In our last research note on the subject of Tesla (TSLA, Financial), we discussed CEO Elon Musk’s shocking tweet in which he claimed to be considering taking the company private at $420 a share in what would be the largest take-private transaction in history. His own board of directors was completely blindsided by the proposal, and has since been doing frantic damage control as it has become abundantly clear that Musk’s claim to have “funding secure” for the transaction was a material misstatement of fact – and arguably fraudulent stock manipulation.
Musk has made a habit of bombastic tweets and over-the-top promises, often setting unrealistically ambitious timetables (and that tend, conveniently, to stretch ever farther into the distance as time passes).
But the game may at last be up for the troubled CEO who has stretched the truth one time too many. In this research note, we discuss Musk’s Twitter Rubicon and how a misjudged tweet may cost him his position at the head of the company with which he has become virtually synonymous.
Queue the waterworks
On the night of Aug. 16, Musk came out of hiding for an interview with The New York Times. Musk gave a tearful performance in which he described the pressure of the job, including long hours and little to no personal time. He admitted to habitual Ambien use, an issue that reportedly worries Tesla's board of directors considerably (though they have never made public statements to that effect, nor apparently sought to constrain Musk's actions until very recently).
Ultimately, no amount of tears or pressure can change the facts of a case. And Musk appeared to admit that the claim of “funding secured” was an impulsive action not backed by any credible offer. Indeed, he claims to have dashed off the tweet from his car on the way to the airport without bothering to consult anyone from the company beforehand. As for the now-notorious $420 per share price, Musk now claims it was derived by simply adding 20% on top of the prevailing share price at the time. That would yield about $419 a share, so Musk rounded it up for “good karma.” Apparently, good karma does not come cheap, since the "rounding" added about $170 million to the proposed buyout price. Pocket change in a deal that would theoretically value Tesla at more than $70 billion, perhaps, but meaningful given the evident lack of any funding source to back up the offer.
The picture of Musk as an embattled, troubled genius has started to gain some play in the media. Whether it is an act or not, we do not care to speculate. But we do feel safe to say that it is too little, too late from a legal and ethical standpoint. Musk is the CEO of a multi-billion-dollar public company and he impulsively decided to initiate, via Twitter, the largest take-private transaction in history. No amount of backfilling can overcome the simple fact that funding was materially not secured. Nor can it alleviate the suspicion that the move was driven purely by a desire to hurt the shorts who have preoccupied so much of Musk’s headspace.
Blood in the water
The SEC has issued a raft of subpoenas, and reports now indicate that Musk might be interviewed as soon as next week. These investigations can take a long time, but Musk has already virtually confessed to making a material misstatement. Whether he did so in order to manipulate the stock price to hurt short sellers – an act of criminal fraud – remains to be determined. If he is prosecuted, he may have little choice to step down. If he does not, the SEC might rule that he is unfit to serve as an officer of a public company.
Meanwhile, the board of directors is reportedly searching for someone to take on the role of chief operating officer. When asked about this search during The NYT interview, Musk claimed ignorance of the matter. If he is genuinely unaware of the process, that is further indication that the board is working independently – and likely preparing for a Tesla without Musk at the helm. Further evidence that the board is now in the driver’s seat at Tesla came in the wake of the NYT interview’s publication. During the interview, Musk claimed that no board member had called him after he made his fateful tweet. Yet, the company reached out to the editor to correct the record, stating that a board member had indeed called Musk immediately. Even when playing for sympathy, Musk seems to have only a passing relationship with the truth. Evidently, the board is no longer willing to roll over for the boss.
A chorus of media personalities bullish on Tesla came out in the wake of the interview to call on Musk to take a leave of absence for his own health. That may prove to be a useful pretext for easing him out, or for moving him off of center stage.
What comes next
We discussed in a May research note how Musk was swiftly becoming a liability for Tesla. Our conclusion appears now to be vindicated as Tesla stares down the barrel of billions in damages, as well as potentially ruinous SEC sanctions, all thanks to the impulsiveness of a mercurial and unchecked CEO.
With the walls closing in, it seems increasingly likely that the board will have to sacrifice Musk to save the company. Musk does not seem yet to have grasped the tenuousness of his position, reiterating his intent to remain CEO and chairman of Tesla during his NYT interview. But we suspect the board may defenestrate him in a desperate effort to close the wounds of liability and to attempt to right the now floundering ship.
Whether Musk is shown the door, shunted into a behind-the-scenes role, or defanged by some other face-saving move remains to be seen. Whatever happens, even if he somehow clings to the role of CEO, Musk’s days as the unchecked master of Tesla are now finished.
Disclosure: We are short TSLA via long-dated PUT OPTIONS.
