With Elon Musk reluctantly forced into resigning his position as head of the board of Tesla over the weekend, the Tesla share price is expected to rebound today. The settlement, the result of SEC legal action over his social media comments around taking the company private, means that Musk will stay as CEO, but not chairman of the board, as well as both he and the company paying $20 million fines. However, while futures indicate an initially positive bounce in share price when U.S. markets open today, it remains to be seen if Tesla will immediately recover from the 14% hit to its share price sustained on Friday after Musk had initially rejected a settlement. That wiped $6 billion from the company’s market capitalisation.
Musk’s crimes, as detailed by the fraud charged filed against him by the SEC, centred around ‘false and misleading statements’ delivered via Twitter in early August when the Tesla co-founder tweeted ‘funding secured’, in relation to the possibility of controversially taking the company private. He also stated that he would take the company private at a share price of $420, later revealed as a ‘round-up’ believed to have been an intentional reference to the 20th April. The date, and number 420, is popular in cannabis or marijuana smoking culture as unofficial ‘International Weed Day’, with the time of day 16:20 also symbolic.
The tweeted statement led to a sharp rise in the Tesla share price, a side-effect of which was significant losses being incurred by investors who had ‘shorted’ the company. At the time Tesla was the most shorted company in history, a situation that Musk had criticised as putting pressure on the company to hit short term targets to the detriment of longer term goals and sustainability. He also said the size of the short positions against his company meant that there was a clear interest on Wall Street for Tesla to fail. This pressure was highlighted by Musk as the main incentive of taking the company private.
The SEC settlement, which means the regulator will not pursue its legal case against Musk which could have seen him barred from holding a company directorship for 3 years, also means Tesla will appoint an independent chairman and two new directors. The final concession is a board-level committee to be established and tasked with vetting and approving any public statements made by Musk over social media that could be interpreted as communicating information to Tesla shareholders.
There is some scepticism among investors around how effective the settlement agreed on will be in terms of ‘reigning in’ Musk. Many others will be relieved that the fall-out has been limited to the final terms. Despite being often controversial and impulsive, the CEO’s force of personality has also been instrumental in establishing Tesla as arguably the highest profile company in the electric car space. A market capitalisation making the company more valuable than either Ford or GM, despite Tesla earning a fraction of the income or profits of the two elder statesmen of the American auto-manufacturing industry, is also largely attributable to Musk’s ability to sell his vision to investors.
Investors are banking on Tesla becoming a genuine force in the next generation market for electric and then self-driving cars, with the company’s giddy valuation largely based on future potential rather than current revenues. Musk has forecast Tesla will move into profit during the last quarter of 2018 on the back of sales of its new Model 3 sedans, sales of which are reported to have been strong.