If Elon Musk manages to take Tesla private, which is something like saying, “if I replace Tom Cruise as the lead in the next Mission Impossible movie,” Tesla will be even less of a threat to Detroit’s "Big Three" car makers than it now is.
To threaten the Big Three — General Motors, Ford and Fiat Chrysler — Tesla has to grow into a mainstream car company — a company that builds and sells lots of cars to people who might have bought a Big Three car.
Tesla has a long way to go before it threatens Renault, much less GM and Ford. The triumph so heralded by Musk, turning out 5,000 cars that sell for $70,000 by working day and night in a circus tent, is a worthy accomplishment, but at best, it is a quarter of what it takes to keep the Big Three up at night.
To be a real threat, Tesla has to mass produce four or five times that many cars and sell them for $35,000.
To make that many cars, Tesla will need to spend a lot of money. Musk says he doesn’t need to raise more money, but that is exactly what he has to do unless The Salvation Army is willing to donate tents and production line equipment.
Tesla’s cash flow, even if the company breaks even as quickly as Musk promises, won’t pay for the investment Tesla needs.
To make matters worse, if Tesla goes private, it will have to borrow a pile of money to buy back its shares or will have to issue so much equity that it will change who controls the company. It is unlikely that any new equity investor, even a sovereign wealth fund, would invest more than $50 billion and have no control over Tesla and its wild-card CEO.
Musk won’t put up with losing control, so the only way he will take Tesla private is to try to borrow that pile of money.
He probably can’t borrow it because there isn’t enough cash flow to service the debt, and he can’t sell off assets to pay down the debt, but let’s assume he pulls another rabbit out of his hat and can borrow it. The newly-private company will be so loaded with debt that it won’t have enough money to buy a new two-person pup tent, much less build new factories.
Given that taking Tesla private will take Tesla out of competition with the Big Three, why would Musk even think about doing it?
He says he wants to go private in order to escape the pressure to operate for the short term. That is a mantra chanted by many CEOs. It often is true. It is not true with Tesla.
Tesla shareholders are not fixated on the short term. They know they are investing in a company that needs more time and more money than a software or mobile app company. Musk’s shareholders are so little bother to Musk that he says he hopes they stay on if the company goes private.
That also would reduce the amount of money Musk has to raise to go private. His best case would be that everyone stays and he goes private without having to borrow any money.
Musk may have other motives for taking Tesla private. As a public company CEO, Musk has to deal with equity analysts. They irritate him with questions that cast doubt on his claims. Despite his apology for calling them boring boneheads, he still thinks that is what they are.
As a public company CEO, Musk also has to deal with short-sellers. He not only has to deal with them, he is obsessed with them. He can’t stand that they publicly vote against him by shorting Tesla shares and telling reporters why they think Tesla stock is overpriced.
Short-sellers and analysts don’t much hurt Tesla, but they hurt something important to Musk. They hurt his ego. Musk may be one of those people who is so smart that he thinks anyone who disagrees with him has to be an idiot who shouldn’t voice his or her stupid opinion.
He is right about that most of the time, but he spends too much time and attention worrying about the disagreeing fools.
If Musk somehow does take Tesla private, what Musk gains is that the analysts and short sellers will be gone. What he loses, and what his shareholders lose, is their chance to see Tesla become a formidable competitor to the Detroit’s Big Three.
Erik Gordon is a clinical assistant professor at the University of Michigan's Ross School of Business. His areas of interest are entrepreneurship and technology commercialization, venture capital, private equity, mergers and acquisitions and corporate governance.