Short sellers have a way of rattling even the most confident business leaders. A classic of the genre is Overstock chief executive Patrick Byrne, whose crazed diatribes against investors betting on a stock-price drop include a public conference call during which he ranted about a shadowy “Sith Lord” out to destroy Overstock and his railing on a site called Deep Capture against unfair financial-media coverage. Overstock also sued his purported enemies.
On the other end of the spectrum is Netflix CEO Reed Hastings, who in 2010 wrote a polite-bordering-on-sweet open letter to short seller Whitney Tilson, calling him a “great investor and a wonderful human being” before laying out an even-toned and reasonable case that Tilson’s evaluation was wrong.
As short pressure increases, CEOs have a tendency to inch rightward along the Hastings-Byrne Continuum, from polite objection to fevered denunciation. Tesla’s Elon Musk isn’t close to Byrne territory yet, but his recent Twitter stylings indicate that he is getting rattled by persistent investor skepticism about a money-burning, never-profitable enterprise with a market cap of about $60 billion. Short interest in Tesla stock has ticked up over the past year.
On Tuesday, Musk casually tweeted that he’s thinking about taking Tesla private at $420 a share. Twitter is not the usual venue for announcing buyout plans, to say the least. On the bright side, taking the company private, maybe with oodles of Saudi money, would give him some breathing room to get better at making cars and developing a battery-charging infrastructure that might actually allow more than a handful of aficionados to buy the things.
But every silver lining has a cloud. As Bloomberg’s Matt Levine laid out on Wednesday morning, Musk’s plan is maybe not so legal. The problem was not so much announcing it on Twitter as exactly what he announced, and then expanded on in a later blog post. For one thing, Musk claims to have already obtained financing for the $420 share price, which prompted Tesla’s stock to soar from the low $340s to as high as $379 before settling at about $358 on Thursday. As Levine noted: “If it turns out, in particular, that Musk has not ‘secured’ funding for his proposal — then a lot of people were misled out of a lot of money. … That’s a thing that the Securities and Exchange Commission pays attention to! That’s a thing that people go to prison for!”
And the structure of the buyout that Musk seems to be envisioning is … weird. Weird in the sense of possibly not countenanced by U.S. securities law. He appears to think that he can let current retail investors just swap their shares for shares in the new private company. Which would be pretty much like having a public company, but without short pressure or the small shareholders wistfully asking when they might see some profits.
The SEC tends to frown on ideas like that. The whole idea seems hasty and ill-thought-out, as tweets often are. It doesn’t bode well for the prospects of a deal or for the company itself. Maybe the short sellers are onto something.
There’s a myth about short-selling that is fervently believed by many, especially CEOs whose stock is being shorted: that concerted short-selling can drive healthy companies into the ground. But it’s very risky to short a healthy company. If a company is actually doing well at making things customers want, then short sellers or no, the quarterly reports will bear that out. Eventually, the market will notice, the share price will rise, and all those shorts will lose a whole lot of money.
If you’re confident that your company has what it takes, there’s no need to do anything but wait for the results to confirm it. In this case, the best revenge really is just living well.
Why doesn’t Musk just do that, as Hastings did at Netflix? Well, as automobile-industry analyst Edward Niedermeyer points out, “Tesla has always been plagued by poor manufacturing quality and missed production deadlines.” Most notably, Tesla keeps missing production targets for its mass-market Model 3 sedan, leaving hundreds of thousands of people waiting for the cars they put deposits on. Of course this has attracted short sellers, as a moth to a flaming pile of shareholder money. If Musk wants these pests to go away, all he needs to do is put out the fire.