Elon Musk fraud inquiry torpedoes Tesla’s share value
Investors fear company will sink without ‘maverick’ chief executive after tweet provokes US investigation
TESLA’S future looks on a knife-edge as investors question whether the electric car company can survive with Elon Musk at the wheel.
Doubts were raised after US authorities began securities fraud proceedings against the billionaire following his Twitter claims that he had secured funding to take the company private.
A successful prosecution by the Securities and Exchange Commission (SEC) could result in Mr Musk being barred from holding an executive role within the company as well as fined.
News of the charges came after trading closed but Tesla shares plunged by 14pc when the markets opened yesterday, dipping below $270 and wiping $6.2bn (£4.75bn) from the market value.
Mr Musk – chairman and chief executive of Tesla – is seen as so important to the company’s future that his departure could result in shares falling further. Barclays said there was a $130 “Musk premium” in Tesla’s share price, such is his influence.
Analyst Brian Johnson said without Mr Musk “Tesla may still have value as a niche automaker [but] the premium the shareholders have been willing to pay is likely to dissipate”. He said the share price is “more faith-based” than rooted in the company’s financial performance. Tesla has been profitable in only two quarters in the past decade.
JP Morgan said if Mr Musk were banned from the company it “could hasten the inevitable transition of Tesla shares being valued on fundamentals … which do not support the price”.
Even at the depressed price, Tesla, which delivered 103,000 cars last year, is valued at $47bn, $10bn more than Ford, which sold 6.6m vehicles in 2017. A prosecution would damage consumer, investor and supplier confidence, hampering Tesla’s chances of raising the capital JP Morgan says is essential to hitting production targets.
The company is depending on the success of its new Model 3, which it hopes will bring electric motoring to the masses. However, it has struggled with production problems.
Prosecutors are reported to have been close to agreeing a deal which would see Mr Musk abandon his chairmanship for two years, pay a nominal fine and appoint two new independent directors. He is said to have walked away from the deal, arguing it would have smeared his name.
Publicly investors are tight-lipped about Mr Musk’s future. One person with knowledge of shareholder thinking said: “Most investors want him to stay as chief executive but might be willing to see him give up being a director for a chief creative or product role, with a new chief executive coming in with whom Elon has a rapport.
“Shareholders are putting up with the current circus because, for all its problems, Tesla is improving and has the potential to sell millions of cars.”
One major shareholder is understood to believe Tesla needs Mr Musk’s “maverick” streak. Mr Musk has a 20pc stake, and would exert huge influence even if he did not head the business.
“The board is in a difficult position,” said Dave Whiston, strategist at Morningstar. “They need Elon to be able to raise capital and make amazing things happen but they have a duty to protect the company.”
The SEC’S case is against Mr Musk and not the company, which analysts believe is an important separation, even though a criminal case from the Department of Justice is in the works.
Mr Musk disputed the SEC’S claims that he made false statements. “I have always taken action in the best interests of truth, transparency and investors,” he said.
There is plenty of competition for the title of “stupidest tweet of all time”. The social media site is perfectly designed for broadcasting every half-baked thought, flash of rage or momentary delusion to the world and subjecting it to global scrutiny. Even so, Elon Musk’s brief comment, made while he was driving himself to the airport, that he was considering taking the electric car manufacturer Tesla private is surely going to rank as one of the dumbest ever. If he ends up losing control of a $50bn corporation as a result, as it now looks as if he might, it will also prove one of the most expensive.
This week, Musk’s turbulent, colourful career took yet another twist when New York’s Securities and Exchange Commission accused him of fraud and threatened to have him debarred as a director of a quoted company. Both Musk and Tesla are fighting that, and it remains to be seen how the matter is resolved. But it is hard to see how he can survive in office now. It is just as hard to see how Tesla can survive. Sure, plenty of companies outlive their founder. But they need to have reached a critical mass and presence before he or she departs – and, in truth, Tesla is nowhere even close to that.
There is no question that the South African-born Musk is, along with Steve Jobs, Jeff Bezos, Mark Zuckerberg and Google’s Larry Page and Sergey Brin, one of the great entrepreneurs of the current tech boom. He was one of the founders of Paypal and made a fortune when it was sold to ebay. He bought into Tesla soon after it was founded and turned it into the first major new force in the global auto industry since the Japanese manufacturers such as Honda stormed into the global market in the 1960s.
More than a decade ago, Musk had the vision to see not only that electric cars were the future, but also that the place to start was right at the top of the market. Its luxurious, environment- friendly vehicles were a huge hit, and as the company rolled out more and more models its growth started to escalate. Its market value raced past GM and Ford to make it the America’s most valuable car company.
This year, however, Musk has grown more and more erratic. He appeared to be smoking dope in one recent interview, and he denied his suggested buy-out price of $420 was a jokey reference to marijuana. The SEC action, which accuses him of misleading the market with a buy-out plan that barely existed, looks like a setback too far. Yesterday, Tesla’s share prices was in freefall, as investors decided a chief executive clinging desperately on to office was not acceptable.
The real question now is whether Tesla can survive without Musk in the driving seat. Of course, lots of companies ride out the departure of their founding sprit. The ranks of the Fortune 500 are filled with the surnames of long-dead entrepreneurs. There is no Walt Disney any more, but the theme parks and film studios he created are still huge. Jack Cohen has long since left Tesco, even if the company has just resurrected his first name for its latest venture. Ford endures decades after Henry died. Daimler-benz is a vast company long after Gottlieb Daimler, and Honda easily outlived Soichiro Honda. More recently, Apple has just become the first company worth $1trillion seven years after the death of Steve Jobs. At some point, the founder inevitably dies, retires or sells out, but by then hopefully the corporation has a life of its own, and can still do very well.
Against that, lots fail. Hanson was one of the largest companies in Britain in the 1980s, but after Lord Hanson left it shrank to a mere shadow of its former self. Wang Laboratories was one of the world’s biggest IT companies in the 1970s, a genuine rival to IBM, but it went into steep decline after its founder An Wang left. By definition, the failures are not so well known as the successes. The names that endure – a Will Keith Kellogg, for example or a William Boeing – are globally recognisable from the businesses they left behind, while the failures are quickly forgotten. But there are plenty of them. Indeed, failure is probably the norm. It is the companies that survive their founders that are the exception.
So which will Tesla be? Here’s the test. The ones that survive have invariably reached a certain critical point in their development by the time the entrepreneur leaves. They are financially strong, have an established brand, have a place in the market, millions of loyal customers and a stable management team in place that can keep the machine ticking over. Apple had all of that when Jobs died, and while it is less exciting company these days it is still a brilliantly successful one, and in some ways
‘In a decade’s time, Elon Musk may be forgotten … or only remembered for the stupidest tweet of all time’
better run as well. All the companies that endure tick at least most of those boxes.
But Tesla? It has a good brand within its niche, but not much else. It still doesn’t make a profit. Its management is chaotic, with constant production problems. And its product range is still limited. It has plenty of promise. But it sill has a heck of a long way to go to become a stable business.
Of course, Musk may clear his name and bounce back. If not, however, Tesla will surely be a tempting target. It would be a perfect fit for a cash-rich Apple trying to muscle into the car industry. Google or even a hyperexpansive Amazon might be interested. So would the big auto makers, especially the German giants.
If Musk had been able to keep himself together, he could have been the new Henry Ford or Gottlieb Daimler. But it is hard to see that happening now. In another decade, he may well be completely forgotten – or, even worse, only remembered for the “stupidest tweet of all time”.