[ad_1]
Elon Musk, the “Chief Fool” and Tesla “Technoking”, may never regain the title of the richest man in the world. How far it should fall is anybody’s guess.
Not only did he become the first person in history to have $200 billion wiped from their personal fortune. And it’s not just how he’s spending more time on Twitter these days, setting a conspiratorial tone about everything from politics to vaccines to the very social media company he bought for $44 billion in a debt-fueled buyout.
Understanding the dramatic rise and fall of Musk’s net worth requires taking stock: with the age-old trap of equating wealth with glitz, and with the pandemic-era grand monetary experiment that has led a whole host of business leaders and investors to look as visionaries — if only for a moment.
But specifically, it all starts with Musk’s pay. First came awards in 2009 and 2012 that bolstered his Tesla stake, then an unprecedented package of moonshots in 2018 that, combined with the use of margin loans, set the stage for one of the most explosive creations of wealth in history.
How to lose $200 billion in about a year
Change in net worth of the five richest people in the world
The 2018 pay plan, the largest executive compensation deal in history, drew sharp criticism from shareholder advisory firms but was approved by the vast majority of Tesla investors. The goals seemed ambitious and far away. One goal was to boost the electric car maker’s market value to $650 billion — about the same level as tech giants Amazon.com Inc., Alphabet Inc. and Microsoft Corp. at this time.
It was, in the biggest, boldest, muskiest way, designed to keep him focused on Tesla for a long time.
Instead, thanks in no small part to his showing, the stock price soared. By the end of 2020, it had earned a coveted spot in the benchmark S&P 500 Index. He made his “moonshot” — 304 million Tesla options with an exercise price of $23.34 — look easy.
The award was structured to be given out in 12 tranches and depended on the automaker reaching various financial and market capitalization milestones. All but one of the tranches have been awarded, making the award a huge success, but not without its drawbacks.
“The 2018 compensation package was clearly not enough to keep Elon focused on Tesla,” said Christine Hull, founder of Nia Impact Capital, a social impact fund based in Oakland, California. “I would like to get a clearer definition of his role at Tesla. What is the actual role of Tesla’s CEO? It’s too foggy right now.”
The pay package is now part of a Delaware shareholder lawsuit that claims it was excessive and should be returned to Tesla because the incentives didn’t do what they were intended to do.
Musk, 51, flew in on a red-eye — albeit on a private jet — to take the stand at the trial in mid-November, just weeks after his leveraged buyout of Twitter closed. The judge in the pay case, Kathleen St. J. McCormick, also presided over months of legal wrangling between Musk and Twitter over the deal. The submissive Musk presented himself as a reluctant CEO and workaholic who had no role in determining his pay.
Although Judge McCormick has yet to rule on the case, the market has already reached a verdict.
Broken happiness
Tesla shares have fallen 39% since Dec. 1, doubling the tech Nasdaq 100’s loss, as the automaker faces increased competition and missed delivery expectations even after offering discounts. Musk, who for years used the stock as a way to raise money for himself through margin loans, is no longer the world’s richest man, with a net worth of $129.4 billion, down more than $210 billion since its peak, according to the Bloomberg Billionaires Index.
Musk’s money
Tesla still makes up the majority of his fortune, but SpaceX is a growing stake
Fidelity Investments, an investor in Twitter, now values the social media company at less than half of what Musk paid for it as advertising revenue has collapsed and borrowing costs have soared. That means Musk’s estimated 79% stake, which required him to repeatedly give up Tesla stock to help raise more than $22 billion, is now worth $11.6 billion.
Musk got an option on Tesla stock and did everything he could to boost its value, said Stephen Diamond, a Santa Clara University law professor who teaches securities law and advises institutional investors on corporate governance. What the directors didn’t expect was for their unpredictable CEO to cash in about $40 billion worth of stock, much of which went to overpay for another company.
“The board made millions and he made billions,” Diamond said of Musk. “But there was always a risk that he would use that in the short term and leave the company hanging.”
At this point, the foundation of Musk’s wealth is his 42 percent ownership in Space Exploration Technologies Corp., the rocket launch company he founded in 2002 before joining Tesla. The value of the closely held company continues to rise, most recently raising $750 million at a $137 billion valuation.
But most importantly, Musk probably can’t use SpaceX, nor his Boring Co. and Neuralink as aggressively as publicly traded Tesla. His margin loans accelerated his rise up the wealth ladder by helping him raise money to fund his other expensive ventures. His original plan to buy Twitter included the use of debt, but he restructured the financing package in May after market volatility sent Tesla shares tumbling.
A question of margin
The natural question after Tesla’s recent debacle: At what point might Technoking margin call?
There is no clear answer and any valuation relies on scenarios that are difficult to understand through price fluctuations or securities documents alone. (Musk and Jared Burchall, the managing director of his family office, did not respond to questions for this story.)
Tesla’s 2022 proxy statement shows that Musk had about 52% of his shares pledged to secure debt as of the end of March, but did not specify how much he actually borrowed against the pledged shares or the terms of what that might be. be it two or more margin loans.
However, the margin loan agreement that was originally part of Twitter’s financing package provides some clues.
Under those terms, it could borrow $12.5 billion at a 20% loan-to-value ratio, with a margin call triggered if that figure reaches 35%, requiring it to either pledge more Tesla stock as collateral or reduce the size of a loan or a combination of both.
Assuming the same parameters and using the stock’s price of $359.20 as of March 31, Musk could borrow $19.2 billion against about $96 billion worth of stock, according to Bloomberg calculations.
“common wise”
As Tesla shares continued to fall, the 35% threshold would be reached on October 14, when the stock closed below $205. To get back to 25%, he had to issue $22 billion worth of Tesla stock or pay off the $5.5 billion loan.
A few weeks later, Musk unloaded $3.95 billion worth of stock — despite saying in April and August that his sales were complete. It is not clear whether he needed more money for his Twitter purchase or whether margin loans played a role.
After starting those sales, Tesla fell another 19% until Dec. 12, when it began selling another $3.6 billion in shares. Days earlier, he tweeted that it was “generally prudent” to avoid using margin debt for any company when there are macroeconomic risks involved.
If the roughly $7.6 billion in combined sales in November and December weren’t enough to completely eliminate margin debt, the math could get tricky.
The notional loan would still have $11.7 billion outstanding. The subsequent declines in the stock price would mean Musk would have to issue more Tesla shares if he didn’t have other sources of cash to pay off the loan.
If Musk were to issue all of his remaining Tesla shares, he would have enough to service the debt unless the stock price falls below $79. Shares fell to $101.81 earlier this month – a nearly 50% drop in five weeks.
After that, Musk’s options from his 2018 award may prove difficult to use as collateral for a margin loan because the shares cannot be sold for five years after they are exercised.
Way forward
Of course, even with Tesla’s sharp decline, Musk has a way to go ahead of Frenchman Bernard Arnault, now the world’s richest man, and fend off competition from Indian energy tycoon Gautam Adani.
It starts with SpaceX, which is a dominant force in a still nascent industry, much like Tesla is in the electric vehicle arena.
Just last week, Chamath Palihapitiya, known as the “SPAC King,” predicted that SpaceX’s Starlink internet-from-space initiative would go public in 2023, much earlier than planned, in part so that Musk could “make room for for breathing’. Starlink played an important role in the war in Ukraine with the Russian military trying to destroy communications.
Such a move would give Musk another publicly traded company to attract investors of all stripes.
Musk has said his big plan for Twitter is to use it as a springboard for an everything app called X. Judging by his previous comments, it could be similar to the Chinese super app WeChat, which is the basis of Tencent Holdings co-founder Pony’s condition. Ma’s is $40.9 billion, which is the 30th largest in the world.
For now, however, those ambitions seem far, far away. Musk still needs to find a new CEO for Twitter — someone he says is “stupid enough to take the job!” He openly floated the idea of bankruptcy in his first address to employees after buying the company.
Meanwhile, at Tesla, the board of directors is under pressure to prove whether they are sufficiently prepared for the potential loss of Musk as CEO. A shareholder in Iceland submitted a resolution for an investor vote in May on whether the eight-member board should prepare and maintain a key person risk report.
More importantly, some of Musk’s staunchest supporters are fed up with his antics. Leo CoGuan, a billionaire entrepreneur who has built one of the largest positions in Tesla, said “the board is missing in action.”
Comparison of car manufacturers
Tesla’s market value is collapsing to the level of other cars
While the company acknowledges its key man risk with Musk, Tesla’s growth has been fueled largely by low interest rates and the reluctance of the world’s leading automakers to enter the electrification era.
But the wide-open playing field that Tesla enjoyed for a full decade is now crowded with legacy automakers and new entrants like Lucid and Rivian. In a sign of the times, Tesla, which reports earnings on Jan. 25, has been cutting prices and offering discounts — a practice Musk has railed against — especially in China’s increasingly competitive electric car market.
“Is Elon Musk really going to allow this iconic American company to self-destruct?” Diamond, the law professor, asked about Tesla. “It’s mind boggling to see what he’s doing right now. With Twitter, he bit off more than he could chew. Now he’s trapped financially.”
Disclaimer: This article first appeared on Bloomberg and is published through a special syndication arrangement.
[ad_2]
Source link