In early 2018, Tesla CEO Elon Musk was under intense pressure. The electric car company was facing intense scrutiny over its production delays and safety concerns.
Tesla shares tanked in 2018. The company's Model 3, its most affordable electric car, suffered production delays and reviews were bad. Wall Street didn’t think the company could survive.
But there is one thing that keeps Tesla afloat: its cult-like fan base.
At first, this seemed like a good thing. They helped the company stay afloat in its darkest moments. But over time, it also became a huge liability.
Many long-time shareholders panned the company’s plan to take on billions of dollars in debt and buy back shares. They called it a “poison pill.”
With its shares at an all-time low, the company announced it would offer buybacks at a higher price to keep the short sellers at bay. The intention was to make it more difficult to sell shares short. Many people saw it as a devious way of diluting the value of existing shareholders. The plan was to make it more difficult to sell shares short. Many people saw it as a devious way of diluting the value of existing shareholders. The plan was to make it more difficult to sell shares short. Tesla’s plan backfired and the company experienced one of their worst weeks in years. Shareholders revolted. They demanded a poison pill to be withdrawn.
What is a Poison Pill?
A poison pill is a type of corporate governance that’s designed to keep high-risk investors at bay, such as short-sellers, hedge funds, and other organizations with a financial interest in the company’s stock price dropping. Essentially, a poison pill is a stock acquisition that dilutes the shares of existing shareholders in order to prevent certain investors from acquiring a large stake in the company. A poison pill is a tactic that companies with a stock that’s been the target of short-sellers and hedge funds often use to fend off hostile investors.
Why Were Shares Offered at a Premium?
Tesla’s poison pill is often cited as an example of how to do equity buybacks wrong. While the intention behind the plan is murky, what happened next was clear: Tesla’s shares tanked, hitting an all-time low of $267. That precipitated a reckoning for Tesla’s board.
Tesla’s share price was down 50 percent from its all-time high, and many analysts and investors were calling for the company to refrain from buying shares back and instead focus on profitability and generating cash. It was a recipe for disaster for investors and for shareholders.
Tesla’s original plan called for its board to offer shares at a 10 percent premium to the price at which they were being sold. But instead, Tesla’s board decided to withdraw the plan.
The Public Backlash
Tesla’s board decided to withdraw their plan to buy back shares. In doing so, they received some very public criticism. It was one of the most talked-about topics in the financial blogosphere.
The Wall Street Journal’s “All-Day Tesla Blog” garnered more than 1.5 million views in three days. The Electric Cars Times’ “Elon Musk” blog also got plenty of attention.
Tesla’s board also received a barrage of messages on Twitter. It became a trending topic on the microblogging site.
Twitter's Buyback and Poison Pill Plan
In the end, it was Twitter CEO Jack Dorsey who helped Tesla quell the share sell-off. He sent what some saw as a pro-Tesla tweet. Yet his tweet was just as much about the buybacks as it was about Musk.
In Dorsey’s tweet, he explicitly praised Tesla’s board. “This is one where the board absolutely got it right,” he wrote. “Musk said there was no need for the buyback, but the market gave him no choice. And the board rightfully said, ‘Don’t."’
The tweet also led to a good question: What would happen if the markets weren’t giving a company the choice to do a buyback or not? This was a possible scenario and it was a question many asked.
What Happens Next?
Tesla and Musk have had a rough year, but they’re not giving up. That much is clear. Musk is the richest man in the world and may sue the Twitter board for not honoring their fiduciary duty for investors.
The Final Word
Musk will be under pressure to deliver and extreme pressure to fail to but Twitter.
If Musk can’t deliver, Tesla shareholders and Model 3 fans will be disappointed. Musk has more to prove than ever before.
That’s what makes the next three months so interesting. Click here