With his tweet about his taking Tesla private for $420 per share Tesla CEO Elon Musk may have unwittingly given Tesla his kiss of death. If Musk is serious about taking the company private it will soon lose its most valuable asset which is its loyal shareholder base. If Musk was bluffing he and Tesla have a serious stock manipulation problem with the SEC. Tesla’s existing shareholders would be wise to take profits.
Mr. Musk’s tweet resulted in the shares climbing above the $359.87 price that Tesla’s shares need to be above for it to not have to repay $920 million of loans in February 2019. However, the company has an uphill battle. It’s because Tesla has been reclassified from being a growth stock to becoming an arbitrage play. For this reason, a good portion of Tesla’s 996 institutional investors who hold 65% of its shares will have no choice but to sell before any deal might close. This will make it very difficult for Tesla’s shares to remain above the minimum bond conversion price.
When a buyout offer is made institutional holders are forced to sell the shares of a company in play for two reasons:
- Mutual funds have mandates that require them to sell the shares they hold of a company that is subject to being acquired since it no longer meets their investment objectives. For example, a growth stock mutual fund is obligated to sell investments that are no longer growth oriented. Also, a mutual fund can not hold shares in a private company.
- Institutions and money managers are fiduciaries. This requires them to sell the shares of a company that is to be acquired to avoid the risk of a deal falling through.
Another issue that hurts Tesla and Mr. Musk by the company going private is that Tesla is no longer a dream stock for its shareholder followers. The majority of all investors who purchase shares of visionary companies do so for the purpose of making substantial long-term gains in the future. Now that the upside for Tesla has been maxed out most will throw in the towel and take their profits. It’s especially since the close of Tesla’s share price on August 7th was within 2% of its June 2017 all-time high.
Finally, I envision a trench warfare battle raging on between Tesla and the short sellers at $359.87 per share for the foreseeable future. It will be very difficult for Tesla to overcome the short sellers. The institutional investors and mutual funds selling their Tesla shares will make it much easier for short sellers to borrow and sell more shares.
After most of its long term and loyal shareholders have long gone Tesla will become defenseless. Should the deal to take the company private fall through Tesla will fall like a house of cards. It’s especially since Tesla’s business model is suspect. See my August 2, 2018, article “Tesla’s Unproven Business Model is its Next Big Risk”.
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