Plunging Tesla Stock to Split 3-1; Larry Ellison Chooses Now to Leave Board—and Twitter Deal?
Tesla announced 3-1 Stock Split in a down market plus a surprising board shakeup as Larry Ellison quietly exits. Is this another red flag with Elon's troubled funding for his messy Twitter buyout?
Tesla (TSLA) waited until late Friday to announce a 3-1 stock split, as one does when the stock at $696.69 is down 34% ytd—much worse versus the 19% decline for the S&P 500—and down 44% versus its November peak at $1,243.49.
Not surprisingly, that news sent the stock down more than 7% to $646.63 as of this writing on Monday.
Which means the stock also is trading 12% lower versus Tesla’s 5-1 split in August last year. Unlike now, as Tesla pushes a stock split despite weak market conditions and its own founding operations (see Forget Elon's Twitter Spatter. Tesla's Got Trouble In China), that first split last year had had followed a 255% ytd gain in 2021 and a 550% gain for the previous 12 months. Good times.
And the stock split was just one of a at least three volatile announcements Tesla quietly released with this proxy statement filing for its shareholder meeting in August.
Not only is it splitting its weak stock in a down market, it’s reducing its already sparse board count by one to seven. Such a small board seems unusual, particularly since Tesla is most expensive companies in the world with a market cap still at $685 billion—still, incredibly, more than all major automakers in the world combined. By comparison, for example, Ford’s board comprises 14 members and General Motors has 11.
If any company needed substantially more board oversight, not less, it’s Tesla. This is
mostly due to its arrogantly reckless CEO Elon Musk.
Indeed, that’s exactly what the SEC mandated in its 2018 settlement with Musk and Tesla over his conviction for securities fraud related to his bogus plan to buy Tesla, funding secured, announced via tweet, which cost investors some $20 billion in evaporated Tesla market cap (see my reports Tesla: Musk Fought the Law, the Law Won, So What?).
As the SEC noted then, Musk’s unchecked behavior has been a long time problem which Tesla had promised to address since at least 2013:
According to the SEC’s complaint against Tesla, despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings. Nor did it have sufficient processes in place to that Musk’s tweets were accurate or complete.
This figured into remedies the SEC mandated in its settlement with Musk and Tesla:
Musk and Tesla have agreed to settle the charges against them without admitting or denying the SEC’s allegations. Among other relief, the settlements require that:
Musk will step down as Tesla’s Chairman and be replaced by an independent Chairman. Musk will be ineligible to be re-elected Chairman for three years;
Tesla will appoint a total of two new independent directors to its board;
Tesla will establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications;
Musk and Tesla will each pay a separate $20 million penalty. The $40 million in penalties will be distributed to harmed investors under a court-approved process.
“The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.
“As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.”
I warned clients at the time that I was skeptical these steps would be enough to rein in Musk, even if he and Tesla did honor the terms of the settlement—which I doubted they would. Sure enough, Musk defied the SEC before the ink on their agreement was dry (see Tesla: Party Today; Hang the Details and Tesla: Looking For Trouble).
I had suggested substantially more comprehensive measure were needed:
It's critical that Musk and Tesla realize the SEC actually let them off lightly. Criminal investigations continue and those investigators will be paying close attention to how Musk and Tesla proceed. So will shareholders who have filed numerous lawsuits alleging securities fraud.
Tesla's new chairman must be a truly independent, seasoned auto industry veteran who can demonstrate management strength, operating prowess, and help begin to restore the company's shredded credibility.
New directors Tesla is compelled to add must be truly independent, and the company should increase its board to at least 12 directors to ensure demonstrable management oversight.
Tesla's board should create and publish new standards for management oversight, accountability, and public communication.
Tesla must install and retain a broad-based bench of seasoned auto industry veterans who can help Musk lead and help Tesla execute its critical transition into a sustainable carmaker. Better-healed rivals are bringing strong competition for 2019.
Tesla needs to replace and retain top-flight accounting and finance execs to ensure there are no worrisome financial irregularities. If there are problems, get them fixed and install appropriate compliance and controls before the year closes for audited financial statements. Too many high-level finance folks leaving too frequently have raised serious concerns. Getting seasoned, credible management in place early can head off problems and damaging fallout later.
Bolstering its finance team also can help ease growing concerns from Tesla's wary suppliers, creditors, bondholders, and investors that the company can appropriately manage its troubling liquidity pressure and the potential need for additional funding while it navigates at least three more difficult quarters before the company becomes convincingly self-sustaining.
Musk must tow the line—his vision and passion are needed and desired, not his frat boy antics which have severely damaged Tesla and its prospects.
Musk may not believe it, but the SEC's quick and decisive action may have forced him and the board to grow up a little—truly a gift considering how challenging the next 6-9 months could prove to be as the company becomes viable, or not.
Whether he has learned anything that sticks remains to be seen.
From my report Tesla: Musk Fought the Law, the Law Won, So What?
Of course, we now know Tesla failed immediately to accomplish even as much as my first suggestion when it let Musk select a longtime fan to succeed him as board Chair, much less add credible independent board members:
Investors can't reasonably believe Musk will be reined in or ever struck with a pang of conscious over any of his actions, especially now that he has hand-picked his successor Robyn Denholm as Chairman, a Tesla director who long has joined the board in rubber-stamping his every move for years. This included his actions which the SEC labeled as securities fraud related to his buyout stunt. This is not likely to change with the addition of Kathleen Wilson-Thompson and Larry Ellison as two new "independent" directors also added this week to satisfy the SEC's mandate for increased board oversight of Musk. Both were notable cheerleaders for another incorrigible CEO: Elizabeth Holmes. She and her company Theranos conducted a stunning multi-year, multi-million-dollar fraud which could eventually land her in jail. Mr. Ellison actually was fined $100 million by the SEC for insider trading when he was CEO of Oracle and sold $900 million in Oracle stock just before the company reported a disappointing quarter.
From my report Tesla: Down to the Wire.
So it was no surprise to me that Musk has continued to arrogantly dismiss the SEC’s mandates ever since. He even bragged on Twitter that the nominal $20 million fine for his fake Tesla buyout stunt was, for the world’s richest person, “worth it.”
Musk’s obvious and repeated violations of his arguably lenient settlement recently landed Musk and Tesla back in court with the SEC.
Not only did Musk try to get the 2018 settlement dismissed by claiming the SEC violated his freedom of speech (uh, you mean freedom to commit securities fraud?), he claimed the SEC was harassing him with “endless, boundless” investigations of his public statements and that he had accepted the settlement only because “the litigation would have put too much financial pressure on Tesla.”
Really? Let’s see. The modest $20 million penalty he and Tesla each were assessed by the SEC was far lower versus the $20 billion in lost market value investors suffered when Musk’s Tesla buyout fraud was revealed.
The court didn’t buy his complaints any more than we did:
“None of the arguments hold water,” Judge Lewis J. Liman of the U.S. District Court for the Southern District of New York wrote in a ruling issued Wednesday that dismissed Mr. Musk’s claims.
Yet, here we are after four years of Tesla failing to hold Musk accountable for, well, anything, and the company is ready to dial back its board “leadership” even more by cutting membership from eleven in 2018 to soon just seven.
Even better, this latest cut is driven by perhaps the most intriguing news in the late Friday release: Larry Ellison now plans to exit Tesla’s board.
Where ya going Larry? Larry?
The timing of Ellison’s exit from Tesla’s board comes just weeks after he agreed, as apparently one of Elon’s richest friends, to pony up a cool $1 billion to help fund Elon’s now comically overpriced hostile bid for Twitter (TWTR) (see Twitter: Take the Money And Run and Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself).
As I noted last month, Ellison’s was the second largest of vital equity commitments Elon has managed to cobble together from outside investors. The largest came from Twitter shareholder Saudi Prince Alwaleed bin Talal, chairman of the board at Kingdom Holding Company, who initially had rejected Elon’s $54.20 per share bid as not even “come close to the intrinsic value” before suddenly deciding to roll his (then) $1.9 billion Twitter stake.
But, as I warned, the flow of funds diminished rapidly after the top two:
The top five of these contributors, last of which was Binance, comprise 69% of the total $7.1 billion, leaving the remaining 14 contributing substantially less at just $2.2 billion. What this suggests is that success from Elon’s full court press to drum up billions from sorely needed investors appears to have dwindled rapidly, even among his biggest supporters. And he is has more than $20 billion to raise.
Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself).
Of course, these investors pledged their equity contributions before Elon’s unusually unhinged antics over the past month, mostly on Twitter, as he came to grips with the consequences of what I still believe was a stupid stunt gone too far by bored mega billionaire looking for laughs (see Elon Buying Twitter? Probably Not).
He’s good and trapped now in a solidly binding agreement to buy Twitter at a ridiculously high price, a deal he’s now actively trying to kill (see Elon's Trying To Get Out Of Buying Twitter—As We Knew He Would).
Of course this has spooked investors in Twitter as well as Tesla. Tesla stock is down 32% since Elon’s SEC filing on May 4th reporting their equity commitments, subject to contingencies, and Twitter stock is down 25% to $37.03.
So I wouldn’t be surprised if this has also irritated his small cadre of rich investors, including Ellison, who now may be understandably reluctant to stick with Elon in his expensive Twitter folly. Elon has demonstrated that the damage he can do to both companies really is unlimited, and that’s before he takes Twitter almost completely under his control as a private company.
If Ellison is planning to take back his $1 billion commitment, he may also trigger a stampede among other already wary investors which could collapse Elon’s limited funding pool for Twitter, leaving him to fund most of the exorbitant $44 billion price he pushed through.
Since Elon can’t afford to do this without selling off sizable chunks of his tumbling Tesla stake, odds are increasing that he finds a way—likely via lengthy maneuverings in court—to blow up the whole deal (see Elon's Trying To Get Out Of Buying Twitter—As We Knew He Would). Any settlement with Twitter he may get forced to pay some time down the road will be far less than the self-destructive $44 billion obligation he's already losing money on.
If so, I can see the strain all this may cause for both prompting Ellison to leave Twitter’s board.
Twitter’s bonds continue to languish well below par, reflecting increasing uncertainty that the deal will close as well as Twitter’s dicey operational prospects. Twitter’s existing $1.7 billion in senior notes are callable at 101% of par if the company is sold, but they remain little changed since my last report with the $1 billion issue of 5% notes due 2030 seen trading at 97.7 (5.36% ytw) and the $700 million 3.875% notes due 2027 at 95.2 (4.89% ytw). Another 4-5 points downside is possible, with significant only upside likely only if Twitter is sold so existing bondholders can cash out—which is far from certain. (Definitely avoid buying new Twitter bonds offered to help fund the LBO if the company is sold.) Maintain “Underperform.”
Tesla repurchased its 5.3% senior notes in the third quarter of 2021 as I projected, though I doubt we’ve seen the last of Tesla as a bond issuer. Until then, I have Tesla: Not Rated.
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