With just nine words last week, Tesla (NASDAQ: TSLA) CEO Elon Musk sparked massive confusion about the company's future and the stock. "Am considering taking Tesla private at $420. Funding secured," Musk said on Twitter last Tuesday. The implications of these nine words were far from straightforward.
- How far into the process of potentially taking Tesla private was Musk at the time of this tweet?
- What does "funding secured" mean, exactly?
- How serious was Musk about following through on this possible transaction?
- If Musk did follow through, when could a transaction close at the earliest?
In two follow-up blog posts and an SEC filing, the electric-car maker has provided some more insight into where the company is in this process, giving investors a bit more context. But there are still more questions than answers.
This puts shareholders in a tough spot. What should they do with their shares?
Image source: Tesla.
Here are several items for investors to keep in mind.
1. Avoid speculation
As in any buyout scenarios waiting to be formalized, a good rule of thumb for shareholders is to continue holding as long as they remain confident in the company's underlying fundamentals and long-term prospects. That way, if the deal fails to materialize or falls apart, investors are holding shares for reasons beyond the deal itself, making them more prepared to endure any short-term volatility the stock is dealt in the aftermath of a failed transaction.
To take a stance like this, investors will need to resist thinking about the stock's near-term prospects and focus on the underlying business.
Simply put, investors should avoid all speculation and only give weight to facts.
2. Know the facts
The most material information for long-term investors, of course, is the condition of the underlying business, its competitive dynamics, the quality of management, and other factors that would impact a buy-and-hold investment thesis. Of course, that also means considering the known facts of a potential buyout.
However, there are very few facts to mull over when it comes to Tesla's potential privatization. Beyond Musk's disclosure that he's considering taking Tesla private at $420 per share, all investors know about Musk's "secured" funding is that the Saudi Arabian sovereign wealth fund reached out to Tesla on July 31 to say it was eager to proceed in a transaction that would help the automaker go private.
"I left the July 31 meeting [with the managing director of the fund] with no question that a deal with the Saudi sovereign fund could be closed, and that it was just a matter of getting the process moving," Musk explained. "This is why I referred to 'funding secured' in the Aug. 7 announcement."
For investors looking to go to the source, the information Musk and Tesla have shared can be summed up in the following blog posts and SEC filings.
- An open email from Musk to Tesla employees about Musk's vision for a private Tesla.
- A blog post from Musk on the timeline of what has happened so far.
- An 8-K SEC filing detailing a special committee formed by Tesla to evaluate and negotiate any formal offer to take the company private.
Another narrative for Tesla investors to consider is the SEC's reported preliminary probing of Musk's comments on social media about taking Tesla private. There's concern the CEO's tweets weren't fully representative of the actual situation.
What's most important for investors to understand is that there still isn't any formal offer to take Tesla private. A special committee, formed by Tesla, of three independent directors to act on behalf of the company in regard to Musk's considered transaction "has not yet received a formal proposal from Mr. Musk regarding any Going Private Transaction, nor has it reached any conclusion as to the advisability or feasibility of such a transaction," the company said in an 8-K SEC filing on Monday.
3. Keep an eye out for updates
Investors should consider the implications of Tesla's potential privatization as facts materialize. If new information makes the company's privatization look more likely to occur, investors can give more weight to the possibility of receiving $420 per share.
For now, however, facts surrounding this potential deal are too scant for investors to assign a high probability to a successful transaction. Betting on this outcome is nothing more than speculation until more details about a possible deal unfold.
4. Consider the middle ground
Perhaps something about this potential privatization does change your thesis on Tesla stock. Maybe the lack of details surrounding the transaction has left you less certain about the company's future. Or perhaps the way Tesla has gone about disclosing information has eroded your faith in management's stewardship. Whatever the case, investors should always remember that they don't have to choose between one extreme or another.
Instead of buying more shares or selling entire positions in the stock, investors can opt to sell a portion of their shares or simply do nothing until more material information has a bigger impact on their outlook for the company.
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