Elon Musk’s Game of 3D Zany Chess

Last year, in commemorating the 20th anniversary of Amazon going public, Andrew Ross Sorkin wrote the following:

Perhaps the most surprising thing Mr. Bezos was able to accomplish, despite his detractors, was to find investors willing to trust him enough to invest in Amazon even as it racked up losses after losses.

That’s not to say investors were always happy with Mr. Bezos — they would frequently punish his stock, making it seem like a volatile investment.

I was reminded of that this week reading all the hoopla about Elon Musk and Tesla. And “hoopla” is putting it mildly. I’m honestly not sure I’ve seen as much coverage about anything — a tweet, no less — in such a short amount of time. But because of the cross sections here — tech, cars, energy, science, business, bankers, billionaires, stock markets, hedge funds, sovereign funds, celebrity, crime, Twitter! — everyone wanted to talk about the possibility of Tesla going private. Or the possibility of Musk getting in trouble for suggesting Tesla might go private. It was basically catnip for the press.¹

These days, with Amazon on the verge of surpassing a trillion dollars in market cap,² and its CEO now the wealthiest person in business — by far — it’s easy to forget, but that company was also once a running punchline on Wall Street and in the press.³ I know this because I used to be one of those people with the jokes.

As recently as a few years ago, it was in fashion to make fun of Amazon for their complete and utter lack of profits. Especially in the face of a company like Apple, which was well on its way to becoming the most profitable company of all time. A company which made more profit in a single quarter than Amazon had in its entire lifespan, was a popular, humorous narrative.⁴

That story isn’t so funny anymore. Because it slowly became clear that Jeff Bezos was playing a different game with Amazon. A very long game. On a different plane than most people, myself included, had considered. A game played on the metaphorical chess board versus the checkers variety…

The Tesla situation isn’t the same for a number of reasons. But at a high level, there are similarities. Namely, Musk is clearly playing a different game.

Whether that game is a smart one, or if it gets him in quite a bit of trouble, we’ll ultimately see. But he’s proven himself quite adept up to this point at playing his own game. It’s perhaps not chess vs. checkers, it’s maybe more akin to something like 3D zany chess vs. checkers.

There’s one school of thought that his entire taking Tesla private threat was a bluff — a threat to the market, mainly the short-sellers, whom he destroyed, at least temporarily, with a single tweet. Was such a threat illegal? Again, we’ll see! But you have to believe this wasn’t a temporary moment of insanity (though this is Twitter we’re talking about) and he knew exactly what he was doing, including how he’d answer when the authorities came calling.

The popular consensus right now is that he either has the money or he doesn’t. Black or white. If he does have the money, there’s one pretty clear narrative, as Felix Salmon has laid out:

The clarification did finally arrive in the form of a press release written by Musk. The press release cleared up some things (no, this wasn’t a pot joke; yes, Musk is serious) and did nothing to clear up others (like, crucially, where the money would come from). Taking Tesla private at $420 per share would cost north of $80 billion, which is a lot of money even by Saudi standards. Still, the investment does make some kind of sense for Saudi Arabia, in terms of helping to diversify its asset base away from oil. If electric cars end up making gasoline obsolete, then at least Saudi Arabia would have a very large stake in the world’s buzziest electric car company. Add in a few other large institutional investors and a dollop of extra debt, and it’s at least within the realm of possibility that Musk could have the requisite financing.

Perhaps bolstered a bit by this bit of reporting by Arash Massoudi, Richard Waters, and James Fontanella-Khan:

The PIF, which has more than $250bn in assets, initially approached Tesla and Mr Musk to express interest in purchasing newly issued shares in the company.

However, Tesla did not act on the interest, one person informed on the matter said. Instead, the Saudi state fund acquired the position in secondary markets with the help of JPMorgan. Mr Musk and Tesla are aware of the PIF shareholding, this person said.

Reuters has seemingly poured some coolant on this notion of the Saudis riding in with bags of money, but Bloomberg now says that the two sides are indeed in talks. So, who knows… No one, it seems!

Another idea, which is slightly more gray from the aforementioned Sorkin with his colleagues Jessica Silver-Greenberg, Peter Eavis, and Matthew Goldstein:

One structure being studied by banks and Tesla, according to people familiar with the matter, is a transaction that would reduce the number of shareholders to such a degree that Tesla’s shares could be delisted from the Nasdaq stock exchange and the company no longer would be required to make quarterly filings with the S.E.C.

That would be expensive — it could cost $10 billion to $20 billion — but much less so than a full leveraged buyout, these people said.

How might such a transaction work?

One possibility is a maneuver called “going dark.” In this situation, Tesla could buy out many but not all of its shareholders to reduce the total number of investors who hold Tesla stock. One way to make that math work would be to persuade as many small shareholders as possible to sell their holdings.

But again, Musk consistently seems to be playing a different game. See also: the SpaceX playbook. This is why I like Matt Levine’s takes on this situation the best — they’re funny, but also throw out zany ideas that could end up being much closer to the truth than we all realize:

If I were Musk’s lawyer, and if he doesn’t actually have $80 billion of financing locked up, I’d be working on a termsheet for the board that (1) offers Tesla shareholders the choice between (A) $420 in cash or (B) shares in a new special-purpose-vehicle that will hold shares in a private Tesla (or whatever your plan is to let people hold on to their shares); (2) limits the cash consideration to, like, $5 billion, or whatever Musk can actually raise; and (3) has some sort of proration mechanism in case more people choose the cash than he can afford. Does this fit with the spirit of the going-private transaction that Musk tweeted about? No, absolutely not, not even a little bit. But it is… something. And then let the special committee reject it, and then quietly walk away and say “well no we were serious about the buyout proposal but it just didn’t work out.” Which is a much better position to be in than walking away saying “oh yeah sorry we were kidding about that.”

If he could get away with such an elaborate ploy/excuse, it would effectively serve as a threat (while serving a dual purpose as a massive middle finger) to the shorts. Risky? Of course. But that’s one large facet of the game Musk seems to like to play! There is rarely reward without risk.

Anyway, the point is that the vast majority of the takes I’ve read on this situation seem to look at it through a very straightforward lens. As if the game being played is on a checkers board. You could argue that it should be being played that way — and the SEC may end up making that very clear to Musk — but that’s clearly not the situation right now.

And not playing on that board has worked well — to put it mildly — for people like Jeff Bezos in the past. It just took everyone else a while to see what was going on. Now you can’t help but see it.

Musk, like Bezos, is one of those people who always seems to find a way.⁵ It’s why it’s so hard to bet against them, even when seemingly a large percentage of Wall Street is doing just that…

Not to belabor the point, but I don’t view the game Musk appears to be playing to be as savvy as the one Bezos played. But that makes sense, Bezos came from Wall Street, he knew exactly how to play his own game which would make their game look foolish in the long run. And that’s exactly what he did. Musk comes from a very different world and so the game he’s playing with Wall Street is very different. But he’s made quite the career doing that within a number of industries. So… we’ll see if he can do that again! Or what the version of ‘checkmate’ looks like in 3D zany chess…

¹ Especially a press Musk just got done battling in a bizarre way…

² And I still believe will surpass the aforementioned Apple in market cap in relatively short order…

³ Not to the Musk/Tesla extent, for sure, but times were also different.

⁴ Also, still true!

⁵ I’d add Reed Hastings to this mix too — always one step ahead — which completes my trifecta!

Update: Since the publication of this post, Musk has written a post on the Tesla blog seemingly confirming the Occam’s razor in this case: he has spoken with and was talking to Saudi Arabia about taking the company private. Of course, this also doesn’t seem to exactly square with “funding secured” so naturally the SEC is continuing to look into this…

Disclosure: Through my wife, our family does own a very small position in Tesla. This is because I told her many years ago (before she was my wife) to buy Tesla when she was asking me to pick an individual stock to buy. That was smart. We’re still holding it, which… we’ll see!