A Tesla without Musk would threaten carmaker’s future
Securities regulators’ lawsuit raises the spectre of exit that could have dire consequences
The legal threat from securities regulators to ban Elon Musk from Tesla Inc. raises the specter of a once-unfathomable exit that would potentially have dire consequences for the electric-car company.
That threat was seen in the trading of Tesla’s shares, which fell 12% to $269.52 in premarket trading Friday.
Few companies and their leaders are as indivisible as Mr. Musk and the 15-year-old company he helped build into a powerful player in the automotive industry.
He isn’t only Tesla’s chief executive, chairman and largest shareholder but also its chief engineer, salesman, marketer and, possibly to his detriment, a Twitter user.
The Securities and Exchange Commission is seeking to bar Mr. Musk from serving as an officer or director in any publicly traded company, accusing him of misleading shareholders about a corporate buyout in his Aug. 7 tweets announcing that he had secured funding to take the electric-car maker private at $420 a share.
The complaint filed by the SEC came after a last-minute decision by Mr. Musk and his lawyers to fight the case rather than settle the charges.
It is far from certain whether the case will go all the way to court and will ban him. Mr. Musk has denied wrongdoing, and the company’s board issued a statement late Thursday backing him as CEO. Even if the SEC were successful in removing him as a Tesla officer and director, Mr. Musk, who owns about 20% of Tesla, could continue to have influence over its vision.
But the mere prospect of the SEC moving swiftly to try to remove Mr. Musk has rattled investors, who were already concerned about his fitness as CEO following weeks of behavior perceived by some as erratic.
If Mr. Musk were forced to step down at some point, Tesla would be left without the visionary
entrepreneur who has captivated investors with his grand ambition to replace the internal combustion engine with electric, self-driving systems. Tesla doesn’t have a clear succession plan nor an obvious No. 2 after droves of executives departed in recent years.
That could spook investors enough to send the stock price spiraling, hurting Tesla’s ability to raise the cash analysts say is required. Tesla is also reliant on the faith of its customers, many of whom are devoted fans of Mr. Musk and place deposits on future vehicles, such as the Roadster sports car, that add cash to the books.
“Tesla requires positive news flow around the future of the company, innovation in future vehicles and adjacent markets in our view,” Jeffrey Osborne, an analyst at financial-services firm Cowen, said in a note Thursday. “The question is does this news around Mr. Musk personally impact order rates or more importantly lead to order cancellations.”
The latest worry over Mr. Musk comes as Tesla races to finish the third quarter with a profit—a milestone that the CEO has bet will prove to doubters
that the auto maker has turned a page and can begin generating the cash it needs to do business without having to raise additional capital.
Many analysts are skeptical. Tesla’s debt has ballooned to more than $10 billion. The company has been burning cash at a rate of about $1 billion a quarter and finished the second quarter with $2.2 billion in cash on hand.
Tesla has issued billions in convertible bonds in recent years, an appealing funding tool because it allows the company to pay lower interest rates than traditional debt and doesn’t immediately dilute shares like a stock offering.
Tesla will need to pay down a $230 million convertible bond this November if its stock doesn’t reach a conversion price of $560.64, and a $920 million convertible note next March if the stock doesn’t reach $359.87. Shares traded at $270.90 in afterhours trading on Thursday.
Some suppliers have become jittery about Tesla’s ability to pay, too. A survey conducted by Original Equipment Suppliers Association found that 18 of 22 suppliers that responded believed Tesla is now a financial risk. To conserve cash, Tesla has
asked some of its capital-equipment suppliers this summer for cash back. Tesla has stressed it was a small number of suppliers and not those that Tesla depends upon to make cars
Even before Thursday’s developments, some analysts were already discussing whether a premium built into Tesla’s share price due to Mr. Musk was in danger of being lost. “That point may be approaching,” Adam Jonas, an analyst at Morgan Stanley, cautioned investors earlier this month. “An investment in Tesla shares should incorporate a long-term horizon and should be agnostic to whether Elon Musk remains CEO of the company.”
Tesla’s executive bench is thin after more than 50 vice presidents or higher-ranking executives have departed over the past two years.
Tesla’s top sales executive, Jon McNeill, left for a role as chief operating officer at ride-hailing company Lyft Inc., while the auto maker’s engineering chief, Doug Field, returned to a job at Apple Inc. Tesla Chief Financial Officer Deepak Ahuja came out of retirement last year to resume that role.
A possible successor on the board isn’t immediately obvious, either. Unlike General Motors Co.’s board, which tapped a succession of its members to fill the CEO office ahead of current boss Mary Barra taking the helm in 2014, there aren’t many Tesla directors with experience in running a major company.
Among Tesla’s directors, James Murdoch has arguably the highest-profile position as the CEO of 21st Century Fox Inc. Brad Buss retired as CFO of SolarCity Corp. ahead of Tesla’s acquisition in 2016, while Robyn Denholm will soon move from her role as COO to CFO at Telstra Corp., an Australian telecommunications company.
Mr. Musk told The Wall Street Journal in a recent interview that he doesn’t know of anyone better to replace him. “This is not me clinging to be CEO,” he said.
Those close to him say he privately worries about what would happen to Tesla without him as the head.
The idea of a Tesla without Mr. Musk was unthinkable a little more than a year ago when Mr. Musk celebrated the start of production of the Model 3 at the company’s Fremont, Calif., assembly plant.
But as Tesla struggled to ratchet up production of the Model 3 during the past year and as Mr. Musk in recent months seemed to continue to stumble through a self-created crisis, questions arose about his ability to manage and whether he has become overextended.
This summer, he suggested on Twitter that one of the cave explorers that helped in the rescue efforts of a boys soccer team in Thailand was a pedophile, a claim that has resulted in a recent defamation lawsuit. He tangled with short sellers who he accused of plotting against Tesla’s success. He recently took a puff of a blunt during a live interview broadcast on YouTube.
“As certain as this company wouldn’t have been created without him, its demise is just as certain with him in the leadership,” said Jeffrey Sonnenfeld, a management professor at Yale University.