Going private: After Elon Musk tweeted about taking Tesla private, we look at what that means
Elon Musk, the business magnate and investor, tweeted on August 7 that he was considering taking Tesla, the electric car business he founded, private.
The chief executive tweeted to his 22 million followers: "Am considering taking Tesla private at $420. Funding secured." It was reported around the world, including here on Business Insider. But what on earth does that mean exactly?
It's time to break down this "going private" malarkey.
We should start with what it means to "go public" before we can understand what such a move could mean for Tesla and its shareholders... and why some people might be unhappy about his social media activity.
What is "going public"?
"Going public" refers to a private company becoming publicly traded on the stock market for the first time, i.e. the first time a private company's shares are offered to "the public" or "retail investors". This is called an Initial Public Offering (IPO).
An IPO on one of the world's stock exchanges, such as the London Stock Exchange (LSE), Nasdaq or New York Stock Exchange (NYSE), might also be referred to as a "listing" or "flotation".
With an investment bank, a company will work out the number and price of shares to be issued. The process of an investment bank raising investment capital on behalf of a firm is called "underwriting", and the bank will get a percentage of the money raised.
Why would a company "go public"?
Usually businesses go public to generate funding (capital) to grow; for expenditure, to pay off debts or for acquisitions or research and development.
Public companies have a broader (diversified) investor base. This spreads risk and the capital raised is typically larger than for a private company because anyone can invest. Listed stocks may also attract the attention of institutional traders such as hedge funds and mutual funds.
IPOs can also offer an opportunity to increase market share due to the publicity surrounding them.
Going public has been the dream of many entrepreneurs. Early investors can profit from selling some of their own shares while retaining a stake in the business. Shares are more easily traded.
In the case of Tesla, Tesla Motors launched its IPO on the Nasdaq exchange on June 29 2010. Random fact: It was the first IPO by an American automaker since Ford's listing in 1956.
Companies must meet certain requirements before they can be listed on an exchange and each exchange has its own rules or "listing standards".
These demands can increase credibility and make firms more creditworthy.
What is "going private"?
Well, the opposite obviously. Converting a publicly-traded company to a private one might also be referred to as "de-listing".
The removal of a security (a tradable financial asset) from a stock exchange involves securing funding to buy out all its public shares by putting out a tender offer. A private group will make an offer (the price it is willing to pay for the shares) to the company and its shareholders. The majority of shareholders need to agree to the deal.
Private firms still have shareholders and can issue stock but do not trade on public exchanges.
Why would a company "go private"?
Private companies face less reporting and regulatory requirements. If two publicly-listed firms merge, the formerly separate businesses de-list to trade as a new entity.
Musk followed his tweet up with a blog post of an email he had sent to staff explaining why he felt it was "the best path forward".
He said: "As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders.
"Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.
"Finally, as the most shorted stock in the history of the stock market, being public means that there are large numbers of people who have the incentive to attack the company."
What is "shorting"? Shorting or short-selling a stock is where an investor takes a risky bet that the stock they sell is going to drop in price and they will profit from the difference.
His comment about the "quarterly earnings cycle" is in reference to the fact publicly-traded firms have to report on their performance quarterly.
Why are people bothered about Musk's tweet?
It is unconventional for an announcement like this to be made via Twitter and he faced questions over the source of financial backing for a buyout. If Musk plans to pay out $420 a share, where would that money come from?
Rapper Azealia Banks (who does have a history of making bold claims) said on Instagram that she was at his house and he was “scrounging for investors”. Oh, and “420” is code for marijuana apparently.
But the tweet wasn't a joke and some people who felt they should know what was going on didn't. Musk's shock tweet affected the stock price. It is up to the US regulators to decide if he broke rules.
According to the Wall Street Journal, the US Securities and Exchange Commission (the US equivalent of the UK's regulator the Financial Conduct Authority), is investigating whether his statement on Twitter was truthful.
The FT has also reported that the buyout plan has shone a spotlight on board independence.
This article on Quartz described Tesla as "almost a religion": "There are heretics, true believers and the rest of us", Michael J Coren wrote.
Does Tesla attract too much attention? For an entrepreneur who has sold thousands of electric cars and raised billions of dollars to be in the news is not surprising. His SpaceX company, a separate entity, plans to send people to the International Space Station next year. Businesses don't get much sexier than that.
Clearly, the world is changing fast. We've had politics conducted by tweet as President Trump makes huge policy announcements this way, and national leaders from Russia and elsewhere respond in kind.
The usual political channels are being subverted and now, it seems, for some the same process may have begun in business.
We are certainly living in interesting times.
Read more: Is investing for me?