Elon Musk Tweets to Take Tesla Private and Short Sellers get Creamed – What Happened? Part 1 - Taki
You might have heard that Elon Musk tweeted about taking Telsa Private. That caused the stock to rise as expected. You might have also heard that he had been upset with “short sellers” and was very happy that they lost a lot of money after his announcement.
Here at Smart Invest Canada we try to take complicated financial concepts and explain them to the everyday investor. So, let’s use this news story to explain a couple of concepts – “taking a company private” and “short selling”. In this edition, we’ll explain what taking a company private means. In our next installment, we’ll explain short selling.
Taking a company private doesn’t mean there won’t be any shareholders. It just means that shares (ownership) of the company won’t be available to the public on stock exchanges. Most companies are actually private. The restaurant on the corner, your dentist, and the florist are all likely to be private companies (unless they are part of a big chain). Private companies have owners and the owners get a say in the direction of the company by electing a Board of Directors who can give direction to the management, including the CEO, just like a public company. But in a private company there is no place where a shareholder could sell their shares (a stock exchange). Instead, if an owner wanted to sell their shares, they would be responsible for finding a buyer. The other big difference is that a private company has much less burdensome reporting requirements. A public company has to put out a complete accounting of its operations once a quarter and also provide public filings of any significant change in its operations. Of course, all that information goes into the public domain and is the fodder of the media and for the company’s competitors. Getting back to the Tesla example, Musk has been upset that shareholders and the media have started to be more negative on Tesla’s potential in the market creating pressure for short-term results. Plus “short sellers” have been betting against the stock, which has irritated Musk.
If Tesla were private again (almost all companies start out private) then Tesla wouldn’t have to report in public on their results and no one would be able to short sell the stock. Musk said in the tweet that he had the financing available to buy stock on the open market at a price well above the trading price when he made the announcement. If enough stock could be accumulated then there are provisions that would force the conversion of the rest of the public stock. Then the entities that purchased up all the public stock would become the owners of the company - likely Musk would own a big stake. That’s what taking a company private means – taking the company out of the public stock exchanges and removing the reporting requirements that go along with being a public company.