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What if Elon Musk’s $420 dream hadn’t gone up in smoke?

Author: Sean O’Kane / Source: The Verge

Last August, Elon Musk tweeted he had “funding secured” to take Tesla private. That turned out not to be true, and he eventually had to settle securities fraud charges with the Securities and Exchange Commission.

Musk is still battling the SEC over that very same settlement, and it’s possible he will be held in contempt of court for allegedly violating it. With the decision looming, it’s worth asking: what if he had lined up funding?

What did Musk stand to gain by turning Tesla, which has been publicly traded on the New York Stock Exchange since 2010, back into a privately held company?

How could he have done it?

There are a few different ways Musk could have taken Tesla private. One of the most common ways would be to secure funding from a small group of institutional investors to buy out the company’s shareholders. Shareholders usually want a premium over the price of the shares at the time (like, say, $420!), and they also have to approve the deal in a vote. The investors then get an ownership stake of the company in return, but the total number of owners would be below the Securities and Exchange Commission’s thresholds for public reporting.

At first, this seemed like the path Musk wanted to take, but his subsequent tweets complicated things, according to Stephen Diamond, a law professor at Santa Clara University and an expert in securities law and corporate governance — specifically the one where Musk expressed his hope that “

.”

“It would be very challenging him to herd a subgroup of several thousand shareholders into some kind of entity” that the SEC would consider below those thresholds, Diamond says.

Another way to take Tesla off the public stock exchange would be to execute a “leveraged buyout,” according to Ann Lipton, an associate professor of corporate law at Tulane University. Here, the goal is the same — buy out the shareholders so only a few remain — but the source of money is different. Instead of trading ownership stakes for funding, Tesla would borrow money from entities like banks to buy out the shareholders. Finance types often call debt leverage because it sounds less dangerous; hence, “leveraged buyout” instead of “debt-fueled buyout.”

The problem with this, Lipton says, is Tesla already had a lot of debt — around $11 billion at the time of the “funding secured” tweet — and not a lot of free cash on hand.

“The theory of a leveraged buyout is you take a company with a lot of cash and you use that to pay down the debt, but that’s not Tesla,” she says.

So if Tesla were private today, probably it wouldn’t have happened through a leveraged buyout. More likely, it would have taken the first route, of a small group of investors. Had that happened, it would have cost tens of billions of dollars and been “one of the largest and most complex private equity plays,” according to Diamond. Since Musk didn’t actually have funding lined up from Saudi Arabia, he likely would have had to find it from existing or outside institutional investors, and then use it to buy out the shareholders in a transaction they’d have to approve.

Many shareholders would inevitably be upset (as

that day in August), either by the amount Musk offered or the way the deal was executed, says Gregory Shill, a law professor at the University of Iowa. This happens in a lot of buyouts, actually. Litigation over the deal price is especially inevitable, he says. But even if Musk “dotted his i’s and crossed his t’s,” Shill says, there would probably be a lawsuit about how the process was handled.

To understand why, it helps to look at Tesla’s 2016 acquisition of SolarCity. Musk was chairman of…

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