Howes: SEC deal with Musk called 'worst possible outcome' for Tesla
The feds’ settlement with Tesla Inc. and CEO Elon Musk assumes two things that may not prove to be true.
First, that a new chairman and two new, allegedly independent, directors could effectively control their chief executive’s inclination to not be controlled, starting with his Twitter account. And, second, that Musk is better equipped to run the company as CEO than as a visionary better suited to thinking big in the boardroom.
The evidence suggests that lawyers for the Securities and Exchange Commission got it precisely backward, meaning there are limits to regulators' efforts to "protect" investors from the vagaries of Musk's leadership, quirky personality and contempt for the rules governing the rest of us.
In an Aug. 7 tweet, Musk floated his "plan" to take the publicly traded electric-car maker private at $420 a share, adding "funding secured." But it wasn't. And there was no plan, no confirmed financing and no agreements with would-be advisers to help deliver arguably the largest buyout in history.
The result: confusion, Musk's customary butt-covering and a swift SEC investigation that culminated in a lawsuit seeking to bar the Silicon Valley mogul (and Tesla's largest shareholder) from "acting as an officer or director" of any publicly traded company — a death sentence his Saturday settlement managed to avoid.
“This is the worst possible outcome for Tesla,” says Jim Collins, a longtime auto analyst with Lehman Brothers and Donaldson Lufkin & Jenrette who now runs Portfolio Guru LLC. “Musk is out as chair for three years, but he stays as CEO. He is still a director, but his ‘vision’ — which drives Tesla's massive valuation — will be diluted.
"He stays as CEO, a job at which he is, frankly, horrible, as he has presided over Tesla's terrible manufacturing execution and massive cash burn." His tasks: to improve manufacturing execution and slow the cash burn, lest investors be asked again for a cash infusion as $1.15 billion in bond payments loom between now and next March.
Does this make any sense?
It does if you accept the proposition that Musk and his audacious, if occasionally undisciplined, mind are as much Tesla as its iconic Model S. In a recent piece in Forbes, Collins estimates Musk accounts for roughly half of the automaker's lofty share price of $310.70 at Monday's close. Brian Johnson at Barclay's comes to a similar conclusion, pegging Musk's value at $130 per share.
Separating Musk from Tesla, as the SEC threatened in its lawsuit filed last Thursday, would remove a major support underpinning Tesla, severely punishing the investors the feds are charged with protecting.
Last weekend's settlement leaving Musk as CEO doesn't necessarily answer those concerns. He needs help running the company; but he runs regularly through senior management talent, a proverbial red flag for such a high-profile company with an equally high-profile founder as CEO.
Under his leadership, Tesla moved from Musk's self-described "production hell" for its compact Model 3 to "delivery logistics hell." It has laid off employees to cut costs; delayed payments to suppliers; reduced color choices on the Model 3; and continued to lose executives at an alarming rate.
Tesla's vehicles challenge conventional wisdom. They've been credited, rightly, with pushing the industry's conception of electric vehicles and their appeal to consumers. But their production, and supply networks, should hew to generally accepted principles shaped by industry veterans Musk is known to disdain.
The SEC's humbling of Musk comes at a critical time for Tesla. Its Model 3 launch remains troubled, behind schedule and plagued with some embarrassing defects. Traditional automakers are primed to launch new electric cars rivaling the Model 3 in range, premium brand cachet or both.
Would-be rivals from China, poised to be the world's largest market for EVs, are quickly positioning themselves with Chinese premium electric-car buyers. Shanghai-based NIO Inc. expects to build 7,000 units in its second quarter of production, a rate that took Tesla three years to achieve.
And people are watching, people with the power and predisposition to enforce securities laws. Musk's ability to wield the tweet in service of his companies and causes is rivaled only by the president of the United States, with one critical difference: the president's comments aren't subject to SEC oversight.
Will Tesla remain Tesla with a little less Musk and a lot more professionalism? We're about to find out because the patience for his games is rapidly wearing thin.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.