
Tesla Announces $2B Public Offering to Accelerate Model 3 Ramp Up - dismal2
http://www.bloomberg.com/news/articles/2016-05-18/tesla-announces-2-billion-public-offering-to-accelerate-model-3-ramp-up
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jboydyhacker
The big surprise here isn't that Tesla was doing an offering - it was Goldman
did a huge research note 24 hours before the offering while actually
participating in said offering.

Super bad form and just goes to show the community- don't trust investment
bankers. Such bad form.

~~~
xadhominemx
The equity research department is firewalled off from the deal teams doing the
offering. It would be unethical if the people who published the research note
even knew anything about the offering.

~~~
ck2
Who actually audits that? Is there proof?

Better firewall would be not even to exist within the same company.

~~~
xadhominemx
Ya, maintaining the Chinese wall between research and investment banking is a
pretty central function of compliance and is regularly audited by the SEC.

~~~
jsprogrammer
What do Chinese have to do with the SEC?

Answers are more helpful than downmods.

~~~
_asummers
From Wikipedia[0]:

> Chinese wall is a business term describing an information barrier within an
> organization that was erected to prevent exchanges or communication that
> could lead to conflicts of interest. For example, a Chinese wall may be
> erected to separate and isolate people who make investments from those who
> are privy to confidential information that could influence the investment
> decisions. Firms are generally required by law to safeguard insider
> information and ensure that improper trading does not occur.

...

> The origin of the phrase is the Great Wall of China.

[0]
[https://en.wikipedia.org/wiki/Chinese_wall](https://en.wikipedia.org/wiki/Chinese_wall)

~~~
jsprogrammer
Yeah, I didn't see anything about SEC in there.

That page also quotes a California Superior Court opinion that found the term
was a "piece of legal flotsam which should be emphatically abandoned". The
same opinion also found:

> The origin of the use of "Chinese Wall" in the context of confidentiality is
> unclear. Evidently, the term was casually coined in some appellate opinion,
> then picked up and used without question or explanation by courts and
> commentators.

Can you point to an SEC regulation, or other law, that refers to a Chinese
Wall? Like, is there a more specific, technical definition? Wikipedia refers
to Chinese wall departments in companies; do you know where to find more
information about them? Perhaps links to their enforcement and compliance
documents?

~~~
azernik
You're taking that quote WAY out of context. That was an ethnic-Chinese judge
criticizing the specific phrase, and preferring that "ethics wall" be used
instead.

'He maintained that the "continued use of the term would be insensitive to the
ethnic identity of the many persons of Chinese descent"'

The article mentions, but does not specifically name, regulations implemented
after the 1929 stock crash; it also specifically names Title V of the
Sarbanes-Oxley Act of 2002. The SEC is responsible for the enforcing the
provisions of the latter.

~~~
jsprogrammer
The damning part is this:

> then picked up and used without question or explanation by courts and
> commentators

This indicates (and was also said) that the term has no lawful basis; it is
industry cargo cultism that had been copied around without basis for years.

~~~
azernik
It is an informal term that refers to very real regulatory requirements.

~~~
jsprogrammer
I'm having trouble visualizing such a wall. Is a wall referenced? Or is just a
metaphor for some vague rules that may or may not be followed? Is there a
turnkey fire/Chinese wall product on the market?

~~~
princeb
it works just like a industrial grade router firewall - the router is
connected to a gas main, which directs a stream of gas over the back the of
router where the rj45s go into, and a flame continuously burns any nasty
hackers attempting to hack into your system.

home router systems don't have such a feature.

edit: matt levine used to work at goldman and he posted a piece that has a
description of how goldman's multiple chinese wall systems works:

> Nor will [the research analysts] get any hearty back-slaps and high-fives
> from the bankers, because any banker who walked onto a research floor would
> be vaporized by powerful lasers long before he could raise his hand for a
> high-five.

> Remember, bankers can't just call up analysts. Their phones would explode.

[https://www.bloomberg.com/view/articles/2016-05-19/goldman-p...](https://www.bloomberg.com/view/articles/2016-05-19/goldman-
picked-a-good-time-to-like-tesla-s-stock)

~~~
jsprogrammer
OK, so what I gathered from that article is that it is super illegal for
researchers to talk to bankers. So much so that they cannot call or email each
other over official company channels, but if they do want to talk, they can
just step outside the office and use their cell phones.

The wall sounds as effective as LIBOR's blind auctions.

~~~
princeb
yup. obviously there are limitations. how do you even plan to 100% restrict
that information? i guess you can lock up the research analysts and bankers in
monitored cells after work...

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Animats
Well, $1.4 billion for Tesla, $0.6 billion for Musk personally, and an option
for Goldman Sachs to get $0.21 billion.[1] Tesla stock is down in after-hours
trading, but that doesn't mean much. If the stock is down significantly at the
close tomorrow, the market didn't like this.

It's a legit offering. The company intends to build a big factory and make
stuff. Real capital assets will be bought with that money. It's not to sell
stuff at a loss to gain market share in hopes of raising prices later.
(Looking at you, Uber.)

Tesla just hired Audi's head of manufacturing, Peter Hochholdinger. About a
week ago, the previous two top people in manufacturing quit, right after Musk
announced he wanted the production line running two years sooner. Maybe
Hochholdinger can do it.

[1]
[https://www.sec.gov/Archives/edgar/data/1318605/000119312516...](https://www.sec.gov/Archives/edgar/data/1318605/000119312516594471/d185970d424b5.htm)

~~~
IkmoIkmo
> Tesla stock is down in after-hours trading, but that doesn't mean much. If
> the stock is down significantly at the close tomorrow, the market didn't
> like this.

Well... there's all kinds of information asymmetry in investing. Musk
generally has a clearer picture of the company's future than investors, such
that signalling theory postulates that when he decides to issue equity, this
may be interpreted as him viewing the equity is overvalued. i.e. selling an
overvalued stock makes sense. Particularly, selling an overvalued stock prior
to bad news coming out that would negatively affect the valuation, such as a
growing rate of cancelled orders. Just making something up here.

As such, knowing nothing about the firm, and only the timing of the equity
issue, most investors are usually inclined to interpret an equity issue as the
stock being overvalued somewhat, and adjust accordingly.

So the market not liking this may just be a function of general principles of
finance, and have little to do with the specifics of the company itself.

~~~
stp-ip
As far as the information goes. Musk is selling his stock to buy his stock
options and cover the resulting taxes. The documents stated, that even after
he sold part of his stake for 0.6B he would have more shares than before.

------
jernfrost
Why do people keep spouting this nonsense that Tesla is losing money on EVERY
car? They make money on every car otherwise they wouldn't be selling any cars.
The lose money due to their high R&D.

~~~
encoderer
Possibly because other auto manufacturers do include R&D in their COGS? Tesla,
instead, treats it as an OpEx which to be fair, most non-automotive companies
do as well. Still, it's not standard for the industry the are in.

tldr: Because if Tesla did their accounting the way Toyota does, they have a
negative gross margin.

~~~
vonmoltke
Actually, per their latest earnings reports[1], if they did what Toyota does
and roll their R&D expenses into their cost of revenue, they would still show
a gross profit. It would just be $70M for Q1'16 instead of $252M.

[1]
[https://finance.yahoo.com/q/is?s=TSLA](https://finance.yahoo.com/q/is?s=TSLA)

~~~
encoderer
I guess I made a _gross_ assumption? Thanks for the link -- i had just
accepted the premise of the question.

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vessenes
This is not a surprise; there's an old saw that I think I first read in a
Buffet annual report. It says that financing tends to alternate forms for
companies in terms of what makes sense: debt -> equity -> debt -> equity.

Equity offering seems likely to be much cheaper than debt right now; Tesla has
great mindshare among consumers, and lots of doubters on the professional
investor side.

~~~
mdorazio
Also, Tesla's valuation is still sky-high in comparison to comparable
companies (automotive or tech), so converting some of their shares into cash
now makes a lot of sense.

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crabasa

        echo "Tesla to offer $1.4 billion shares, remaining to be sold by Elon Musk. 
        Musk is exercising options to buy 5.5m shares and will boost overall holdings 
        on net basis. Developing... " | wc
        1      30     176
    

News articles and tweets are converging at an alarming rate.

~~~
Diamons
Twitter's been around for 10 years, and Twitter is mostly a fad. I wouldn't
call it alarming.

~~~
kgwgk
Newswires have been around for 100 years...

Edit: to be clear, my point was that "twitter-like" news alerts are not new;
not that Twitter is some kind of successor to newswires.

~~~
toomuchtodo
And they'll still be around in 100 years. Twitter? Not so much.

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jgalt212
It's pretty obvious at this point that Tesla's number one product is their
stock. Which makes it no different from a number of other high fliers.

At first they were an innovative car company. Then the stock price shot well
above the level sustainable by an electric car company. Elon realized this,
and then builds the Giga factory. We're not just a car company, we're a power
company!

Now they are raising more equity off of an inflated stock price. I'd stay away
from this one.

Not a total hater, Tesla cars are great, but one of these day's Elon's moon
shots and obsession with the stock price will catch up with him (he'll still
be rich) and his investors (they may be significantly less rich).

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11thEarlOfMar
It's neither here nor there, but I feel like Bugs Bunny in "High Diving Hare",
and Musk just raised the platform another 50 feet:

[https://youtu.be/6eZaVdFbo6A?t=145](https://youtu.be/6eZaVdFbo6A?t=145)

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marvin
From the press release, it appears that the capital raise is "only" $1.4
billion -- the remainder is Elon Musk selling shares to cover his tax
liability for simultaneously exercising options from 2009. Hopefully 1.4
billion is enough.

~~~
dsugarman
I don't think it is, I am guessing they are going to go back to the well when
the stock price is higher, but I don't really like that strategy.

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slantaclaus
Tesla has a really great business. They're not just cars, they're batteries.
Their home battery for storing solar energy is a huge deal at least in terms
of future cash flows. Also, they're a white label supplier of batteries to
companies like Toyota and Mercedes. Anyway--new long term TSLA shareholder
here. Bought in at $205.

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mjbellantoni
Anyone have thoughts as to why they're selling stock as opposed to issuing
bonds?

~~~
mywittyname
Sounds like they would need to issue a ton of stock anyway, because Musk is
exercising like $600M in options.

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syngrog66
When you have 375k $1000 preorder deposits its probably an ideal time to raise
investment.

