The mus­ings, short fuse of Elon Musk

The Hazleton Standard-Speaker - - OPINION - ME­GAN McARDLE is a colum­nist with The Wash­ing­ton Post.

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 illthought-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.

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