the money game

Is Elon Musk Setting Himself Up to Lose Tesla?

Elon Musk at the official opening of a new Tesla plant in Germany this year. Photo: Christian Marquardt - Pool/Getty Images

There is no doubt that Tesla, Inc., is Elon Musk, at least on a spiritual level. He is the sensitive, trollish soul of the company, the force behind its monumental success and its more recent 60 percent fall in value. But who cares about that? What matters, on a business level, is its corporeal form: Tesla is a publicly traded company. In that sense, Tesla is only about 13 percent Musk with the vast majority of its shares held by Wall Street giants such as Vanguard and BlackRock as well as millions of individuals who want to make a quick buck or pad their retirement. So on Wednesday evening, when securities filings were made public that showed he had sold another $3.5 billion worth of stock (equivalent to 22 million shares), it became clear that he has brought himself ever closer to losing control of the company that’s the source of his wealth and power.

It hasn’t been even two months that Musk has outright owned Twitter, but it’s clear the social network is already an albatross around the neck of the world’s second-richest man. This year alone, he has sold nearly $40 billion — with a b — in Tesla shares. At his peak, he owned about a quarter of the company, but his stake is down roughly 40 percent from that. On top of that, he’s pledged billions more to Morgan Stanley and other banks to fund his acquisition of Twitter, where he is devoting his attention even as Tesla faces production cuts in China, a market increasingly important to Tesla. “He’s essentially using Tesla as an ATM machine to fund Twitter,” said Dan Ives, tech analyst at Wedbush Securities. And just as Musk was the force behind the company’s meteoric rise throughout the pandemic, he’s also the reason behind it losing more than $600 billion in market capitalization since last November. (That slide cost Musk his position as world’s richest man.) “Eighty percent of this is self-inflicted, in our opinion, by Musk and the Twitter circus show that is getting worse, not better,” Ives added.

Ives isn’t alone. KoGuon Leo, a Chinese billionaire believed to be the third-largest individual shareholder, criticized Musk in a series of Twitter posts that called on the board of directors to oust him and replace him with someone more like Tim Cook, the reliable steward of post-Steve Jobs’ Apple. KoGuon isn’t enough of a force on his own to force Tesla to change course — Forbes reported last year that his portfolio of Tesla shares and options is mere fraction of Musk’s — but the sour tone in striking, since it wasn’t that long ago that he was a self-proclaimed fanboy who was willing to bet everything on the company’s future.

Take this all in from the eyes of a cold-blooded Wall Street investor: Tesla is plausibly cheap, and Musk owns less of it than ever — and would have a hard time backing off a challenge to his control. Musk said Twitter loses $4 million a day; he’s got to keep it going somehow, and the easiest way is to just draw down his Tesla stake. But, at this rate, someone like Carl Icahn can easily come along, say “I can do this better than you can,” and muscle their way onto the board — especially if there are more like KoGuon who are willing to believe that a new leader is the way for the company’s shares go up in value again. “If he goes below 10 percent, activism can start to increase,” Ives said. “That’s probably the biggest risk right now. And Musk is not an individual that plays nice in the sandbox.” This is, ironically, a similar scenario to the one Jack Dorsey found himself in before he left Twitter, when hedge fund Elliott Management got on the board.

Does this mean Musk will get booted from Tesla? Probably not. Richard E. Farley, the chair of the leveraged finance group at law firm Kramer Levin, pointed out that it’s still a relatively expensive company, with its stock price about 30 times what it earns before interest, taxes, depreciation and amortization — an accounting standard usually known as EBITDA. “I would say it’s extraordinarily unlikely because of the rich trading multiple and the size,” he said. But who controls Tesla is an active question in Delaware Chancery Court, the very venue where Musk found an unfavorable audience in his bid to get out of buying Twitter. A minor Tesla shareholder sued the company last year, claiming that Musk’s unbelievably large $50 billion compensation package, which is paid in options if Tesla hits certain revenue and production targets, shows that Musk really runs the company and that the board isn’t independent. Musk has been in the weird position of arguing, No, how could I run the company? I don’t have 50 percent of the shares. But, of course, it’s far more complicated than that, especially when it’s obvious a company is synonymous with its CEO. (Musk had once been the company’s chairman, too, but he was forced out of that position as a condition of his settlement with the Securities and Exchange Commission for falsely saying he had the “funding secured” to take Tesla private.)

The way publicly traded companies work is that they’re run by the top executives but controlled by the board — which ultimately answers to the shareholders. (In practice, this is more fluid.) In Tesla’s case, this arrangement has largely worked fine because its CEO is charismatic and shareholders have made good money. But there is a risk here that this deal won’t hold together forever. For as much as Tesla is a darling of Silicon Valley, it is structured in a much more traditional way than, say, Meta (formerly Facebook). Mark Zuckerberg’s company popularized a dual-class share system that gave the founder and CEO nearly unbreakable voting control over the company even though he didn’t outright own the majority of the equity. Tesla, on the other hand, has only a single class of shares. Shareholder coups have been held off in the past because, unlike most traditionally structured companies, two-thirds of Tesla shareholders need to agree to make changes, an extremely high bar. When Musk owned nearly a quarter of the company, that meant that nearly all of the remaining shareholders would have had to vote against him. And why would they have done that when the company’s shares had gone up more than 1,200 percent at its peak since the start of 2020?

There are still a lot of factors that could keep Musk from losing total control. For one, he could potentially continue to get billions of dollars’ worth of stock options to bring his stake higher, though that may be harder to pull off if the stock keeps falling. The rising cost of debt from interest-rate hikes by the Federal Reserve would also make a leveraged buyout an extremely expensive proposition for anyone — exactly the risk that led Musk to descend into the Twitter morass. But still, as mercurial as Musk may be, he may soon lose his ability to call the shots at Tesla. “It’s like watching an episode of The Twilight Zone, and it just never ends,” Ives said.

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Is Elon Musk Setting Himself Up to Lose Tesla?