Final Inspection

Who Does Tesla Want to Buy?

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Analysts now define Tesla as a technology company, not an automaker. As a result, the company’s market capitalization is more than $30 billion.

Since day one I’ve been a skeptic about Tesla. Not about its fantastic Model S, but about the company’s ability to generate the hundreds of millions of dollars it needs for future product development.

Yes, the company has its own proprietary battery system, so unique it’s being licensed by Toyota and Daimler. And its Model S is as exceptional as all the rave reviews say it is. And yes the company might singlehandedly destroy the dealer franchise system as we know it. And yes it can sell electric vehicle carbon credits to earn income. And of course Tesla’s CEO Elon Musk is one of the most successful entrepreneurs of our time. But even its most recent financial reports show the company continues to lose money.

I always felt if Tesla hit a certain level of success some other car company would swoop in and buy it. Toyota and Daimler were at the top of my list of candidates. When I got a chance to talk to Elon Musk personally last year he admitted he would sell the company if the conditions were right. But he said he would only sell to the proper buyer, that is, someone as committed as he is to convert the world to electric cars.

But now, thanks to its surging stock price, I’m changing my opinion about Tesla. And that’s because the company itself is changing. Tesla is not just going to be a car company any more. It’s now going to make and sell batteries for its own electric cars, but it also plans to sell battery packs to electric utilities and others. This would allow utilities to continue generating electricity at full capacity at night when demand drops, and store that excess power in those batteries. Then, during peak demand during the day, they could simply tap into the batteries. A system like this would mean the U. S. would almost never have to build a new electric generating station again.

That changes the ballgame. Analysts now define Tesla as a technology company, not an automaker. As a result, Tesla’s stock price soared to $250 a share, giving the company a market capitalization of over $30 billion. Even though the stock price has since settled down a bit, Tesla still has half the market value of General Motors even though GM sold 9 million more vehicles than Tesla last year.

So now Tesla can leverage its equity to assure it has plenty of money for product development. It just issued $2 billion in convertible bonds that it will use to pay for its battery factory. Those are bonds that, after time, get changed into stock, meaning Tesla just got 2 billion bucks essentially for free. You can do that when the market goes gaga for your stock.

With that kind of a war chest the question no longer is “Who will buy Tesla?” Now the question is “Who does Tesla want to buy?”

I’m not sure Tesla would want to buy another car company, but it might be interested in getting its hands on companies involved with autonomous technology. And who knows what else?

But it better move fast. Tech investors are notoriously fickle. Today’s bleeding-edge technology can quickly turn into yesterday’s yawn. And red-hot stocks can drop as quickly as they soared. My advice to Tesla: Take the money and run.

John McElroy is editorial director of Blue Sky Productions and producer of the “Autoline” PBS television show and “Autoline Daily,” the online video newscast.

Discuss this Blog Entry 1

on Apr 2, 2014

Great piece on Tesla. There are still many questions to be answered. For example, will Panasonic actually partner with Tesla on the Giga Factory even though Toyota is by far its biggest customer? Will Panasonic choose to partner with the idea guy, Elon Musk? I don't know the viability of batteries on site at power generating plants, but it is certainly an interesting idea.

Also, I have serious doubts that Tesla might end the dealer franchise system. The other OEMs have learned that they need access to dealers' capital, expertise, and local relationships. In time, Tesla will learn the same lesson, IMHO.

Tesla has left itself many options, but unless it wants to remain a niche OEM it needs to establish mass market volumes to achieve economy of scale. Despite its healthy current market cap and its ability to raise money, the capital needs to build out an international recharging infrastructure, build a Giga Factory, invest in ahead of the curve products, expand production AND own its own retail network ming boggling. Elon Musk has left himself the option to either sell out his retail network for large multiples OR become the factory direct division of Toyota in exchange for huge dollars.

I think Mr. Musk is fairly good at math. Despite the fact that things look rosy until looking at quarterly results, there are some moves made that smack of a modicum of desperation. First, there is the guarantee of residual values at levels no one would think of insuring. There is no set up on Tesla's balance sheet if the predicted and guaranteed residuals don't come true. Then there are the carefully timed hypes, which includes the reference of "talks with Apple," which had the market buzzing. Then there was the Battery Giga Factory announcement BEFORE Panasonic even agreed to participate, carefully timed with the new debt issue.

While I want Tesla to succeed, I'm trying to keep my feet planted firmly on the ground.

I think dealer associations do themselves a disservice by blocking Tesla's attempts to own its own retail network. While I don't blame them for flexing their muscles and making sure Tesla doesn't get any special deals, it is turning into a PR disaster. I don't think any traditional auto OEMs want anything to do with owning their own retail points and competing with their own partner dealers. I think dealers should just sit back and allow the Tesla experiment to run its course until it comes around to the only option that makes any sense: a franchise dealer system.

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