Tesla: The Risks of a Foreign Buyout

Tesla cofounder and CEO Elon Musk shocked investors worldwide last week with a vague tweet saying that he was thinking about taking his $60 billion public company—one of the most hotly traded on Wall Street—private.

Am considering taking Tesla private at $420. Funding secured.

— Elon Musk (@elonmusk) August 7, 2018

He subsequently revealed that he has been talking for more than a year with Saudi Arabia’s sovereign wealth fund about a potential buyout of the electric car company. While it’s unclear how serious the courtship is, a privatization deal with Saudi Arabia or other foreign investors would raise national security and ethical questions.

What’s happening?

Musk says that going private would free Tesla from the quarterly earnings cycle, allowing it to focus on long-term goals. “SpaceX is a perfect example: it is far more operationally efficient, and that is largely due to the fact that it is privately held,” he wrote in an email to employees, referring to his space venture.

He says that Saudi Arabia’s sovereign wealth fund has approached him “multiple times” about a buyout, beginning in 2017. In the meantime, it has quietly built up a 5 percent stake in the automaker, part of the country’s Vision 2030 strategy to diversify its petroleum-based economy. At the direction of Crown Prince Mohammed bin Salman, the $250 billion fund is building up a vast portfolio of foreign companies that includes many U.S. tech firms, including Uber, Nvidia, and WeWork.

Why It Matters

Security concerns. Tesla is one of the most innovative companies in one of the world’s most important and competitive industries, so there is a significant possibility that any deal it might undertake with a foreign entity, particularly one with state ties, would trigger a security review by the U.S. government.

The Trump administration has already blocked two foreign transactions on security grounds, and it has even more power to do so following the enactment this week of a new law that offers greater protections for sensitive technologies like artificial intelligence. If a Tesla privatization deal does get flagged by Washington, legal experts say the parties would have to play up the merits of the funder’s steady financial commitment to Tesla and then make the case that the United States would not lose control of critical technologies.

Financial analysts have also speculated that Abu Dhabi’s sovereign wealth fund and Tencent, the Chinese internet giant, might also be interested in a major deal with Tesla.

Political risks. There are also ethical considerations and political risks in doing business with certain governments. Some critics say a marriage between U.S. companies, like Tesla, and Saudi Arabia would be fraught given the monarchy’s conservative politics and poor human rights record. “U.S. tech companies should not need reminding that this government’s attitudes are as distant from their own stated values as it is possible to imagine,” writes Tom Braithwaite in the Financial Times. “When Uber gobbled up the first investment from [Saudi Arabia’s sovereign wealth fund], women were still barred from driving in the kingdom.”  

Many countries that have publicly criticized the Saudi government’s policies, including Canada, Germany, and Sweden, have been subjected to political and commercial retaliation. For instance, in its reaction to Canada's recent criticism of its detention of women’s rights activists, the kingdom expelled Ottawa’s ambassador, sold off Canadian assets, and canceled flights between the two countries.

So while going private may deliver clear commercial benefits to Tesla, as Musk claims, the unusual way he has pursued foreign investment could have much broader implications for this highly strategic sector of the U.S. economy.