The "Tesla Top"

Submitted by Nick Colas of DataTrek research

Would a Tesla go-private deal be a sign of a market top, like AOL-Time Warner or the RJR Nabisco LBO? It certainly checks a lot of the boxes, and also highlights several fundamental shortcomings to public equity markets. For investors that latter point is critical, since they end up long “the disrupted” with no/little chance to own “the disruptors”.

In April 1995, billionaire investor Kirk Kerkorian made a surprise bid to buy Chrysler Corporation for $21 billion. The offer came after a private conversation with then Chair/CEO Bob Eaton where Kerkorian had said “You ought to consider going private… I already own 10% of the company. It would be easy!” Eaton simply replied “Interesting idea”, not wanting to alienate a key investor. On the strength of that discussion – and nothing else – Kerkorian made his very high profile move.

I know that sounds hard to believe, but I heard it from Bob Eaton himself when working on Chrysler’s defense against the bid. Every other senior manager concurred; Kerkorian, the consummate dealmaker, had simply heard what he wanted to hear.

So when Elon Musk announced yesterday that he had “Funding secured” for a buyout of Tesla, I flashed back to Kerkorian’s ill-fated assumption. Did Musk raise the topic of going private with a few high profile venture capitalists and hear “Interesting idea” in reply? Or perhaps he has a few anchor investors and assumes they will work to find more capital. No matter which (or none of the above), we will hear soon enough.

The real question from a market perspective is different: “How is a go-private of a $64 billion unprofitable car company even possible or an attractive idea?” A few thoughts on this:

#1. Every investment cycle has a “high water mark transaction” that signals underlying market trends have reached their apex. For example:

  • RJR Nabisco went private in 1988 in a leveraged buyout led by KKR, using $1.5 billion of investor capital to underpin a $25 billion deal. The transaction ended up working well enough, but it became a hallmark of 1980s greed and excess nonetheless.
  • In 2000, AOL effectively purchased Time Warner with its dot-com bubble inflated stock for $164 billion. The combined company’s stock declined by 90% in the years after the transaction.
  • In May 2007 Goldman Sachs assembled and sold Abacus 2007-AC1, a collateralized debt obligation chock full of risky mortgages. That’s the one where hedge fund manager John Paulson helped pick the paper he wanted to short and these were packaged and sold to other investors, who eventually lost close to $1 billion.

For better or worse, Tesla’s move to tap venture capital (debt is not an option here) to exit public markets captures every dominant narrative of the current cycle to a “T”. Venture capital fundraising is booming as VC firms struggle to compete with SoftBank’s $100 billion Vision Fund. And while public equity markets still award disruptive Tech giants outsized multiples, they usually cannot match private valuations or the convenience/flexibility of private ownership.

Bottom line: VCs are so flush with cash that they desperately need companies like Tesla – large, scalable, and levered to mega-trends like autonomous driving and clean energy – as much as Tesla needs them. Musk understands that dynamic better than most.

#2. Tesla has never been a “Typical” public company, and that highlights some of the structural shortcomings of equity markets. Forget the quirky CEO – the problem here is that disruptive technologies in capital-intensive industries take a long time to generate profits. In the interim, their stocks live and die on investor confidence alone. That makes for a volatile ride, which can hurt employee morale and motivation since they are often shareholders.

Equity investors face an even larger problem, however: consider that GM and Ford are in the S&P 500 but Tesla is not. And if TSLA is no longer a public company, there will be once less way for investors to hedge technological disruption in this industry. Blow that concept out to public equities as a whole and the issue becomes clear. Stock markets will consistently be long “The disrupted” and short “disruption”.

Not a comforting thought but that is exactly what is happening as VC-backed companies take longer to come public, and now one high profile example wants to go private again.

So what should investors make of all this? Two final thoughts:

#1. While we are not superstitious by nature, we do fear this transaction looks an awful lot like other deals done at the peak of prior cycles. If TSLA really can go private with VC capital (a $57 billion ticket), it may show that venture capital has gotten too large relative to its opportunity set. Or, perhaps, that investor enthusiasm over disruptive companies is simply too high in both public and private markets. Or both. Is all that a sign to sell everything? Obviously not, but it bears watching especially if this deal actually goes through.

#2. Venture capital investing is hugely risky and success depends heavily on access to the right deal flow, but for long-term investors there seems little choice but to play as best they can regardless of the prior point. For those who don’t check the “high net worth” category, the only choice is to own large public Tech companies that can at least buy assets from venture capitalists and fold them into their operations.

Put another way, public equity markets are packed with successful and highly profitable old-line companies. That used to be a feature. Now, with tech-based disruption, it is a very serious bug and the work-arounds are difficult and risky.

Comments

Take-a-Dump Thu, 08/09/2018 - 22:37 Permalink

Tesla haters tend to be global warming deniers as well. The Onion has some news here:

GENEVA—Saying the time to act has come and gone, a group of researchers from the U.N. Intergovernmental Panel on Climate Change warned Tuesday that any hope for the future of humanity now hinges on the possibility that scientists like themselves are simply making all of this up. “After reviewing our climate models and projections of worldwide CO2 emissions, we have come to the conclusion that the only scenario in which the human race survives is if our thousands upon thousands of meticulous empirical studies on climate change turn out to be something we’ve been lying about all along,” said climate scientist Philip Vanderwall, who stated that unless the entire scientific community has spent the past 50 years falsifying reams of data as part of a coordinated disinformation campaign to sabotage the global economy, the world’s low-lying coastal regions are as good as done for. “The evidence indicates our planet still might stand a chance of averting a complete climate catastrophe as long as my colleagues and I belong to a cabal of charlatans who are secretly paid huge sums of money to trick everyone into believing excess greenhouse gases will precipitate record-breaking natural disasters and worldwide famine. Otherwise, we’re all doomed.” On a personal note, Vanderwall added that he hopes that one day, his grandchildren will discover that he was involved in a massive, nefarious conspiracy spanning every country on the face of the earth, because it is the only thing that can possibly save them.

Bottom line: TESLA is a sure winner .... unless all the scientists are lying

NoDebt Take-a-Dump Thu, 08/09/2018 - 22:49 Permalink

Would you like me to walk you through all the failures of "scientists" to carefully regulate the much simpler, smaller ecosystem in Yellowstone National Park as an example of this "scientific" insanity?

Short version: EVERYTHING they tried only served to create three new problems for every one they "solved".

I trust science in massively complex analog systems about as much as I trust Dennis Gartman to predict the future direction of the "markets".  And those simple systems are created and run ENTIRELY by human beings.  Add in the insane complexity of Mother Nature and your childishly simplistic (CO2 = bad) understanding of how things work becomes laughable.

Going one level further out, I trust Government to know how to "fix" those problems even less.

Zooming out even further, I trust government NOT AT ALL to implement those "fixes" in any effective way.  

In short, even if "global warming" is real, adaptation to it's effects is VASTLY easier than trying to "fix" it.  One step further away front the ocean per year should do it.  Or we could kill another 100 Million people in rapid order with the misguided and draconian "solutions" that Governments would implement to fix it.  Merely banning air conditioning, as Al Gore suggests, would kill at least that many.

 

 

In reply to by Take-a-Dump

sessinpo NoDebt Fri, 08/10/2018 - 01:28 Permalink

NoDebt Take-a-Dump Thu, 08/09/2018 - 22:49Permalink

Would you like me to walk you through all the failures of "scientists" to carefully regulate the much simpler, smaller ecosystem in Yellowstone National Park as an example of this "scientific" insanity?

-------

I found it's a waste of time talking any sense to people like take a dumo. They have no sense so it won't sink in. Just let thembe the cannon fodder they are. They contribute very little to society so they won't be missed. That's the reason they have to make their silly statements. They have nothing else. Pretty sad really.

In reply to by NoDebt

vaporland NoDebt Fri, 08/10/2018 - 12:14 Permalink

"science" used to tell us that the earth was the center of the universe, flies and rats erupted spontaneously from dead things and drinking radium was a good idea.

At any given point in human history, at least half of what we believe to be true, is false.

Extrapolate to present day. I have no confidence that government in cahoots with corpirate interests will do anything other than fuck us all over.

In reply to by NoDebt

just the tip Take-a-Dump Thu, 08/09/2018 - 22:52 Permalink

it's a sure winner.  but when?

the boring 757 was not that big of a deal when first released  and not that many airlines were interested.

now that it is out of production, the airlines are taking aircraft from the desert boneyards and re-certifying them due to the niche in the market they now fill.

my point.  microsoft didn't do shit for computers, until their software transformed computers into communication devices.  no one uses a computer for computations anymore.  they use it to buy cheap shit from china.  and tell other commenters to go clean the worms out of their anus.

In reply to by Take-a-Dump

PrivetHedge DisorderlyConduct Fri, 08/10/2018 - 06:59 Permalink

Remember Elon has over 17,000 electric cars sitting in the sun in various parking lots and fields.

If they have batteries in them they could well go completely flat: which kills them. Then the heat in the greenhouse like car will destroy the big LCD screens too, which means potentially Elon has created over 17,000 dead batteries and over 17,000 dead LCD screens as a little job he'll have to deal with later.

With management like that the cash burn and viability of EVs is only one problem of many...

In reply to by DisorderlyConduct

unlock your mind Take-a-Dump Thu, 08/09/2018 - 23:59 Permalink

Looks like the Onion accidentally backed into the truth, because in a broad sense, that is what happened. It is not only plausible, but very common for entire industries to conjure their own reality, especially if it serves their own interests for obtaining funding and wealth in general. I would say that in today's mercantilistic economic system that is the norm. Someone recently phrased a large portion of so called published science as being "Advocacy Science".

Furthermore, your not even correct in your assumption as to why TESLA is a winner. Sure TESLA was able to ride the green wave, but the real facts point to a highly disruptive company that is going to change the automobile landscape in a way we have not seen since the period between 1905 - 1925 when the horse-and-buggy was obsoleted.

I used to think that ZH served an enlightened audience but their growth in popularity has come with a severe downturn in audience IQ.

In reply to by Take-a-Dump

IronForge unlock your mind Fri, 08/10/2018 - 01:38 Permalink

Have you been stuffing your head up Musk and Your Arses?

Hybrid Electrics, Flex-Fuel (BRAzilian Ethanol), BioDiesel, and now, HFCVs are among the Real Leaders in Innovation.

NSANY Leaf and Better Place (Swap Out Batteries) tackled range issues better. 

Hybrids have been out before TSLAs. HFCVs have been introduced and researched for some time as well. Gasoline were relatively cheap until the Second Gulf War Started, IIRC.

TSLA were the repackaged T-Zeroes after Musk ousted the Original CEO.

BEVs were revisited by TSLA; but the Original T-Zero had a towed Gas Generator for extended Trips.

TSLAs only work for Warm Weather Commuters who can make the daily round trip on one charge or charge up at the Office.  They Epic Failed the NYC-BOS Run in Winter; and won't be able to maintain sustained Freeway Speeds for their claimed Range.

Battery Tech may be improving; but the BEV Tech is no match for the PHEV and HFCV in terms of convenience (here in California wrt HFCVs) when multiple/frequent charges are required.

Still, BEVs are popular; and several Makers are rolling Models Out ; but mostly as part of a Lineup.

TSLA as Car Models and as a Company have "Jumped the Shark".

In reply to by unlock your mind

not dead yet unlock your mind Fri, 08/10/2018 - 02:08 Permalink

Yep, the auto industry is going to be disrupted but not by Tesla. It's your enviros in partnership with the government that's doing it. They are the ones who have been pushing for decades to ban "polluting" cars and as has been expected for many years as countries, like Germany, are now in the process of legislating it. Then we have the US government writing into law under Obama the corporate average fuel economy of 55 mpg in a few years which means electrics are needed in the product mix. Tesla was early to the game and not a game changing disrupter or the bunk that others are doing electrics because of Tesla. Substituting an electric motor and a battery over an engine and gas tank still gives you a car not a magic carpet. For a supposed game changer it's ironic that you can't hardly give Tesla's, and other electrics, away around the world without large government tax breaks to the buyer to sweeten the deal. Maybe you should do some research instead of ignorantly insinuating anyone not on the Tesla bandwagon is a dumb ass. Tesla has nothing to offer the world that isn't already available from others such as a lot of tech which Tesla takes credit for like batteries and self driving but had no hand in developing. Every market Tesla is in from cars to solar panels to Powerwalls to batteries has established and better funded competition. Self driving alone has dozens of companies working on it, and doing a better job, and more popping up all the time. Let's not forget that Musk was going to disrupt the auto business with the automated factory of the future and would be the death knell of the dealer system. Well his future factory was a huge expensive flop, the mainstream auto mfg's employ humans because expensive robots cannot replace human hands and intelligence for many tasks, and Tesla is opening dealerships.

I mentioned yesterday the big Musk lie about Tesla being the most shorted stock in history was a load of manure. There are plenty more in the Tesla short ballpark and lots more with much larger shorts. Like Alibaba with 4 times as many short or AK Steel twice as many. Came upon another load of Musk lies when he claimed over a hundred people had installed solar roofs. When pressed he hemmed and hawed and admitted that included people who had ordered them but they hadn't been installed. Of course like the lie about the numbers of installations we can't believe his over a hundred on order either. Seems his solar factory of the future, a freebee from the New York taxpayers, has a problem making a quality product. It's so bad that Panasonic, which shares that facility, is trying to sell to others components they made for Solar City because SC production and product is a basket case.

In reply to by unlock your mind

Clock Crasher Thu, 08/09/2018 - 22:41 Permalink

You guys remember the VW parabolic short squeeze? 

Time for round 2. 

If your short get ready to have your fucking face ripped off and your wife to separate you from your kids after serving you divorce papers.  

Idiots!! 

adr Bunga Bunga Thu, 08/09/2018 - 23:22 Permalink

Also, VW was in the process of a hostile takeover by Porsche which is what caused the massive short squeeze.

Here you are talking about someone paying $70 billion + for an unprofitable company with a few billion in maturing debt over the next year and near zero in assets.

The Tesla factory is worth zero to any other manufacturer. It would cost billions to turn it into a factory that is actually capable of mass producing cars, and who would want to do business in California.

In reply to by Bunga Bunga

just the tip Thu, 08/09/2018 - 22:45 Permalink

ok.

this guy is an insider and has been around the block.  he knows stuff.

here's what i know.  in earlier articles i've read about tesla, its valuation would be $74 billion US.  at the start of this article this guy says it is $64 billion US.  toward the end of the article he says the valuation is $57 billion US.

my point.  what this guy knows.  i ain't buying.

SocratesSolutions Thu, 08/09/2018 - 22:53 Permalink

No more Tesla articles. Not pertinent. 

Only one real issue on the World Table today. The JP. The Jewish Psychosis. It must be finally dealt with. Permanently solved. 

America and the world will no longer be 911'd by the black plague which has ran its course and must be burned down now. 

Groucho Thu, 08/09/2018 - 23:04 Permalink

Tesla is a Ponzi scheme with a mentally unstable CEO. It is over valued by an order of magnitude and it’s inconceivable that anyone would pay $420 per share. And if Musk was lying he could be looking at jail time.

BTW to those who think driving an electric car is going to save the world tell me where do you think energy comes from when you plug in? If you live in the USA 60% chance it comes from fossil fuels and 30% chance that fossil fuel is coal.

 

not dead yet Dolar in a vortex Fri, 08/10/2018 - 02:17 Permalink

As has been proven Tesla's self driving isn't so great. Cadillac is offering hands free driving on the interstates while Tesla says the driver should have his hands on the wheel at all times. There are dozens in the business of developing self driving and more on the way. Tesla has plenty of competition in every arena and nothing unique to offer anyone. Other than how to lose money selling to rich people willing to pay what it takes for the latest status symbol.

In reply to by Dolar in a vortex

snblitz Groucho Fri, 08/10/2018 - 01:28 Permalink

When you burn oil, coal, or natural gas  to boil water to make stream to spin a turbine to make electricity you are stuck at 33% efficiency. 

Are you aware that we still boil water to spin turbines?

"Electric" cars simply cannot overcome that fact of thermal dynamics.

And that is just for the electricity back at the plant.  It all goes down hill from there:

"Electric car" efficiency (being generous):

oil to electricity 35% -> transmission line 90% -> battery charging 85% -> battery discharging 85% -> through electric motor 85%

= 18%

Light duty diesel efficiency:

oil to diesel 90% -> transportation 95% -> through engine 55%

= 47%

That comes to "electric" cars using about 2.5 times the amount of fossil fuels per mile driven.

The oil majors are laughing all the way to the bank.

A light duty diesel with a SCR/DEF pollution control system pollutes less too.

https://www.finitespaces.com/2018/02/14/electric-cars-use-twice-as-much-oil-as-diesel-vehicles/

 

In reply to by Groucho

not dead yet snblitz Fri, 08/10/2018 - 02:30 Permalink

What people are missing in the electric story is the great job American utilities have done to make electricity so cheap. As has been shown in Europe and other places the more renewables, which the enviros are pushing for, are added to the mix the higher the electric bill. In the USA the price of electricity is only going to go up as enviros push renewables and the more electric cars we have the rate of increase will explode. Especially when we are eventually forced to pay rates based on current system demand instead of a flat rate.

In reply to by snblitz

lizzoilz Fri, 08/10/2018 - 00:12 Permalink

Shepwave cycles playing out.

 

From their blog

 

ShepWave.com
Posted: 8/9/2018 22:31 EST

 

Friday could be a critical day of trading. 

From the OUTSIDE-UP we saw last week on Thursday, August 2nd, which led to some short term bullish activity as anticipated--to the ISLAND and GAP Patterns we have in the SPY/SPX for this week:this market is not for sloppy traders. 

Remember the ShepWave criteria for Island and Gap Patterns and triggers.

Now is not the time to be na�ve! Pay close attention to new tend lines and trigger areas using the more aggressive 15 minute and 60 minute time frame charts.  

NVTRIC Fri, 08/10/2018 - 00:50 Permalink

Tesla got in line like a good little bitch and paid the services contract.  I guess my red tag the gigafactory comments had some punch.

You bet your ass Elon reads this fucking blog.