An Offer for Tesla?
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Followers of small biotechs will know the game pretty well. It goes company raises capital, company develops attractive drug, big pharma arrives with a buyout and the shareholders get a big payday. Of course many others fail along the way, but for those that do succeed a buyout if often the final goal.
But what if you replaced the word "drug" with the word "technology"? Then investors begin the search for innovative, in demand technology being developed by a small company. And up pops electric car maker Tesla Motors (NASDAQ: TSLA).
Does Tesla want to sell?
Followers of Tesla Motors, and there certainly are plenty of them, will know that Tesla is the next project developed, and funded in part by, Elon Musk and his massive pile of cash. Since the automaker's founding only a decade ago, there have been those who have predicted its demise every year. But the automaker has clearly beat the odds so far and is beginning production of its first ever mass production car. So a question after the company has made it this far is, will Musk and the shareholders willingly turn around and sell it?
Two years ago, before the Model S had even entered production, Musk responded to a claim in Business Insider that Tesla would not be able to succeed on its own and would require a buyer. Autoblog reported that Musk responded to this comment with one of his own which he submitted to Automotive News. He dismissed the premise of the initial article saying "Their analysis of Tesla is incredibly bad. Tesla is of course a potential takeover target, like almost all public companies. However, I'm also confident that we can succeed as an independent company."
So there you have it, Musk says Tesla's not for sale. But Musk does not even own the majority of Tesla. While he does own a substantial stake, if a strong majority of other shareholders decided to vote in favor of an offer from another company, Musk may well be out of luck. To examine the hypothetical, we will explore who could buy Tesla and why, keeping in mind none of this is a certainty.
The maker of Mercedes-Benz and Smart cars looks to be near the top of the list were Tesla to be acquired. Due to agreements spelled out by Tesla, Daimler (NASDAQOTH:DDAIF) is essentially able to counteroffer any offer given to Tesla related to a buyout. So anyone trying to take over Tesla would have to go through Daimler, or be Daimler.
The relationship between Tesla and Daimler is not simply an equity ownership one. Daimler is one of the companies Tesla supplies batteries and electric motors to in cooperation to build cars such as the electric Smart Fortwo. However Daimler has actually reduced its Tesla stake since first acquiring it. Bloomberg reported in June 2012 that Daimler sold 40 percent of its Tesla shares to an Abu Dhabi based sovereign wealth fund. If Daimler were seriously contemplating a bid for Tesla the automaker would unlikely be reducing its stake in Tesla. At this point we can reasonably assume that Daimler is happy with its current relationship with Tesla as a parts and technology supplier.
Toyota (NYSE: TM) is the frequently brought up example of bringing the eco-friendly car to the masses when the automaker released the now commonplace, Toyota Prius. Not leaving electric entirely behind, Toyota has had a long partnership with Tesla purchasing $50 million in Tesla shares and cutting a deal to sell Tesla the NUMMI manufacturing facility which has become the Tesla Factory. While $50 million is a lot of money to most people reading this article, it's a drop in the bucket for an automaker valued at well over $100 billion.
Like Daimler, Toyota orders parts from Tesla and Tesla is happy to supply. Musk has repeatedly stated his intention of bringing electric cars to the masses and this sale of parts helps to produce sales as production of the Tesla Model S ramps up. Still if Tesla were to attract the interest of Toyota, the start-up automaker currently is not prohibitively expensive for a takeover. At current prices, Tesla's market cap is less than half of Toyota's annual R&D budget according to an article in the Washington Post.
However, Tesla shareholders are certain to demand a premium, and probably a large one given the company's potential. This could drive the price of Tesla far higher as there will undoubtedly be a faction of those who would rather bet on the success of an independent Tesla than accept even a 50 to 100 percent premium from Toyota. All of this would of course be built into Toyota's calculations and certainly would affect the chances of an offer from the automaker. With the recent cutbacks at Toyota's homegrown electric vehicle programs, the automaker does not appear to be as actively pursuing this segment as it was before. Whether Tesla attracts a Toyota buyout offer will largely deal with the EV landscape but if demand for EVs grows, Tesla could become a more expensive target.
A piece of Tesla
Tesla embodies the idea of a company with both the potential for great success and the potential for complete failure. Following the advice of many "experts" Tesla should have died many years ago yet the automaker is not only surviving but growing today. Unlike so many other companies which are looking everyday for a buyout, Tesla appears to want to grow itself into the position of the primary manufacturer of the next generation of vehicles. I, for one, am acquiring Tesla shares in the speculative part of my portfolio. Tesla has far more potential than much of the market is giving it credit for and potential buyers of Tesla better beware, Musk and the shareholders will not let it go cheap, if at all.
TulipSpeculator1 owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!