CEO Elon Musk has started getting himself into hot water again, putting the company's board in a tough spot.
Tesla’s stock price took an upward bounce on Thursday morning after tumbling sharply for several days following another series of explosive tweets by the battery-carmaker’s increasingly mercurial CEO Elon Musk.
On Tuesday, the 47-year-old Musk sent out an e-mail to a news site alleging that Vernon Unsworth, a British diver who helped rescue a youth soccer team from a flooded Thai cave was a “child rapist.” The two had previously tangled, though Musk issued an apology after declaring Unsworth a “pedo guy,” slang for pedophile. The latest flap comes shortly after the Tesla CEO abandoned a questionable bid to take Tesla private, a move that has led to growing concerns about his stewardship of the company.
On Wednesday, Tesla stock dropped to the lowest level in nearly six months, and its bond prices fell to a record low. But Thursday’s share price rebound – the first in eight trading sessions – came as Musk announced some strong sales numbers for the new Model 3 and Tesla’s other product lines.
The battle between Musk and Unsworth was triggered by comments the diver made about the mini-sub that the Tesla CEO was planning to send to Thailand to help rescue the young soccer club members trapped in a flooded cave. Unsworth derided the plan as a publicity stunt and, after a series of increasingly nasty comments back-and-forth, Musk denounced the driver as “pedo guy,” and said he looked forward to being sued. Subsequently pressured by shareholders and analysts to back down, the South African-born executive apologized in July.
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Whether Elon Musk could justify tweeing "funding secured" is a matter of hot debate, and an SEC query.
But he unexpectedly renewed the war of words in a Twitter post asking why he hadn’t been sued yet. And Musk took things a step further, asserting that Unsworth was a “child rapist.”
“Elon Musk’s ongoing campaign of publishing vile and false accusations against Mr. Unsworth is outrageous,” Unsworth’s lawyer, L. Lin Wood, said in an email sent to the Reuters news service, adding that, “Musk has publicly and clearly stated that he ‘hopes’ to be sued. Let me be equally clear in response – Musk will be sued – not because of his hopes, but because he deserves to be sued.”
There has been growing concern about Musk’s behavior. In May, he cut off several analysts trying to raise questions about Tesla’s finances during a first-quarter earnings call. He then took to Twitter to attack Unsworth. But what may yet turn into his biggest headache was Musk’s surprise announcement via tweet on Aug. 7 that he was prepared to take the company private and that “funding (was) secured.”
Barely a week later, however, Musk wrote a blog post indicating the finances were far from locked down and that he was simply acting in response to a late July meeting with officials from the Saudi Arabian sovereign investment fund who had raised the prospect of backing a bid to privatize. By late August, Musk announced, again by a tweet, that he was scrubbing the idea, supposedly because of investors’ concerns.
Tesla board members may be forced to push Musk to make decisions he doesn't favor for the good of the company.
The episode has triggered an ongoing SEC investigation, as well as several lawsuits filed by short-sellers who claim to have lost hundreds of millions of dollars as a result of the short-lived privatization bid.
On Thursday morning, it was revealed that Musk has now hired two hire-powered lawyers from Washington, D.C. to defend himself in the probe Roel Campos, with the law firm Hughes Hubbard and Reed, and Steven Farina, of Williams & Connolly. Tesla’s board has separately hired Daniel Kramer, from New York firm Paul Weiss, to handle its part in the investigation.
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There has been increasing concern about Musk’s ability to run Tesla and, more broadly, its financial situation. On Wednesday, $1.8 billion in high-yield Tesla bonds dropped to a record low. Tesla’s debt has been put into junk status by ratings agencies Moody’s and Standard & Poor’s.
Tesla’s stock, meanwhile, fell 13% before rallying Thursday morning, but it is unclear if the upturn will last. And Musk’s role in the company could play a major factor.
He has become more than just the CEO but the face of Tesla, someone whose tweets are widely followed, with several online publications reserving space specifically for the latest Musk news. But that has also made the carmaker particularly vulnerable to any flaps triggered by Musk’s behavior.
While he still has the support of the Tesla board, major investors have increasingly expressed concern. Funds run by Black Rock Inc. voted in favor of a recent shareholder proposal that would have required the carmaker to appoint an independent chairman. The measure failed to pass.
“He should not tweet about things outside of car production and the auto industry,” Tigress Financial Partners analyst Ivan Feinseth, who has a “neutral” rating on Tesla, told Reuters this week. “The board, even though it is friendly to him, has now been put in a position where the internal governance of the company has been questioned.”
Whether the SEC probe or the flap about diver Unsworth will shake Musk from his perch is uncertain. The big test could come a few months from now, as Tesla reports its third-quarter earnings. After big increases in its losses for the first two quarters of the year, Musk has promised Tesla will be solidly in the black during the second half of 2018, with positive cashflow. He has also dismissed reports that Tesla will need to raise new capital this year.
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If sales continue to rise and Tesla’s balance sheet finally turns into the black, Musk could weather the storm that was largely of his own making.