Elon Musk and the SEC both cave
Elon Musk is a chaos monkey who creates problems more quickly than he can resolve them.
A perfect case in point: Hours before signing a settlement to pay the SEC $10 million and step down as chairman of Tesla for two years, Musk changed his mind, precipitating an SEC lawsuit and the destruction of more than $7 billion in wealth as Tesla stock promptly plunged on Friday. So then Musk unchanged his mind, agreeing to pay a $20 million fine and step down as chairman for three years.
- The punishment is worse than it would have been if Musk had settled on Thursday, but it's still largely a slap on the wrist, and it indeed puts Musk and Tesla on a significantly stronger footing, governance-wise, than they were before Musk's fateful (and very expensive) tweet.
- Musk still faces many legal threats, but the SEC lawsuit was the most salient for Tesla shareholders.
- That's because Tesla is still burning through $1 billion a quarter. Investors don't love to lend money to a cashflow-negative company that has never made a profit, is at war with its regulator and already has more than $11 billion in debt.
Quick take: When companies die, it's nearly always because they can't raise money. That, ultimately, is why Musk swallowed his pride and settled with the SEC. He can't afford to be in a fight with the SEC when he inevitably returns to the debt markets to ask for more money.
- The chart above shows that the Tesla debt window probably hadn't shut completely. Even with Tesla stock at its post-lawsuit low, there was still a huge equity cushion, and in a worst-case scenario, there are any number of companies that would be willing to buy Tesla for much more than the value of its debt.
- If you lend Tesla money, you're lending against an asset, which is the company itself. And there's always going to be a buyer for Tesla at a price above $11 billion.
- But stock-price chaos is always reflected in higher borrowing costs, and Musk will surely need to borrow more money in the next year or two, which is the amount of time that the SEC lawsuit would have been hanging over him had he not settled.
The most galling part of the settlement, for Musk: He has to hire an "experienced securities lawyer" who will vet his tweets and make sure they comply with independent board oversight of his Twitter activity.
The bottom line: Twitter itself never booted Musk off the platform, although there's an argument that it should have. But where Twitter balked, the SEC has now stepped in.