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The bid for TSLA is $420. Do I hear $430?

The bid for TSLA is $420. Do I hear $430?

If Musk has a buyer willing to bid $420, what prevents a competitor from bidding $430...or more? Musk only owns 20% of the stock. So he can't stop a higher bid at a shareholder meeting. Musks tweet amounts to putting TSLA on the auction block with an opening bid of $420. If he doesn't have a written agreement at $420, he's all but invited a much lower opening bid from a competitor.

greg | August 11, 2018

Two things have to happen.

1. The board have to accept at least one of the [possibly many, competing] buyout offers, having first determined that they are genuine/valid with the ability to execute. If multiple competing bids are received they may accept more than one.

then

2. The shareholders have to vote, don't know the exact rules, whether its simple majority, or super majority required to gain acceptance. Some sort of special meeting is held usually. But you'd have to bet that unless the board is confident of a majority voting for the buyout offer, they wouldn't approve it in (a).

So while a bidding war could erupt, a competing offer just can't be slapped down at the Shareholders meeting and voted on out of nowhere***. A lot of due diligence would have to take place first by the board and then the shareholders before they voted. Especially as many of the shareholders are institutions.

[***If you've seen the movie "Barbarians at the Gate", which is a movie of a book of the same name based on the true story about the failed LBO and takeover antics of the firm now known at KKR back in the '80s, via a hostile takeover of "RJR Nabisco" - which started out as a LBO, like Elon wants to do here - the final part has a showdown of competing bids at the stock holders meetings, which even allowing for the Hollywood usual free license of the facts is quite gripping and apparently not too far from the actual facts].

I think once the board approves at least one bid, then the shorts really start to panic, thats when the stock price may rocket as the shorts have to finally start to cover their arses no matter the cost. Thats when the share price may rocket up by several multiples. With 25% of the stock being shorted there is a lot of arses that will need covering if that ever happens. Of course, if no bid is ever approved then all bets are off.
And the shorts may be able to get out alive.

But the LBO process has moved on a lot since the 80's, so [I truly hope] we won't have one of those situations for sure.

Mike83 | August 11, 2018

I don't believe it is a buyout. It is changing the investment vehicle from public to private stock. If all agree no money is needed but there are some will take 420/share and they will require cash. From my reading it seems max cash might be $20 billion or not.

greg | August 11, 2018

@Mike83

Its has to be treated as a full LBO of all the shares Musk doesn't own by the board, in order to take it private.

In theory, yes he could take it private for say $20B or less if all existing shareholders come on board in a completely cashless transaction. [Bondholders will need to be bought out though in all likelihood].

[What the shorts will do in that situation is impossible to guess, as their modus operandi operates on being always able to buy stock back even at a super high price - but what happens when there is actually insufficient stock being sold to allow them to buy back at any price? They may fail, but the collateral they put up is not infinite]

However, many investment funds say they cannot stay in a private fund so they will have to sell, so at the very least Musk has to be able to cash out those heading for the exits. either directly, or if they first elect to sell to the shorts above $420 a share, then he has to pay the shorts $420 a share to take each of those shares back. Leaving the public funds the profit as the difference between what Musk offered and what they sold to the shorts at.

So he will need to plan for the possibility that every shareholder does the same, resulting in him needing to buy back at $420 a share, the entire stock in Tesla he doesn't currently own - which will also have to include all those bond holders with convertible bonds.

So its treated as a full on process, even if the actual cash required ends up less, it may not in fact play out that way. And he needs to control [directly or indirectly] all the stock to go private - a 85% or whatever control is not enough, just as a SpaceX rocket 85% of the way to earth orbit doesn't work as a successful mission nor does an 85% control of Tesla stock work either. So its either all the way or it fails.

So he has to make sure he has enough fuel (cash) to reach earths orbit alone, even if he doesn't likely need it, because if he does, he really, really, needs to have it.

Mike83 | August 11, 2018

Disagree.

Mrx50518 | August 11, 2018

My understanding is that 2/3 of shareholders (of total shares?) have to approve.

Mrx50518 | August 11, 2018

Also, I just bought 30 shares, and planning to buy more. Would like to end up with around 100 shares but thinking of even more.

Ross1 | August 11, 2018

Better to get a loan so there isnt a hostile board, which kicks out EM, closes down Tessie.

greg | August 11, 2018

@Mike83

You can disagree, but on what grounds? Your "waters" tell you its different somehow?

The facts are this is how the process works. A privatisation is a LBO [Leveraged Buyout], even if no cash changes hands. Its still treated as such and goes through the same processes as if some external party wanted to buy the whole company. The terminology used might be a little different, the effect will be the same - Tesla is no longer listed as a public company. How and when they get there is a path yet to be determined by the Board who are in effect steering the ship right now.

Musk is on the sidelines and has been since he announced his "thinking about" bid via a tweet.

@Mrx50518

That will be 2/3rds of the shares that don't belong to Musk and associated parties who determine that.

Just as happened when they bought Solar City out, Musk [Kimble and Elon] couldn't vote even though they had probably a controlling vote on the SC [but not the Tesla] side of that deal.

Same for this, as Musk is the one doing the buyout, he can't vote [actually he is implicitly "voting" yes by doing the buyout], so his shareholding and thus his "votes" aren't counted to the approval percentage required.

@Ross1
At this stage the board are legally charged with protecting all the shareholders interests and of course staying within the securities laws as is required for any public company.

I don't think the board is currently hostile to the plan but the financier backing Musk may want to appoint board members they prefer [replacing some of all of the current ones], which may eventually lead to Musk being kicked out as CEO and/or the board voting closing the place down.
Its a risk shareholders who stay and Musk himself are all taking.

But the alternative is having Wall St dictating every move, quarterly report to quarterly report.

I think Musk's plan is the lessor of two evils.

I own some stock in TSLA, I don't know if I will be able to partake in the private shareholding or not, nor do I know even if I can, if I will. As the rules under which that will operate will need to be spelled out. And of course, how ti works for non-US stock holders also needs to be clarified.

While I support Elon's mission the influence any shareholders like myself will have going forward once privatised will be mostly insignificant. We will be, like a SpaceX rocket cargo, merely along for the ride, and hoping like hell to make it to space and get into a good orbit. If I worked for Tesla I'd feel ok with all this, I don't, so the fishhooks I see may outweigh the benefits.

ravisundaramam | August 12, 2018

"or if they first elect to sell to the shorts above $420 a share, then he has to pay the shorts $420 a share to take each of those shares back. "

1 This is not correct. If the board approves the plan to go private at 420$, everyone holding a share on that appointed day will get 420$. That is it. There is no way for anyone to hold the shares and demand higher price. They can take shares in private tesla instead of cash that is the only option the shareholders get.

2 The shorts have *already sold* their shares at various prices. Even if they buy in open market at astronomical price to cover their contracts, they will immediately turn them over to the people who bought the calls, they will not own the shares to do any demands or negotiations.

3 Since every one is going to get 420$, if the price is certain, the share price will go to (420 - time value for the money) and stay there. When our company was bought at some 36$ a share, it immediately went to 34$ and slowly inched up to 36 over the next four months. Right now it is way below 420 because, many people think the deal is not likely to happen. Come next week if the board studies the proposal, or files a statement with SEC saying Elon did have binding commitment from someone for buying all remaining shares at 420$, the stock will touch 420 and stay there. Wont go past it.

4. If there are not enough float available to close the contract, the calls will be paid the difference between strike price and the market price instead of a share. Often the call option owner will ask for that cash instead of actual share. (Technically it will be done by offsetting buying put options, price of put option will be 420$)

ravisundaramam | August 12, 2018

One more important thing to realize, it is possible the shorts have suffered significantly already.

The American style call options can be called at anytime, before the settlement date. So when the stock spiked to 380$, people holding call options can choose to exercise them at that point. The broker will buy at market price settle with the call holder and debit the account of call seller. The broker constantly calculates whether there is money to do this. Anytime it looks like the call seller might not have the money to cover it, they will issue a margin call. Deposit collateral or they will settle immediately by buying shares in the open market.

Thus, when the price hit 380 so many small accounts would have had their margin calls, and settlements.

ravisundaramam | August 12, 2018

Most brokers want 20% cushion. So when the stock touched 380$, shorts have to put up collateral for 450$ sale price.

kateproom | February 6, 2020

I think nothing can affect Tesla's success. This company is unique. The idea, the concept is new for our market. I appreciate Musk's activity and his vision. From my own experience, I know that bidding is risky and it's hard to fulfill everyone's interests. Actually, I know a company that is very good at auctions https://www.taylorandmartin.com. So, besides Tesla, I am a big fan of trucks. I am wondering if this situation with bidding affected the financial situation of Tesla and how was it?