Investing

Why Would Tesla Want to Go Private—and What Does That Mean for You?

The president isn’t the only person who can move markets with a single tweet. On August 7, Tesla CEO Elon Musk : “Am considering taking Tesla private at $420. Funding secured”—sending his company’s shares up 7 percent in 80 minutes until Nasdaq halted trading. (Exchanges sometimes pause trading if a company indicates it has key information that could influence investor decisions.) Then, just 15 minutes until the closing bell, trading resumed, and shares wound up more than 10 percent higher for the day.

Wait. A public company can go private?

Yep. While companies are more frequently in the news for “going public”—or issuing shares through the stock market for the first time with an initial public offering (IPO)—they can head in the opposite direction, too. This makes even more headlines because it’s a much less common move. Some big names that have gone private include Burger King, Heinz, Hilton Worldwide Holdings and Dell Computers.

It works like this: A private group offers to pay a company and its shareholders a certain price per share. Then shareholders vote. If the majority favors accepting, the bidder buys the shares, and voilà.

In his tweet, Musk suggests the offer price will be $420 a share—$76 more than Tesla stock opened at on August 7. If you owned 100 shares that day, you’d be looking at a possible gain of $7,600 in this deal.

Why would Musk want to go private?

Being a public company means, among other things, adhering to a multitude of regulations and producing quarterly results that hopefully please shareholders. That’s a lot of pressure, which, Musk says in a blog post, can work against his company’s long-term mission. “Basically, I’m trying to accomplish an outcome where Tesla can operate at its best, free from as much distraction and short-term thinking as possible,” he writes.

Interestingly, he’s not alone in his growing distaste for being public. In 2016, Fortune reported on a growing trend of companies staying private (versus going public) to avoid public shareholders, activist investors and regulators.

Fair enough. So, what’s the problem?

It comes down to two words: “funding secured.” The U.S. Securities and Exchange Commission is officially investigating whether that portion of Musk’s pot-stirring tweet was accurate or intentionally misleading investors in order to manipulate share prices—obviously, a big no-no. Such SEC inquiries take about two years on average to sort out, meaning that, at the very least, any progress on privatization could be hampered for a while.

Plus, the way Musk’s explained his tweet makes clear that funding for the whole deal is not actually fully secured, which casts some doubt. All this news has sent Tesla’s shares back down. It closed at $338.69 per share on August 15, or 1.5 percent below its price before the hoopla began.

What does this all mean for me?

If you’re a Tesla shareholder, stay calm. As with any investing move, you want to be thoughtful and deliberate, and not just react to the latest headline. Even when news breaks that could affect the company’s future, it’s good to look at it as part of the bigger picture, taking into account the company’s general business and fundamentals to decide whether Tesla is a stock you want to hold onto for awhile. (Some questions to consider when looking at a company: Is revenue going up? Is the customer base growing? Does the company make good products? Do you believe in its future prospects?)

If Tesla is a stock you want for the long run, and Musk gets to move forward as he’s proposed, you may have the option to stay on as a private investor. Note, though, that you may still face a hefty tax bill because you’d sell your public shares first to buy into the private fund (which is how Musk has described the privatization), triggering capital gains taxes. Otherwise, you could take the proposed buyout and run—again, after paying taxes.

If you owned the shares less than a year, the gains you made will be taxed as regular income. But if you held them for more than a year, you’d be taxed on “long-term gains,” and the rate will be 20, 15 or even 0 percent, depending on your overall income.

Beyond that, one lesson you might take from this is that investing in individual stocks is tough. Not only is Tesla’s share price unaffordable for many investors, it’s volatile and moved by so many unpredictable factors, like all individual stocks. Unless you’re prepared to follow a company closely for years, you’re often better off investing in funds like ETFs.

In fact, more than 100 ETFs hold shares of Tesla, and many of their share prices rose along with Tesla’s in the wake of the initial tweet, though they’ve since subsided a bit, too. The returns on ETFs may be smaller than if you’d owned Tesla outright, but buying ETFs also allows you to own hundreds of companies at once, giving you diversification at a relatively low cost—and your investment is far less likely to jump at a tweet’s notice.

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