TSLA: Round Up The (Un)Usual Suspects

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TSLA: Round Up The (Un)Usual Suspects

No matter how it ends, the potential Tesla go-private transaction is the most important event of the year in the world of disruptive technology. TSLA, for all its well-known operational shortcomings and wet-finger-in-the-air valuation, is a major force in its core market of electric vehicles and has a treasure trove of real-world data related to autonomous driving. Reasonable people can argue about how much that’s worth, but everyone can agree it is a totally unique asset.

Elon Musk’s wildcat tweet on taking the company private has put this asset in play, if not as a takeover candidate then at least as a chunky piece within the broader jigsaw puzzle of innovative disruption in personal transportation. The eerie silence/conflicting reports from logical funding sources like venture capital likely means the money for a TSLA takeout isn’t quite “secured”. But that leaves the door ajar for non-traditional players to take a role in any transaction. And once a deal happens, there are no do-overs or second chances for the losing players; there is no “other Tesla” out there to buy.

We’ve worked with enough great M&A bankers in our career to know that the best transactions fundamentally shift investment narratives, and that appears to be the missing piece to Elon Musk’s go-private plan. He’s tired of being public; we get that. But as long as he’s shopping Tesla like an old house (as-is, where-is), it will be a stretch (but not impossible) to find a buyer at his proposed $70 billion valuation. And if he fails, capital markets will not be forgiving. Nor will, we suspect, the Securities and Exchange Commission.

Adding a high profile Tech company to the mix would be the easiest way to create a “1+1=3” transformative deal. Apple and Google, to name two obvious potential partners, could easily drop $10 billion into a deal in return for technology sharing and seats on a private Tesla board. Yes, Musk would have to give up any aspirations to one day compete with his new partner. But putting strategic capital into a deal would strengthen his hand with VC money to round out the transaction at his target valuation.

If public tech companies don’t bite (and their silence to date is deafening), the best Plan B is public automotive companies. A few thoughts based on our decades of following the group:

#1. Public equity investors have an especially dim view of global car companies, and not just because of cyclical factors or concerns related to global overcapacity. How will autonomous driving technology impact new vehicle sales over time? Do electric vehicles have the same opportunities for aftermarket/replacement parts sales? Involvement in a TSLA go-private deal could help any auto company overcome those worries provided it comes with the right economics.

#2. Industry watchers also know that auto companies have deeply entrenched corporate cultures and mergers/strategic investments have to accommodate that fact. From Ross Perot/GM to DaimlerChrysler, the industry is littered with transactions that looked good on paper but failed due to personality clashes.

#3. Because of the prior point, we doubt Japanese or European carmakers would see Tesla as a good strategic fit. When you buy into TSLA, you get Elon Musk. Enough said there… Also in the mix: global auto industry unease with current trade/tariff tensions, which may limit their interest in creative dealmaking until those are resolved.

#4. That leaves the US “Big Three” (including FiatChrysler).

  • GM is likely out – their Cruise autonomous division recently got $2.4 billion from SoftBank. They probably feel they are in a good position and do not need to look at a Tesla transaction.
  • Ford is a likelier candidate; the family still controls the company and the stock is lost at sea (down 22% YTD). We’ve been waiting for a management shakeup here based on that poor equity performance, but involvement in a Tesla deal on good commercial terms could reignite investor confidence.
  • FiatChrysler is still reeling from the recent death of visionary CEO Sergio Marchionne and could use a new narrative to hold investor interest.

#5. Deal participation from any auto company – even a small one – would neatly address Tesla’s most persistent problem: manufacturing. Not only would an OEM be able to give valuable advice here, but folding Tesla’s supplier network into a larger company would provide margin-enhancing cost savings over time. All that would assure investors that Tesla will be able to meet future production goals more easily than in the past.

Summing up: the point of this exercise is to examine what else may come of a Tesla transaction aside from a simple VC-funded go-private deal. If Musk really has his capital ducks in a row, then the strategic implications of the transaction are minimal. If he doesn’t, there is ample room for a broad range of partnerships that fundamentally remake the auto industry. None of these hold a high enough probability to make them investable just yet, but that may change in the coming weeks.