweet.
Musk also indicated in the tweet he’d secured funding for the startling move, though it’s unclear where the funding would be coming from at this time as he has yet to disclose those details.
At stake in the SEC-Musk-Tesla investigation is whether or not Elon Musk was being false or misleading in his business-related tweets.
Under US law, companies and their officers cannot give shareholders misleading information.
And the rapid stock-price shifts demonstrated that the investing public believed what Musk tweeted.
His supposed offer of $420 a share was some 20 per cent above trading levels at the time of the tweet.
If his Tesla buyout tweets were just musings or an angry reaction, such as his angry outburst that one of the Thai cave divers was a ‘paedophile’ in response to criticism of his rescue submarine offer, it could put Musk in a whole lot of hot water.
He and his company could face regulatory action and private lawsuits.
“If his comments were issued for the purpose of moving the price of the stock, that could be manipulation, it could also be securities fraud,” said former SEC Chairman Harvey Pitt.
“The use of a specific price for a potential going private transaction is highly unprecedented and therefore raises significant questions about what his intent was. So, that would have to be investigated.”
Since then shares of Tesla sunk about 2.5% on Wednesday, just one day after CEO Elon Musk’s tweet. Tesla shares are still up significantly from the surge seen after Musk controversially shared details of the proposed deal on Twitter, but yesterday's trading suggests many remain skeptical about the practicality of such a move.
Musk lashed out at short sellers, saying that being public "means there are large numbers of people who have the incentive to attack the company."
"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.
These comments were met with some criticism from skeptics who quickly pointed out that many of Musk's recent actions-including his controversial conference call behavior, involvement with the Thai cave rescue, and even the recent spontaneous Twitter announcement-had also served as major distractions for the company.
Typically it is investment firms like T.Rowe Price, Fidelity, and Baillie Gifford – who are three of the largest shareholders of Tesla, besides Musk - that would provide the capital needed to take a company private. But this does not appear to be a very typical situation.
One of Musk's tweets indicated that Tesla shareholders would have the choice between selling their positions or holding on to partial ownership of the private company, which does not seem like a standard go-private move and raises even more questions.
Therefore, if there is the money to take Tesla private, the buyer(s) are going to be stuck with an entity that has about $2.2 billion in cash and $9.5 billion in debt. Step one for the newly-private automaker would be patching up the balance sheet and ensuring it has the money needed to continue expanding production.
However, a deal is far from done and may never materialize. Pointing to the rate at which Tesla is burning through cash, growing competition from other electric carmakers, and its difficulty hitting production targets, analysts and investors were skeptical that lenders would be willing to finance what would likely be the largest leveraged buyout in U.S. history.
In addition, leveraged buyouts usually depend on growing earnings to determine how much debt can be serviced to complete the buyout, but Tesla has never yet produced an annual profit, so dealmakers said any buyout transaction for Tesla could probably not involve placing much more debt on the company.
It seems to be, that this was discussed the week before with the board; and considering that anytime Musk tweets he could send the stock price soaring - or crashing - that's probably a good enough reason for the board to approve such a measure.
You judge as to what the real reason behind the tweet was!
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