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Big Tesla investors fear that Elon Musk’s Twitter bid will make them unwilling shareholders in his new X Holdings conglomerate

April 22, 2022, 11:25 AM UTC

If there was any question whether Elon Musk was serious about acquiring Twitter, the charismatic visionary dismissed all doubts when he strung together a $46.5 billion financing package

Now some institutional shareholders of Tesla are concerned it might be the first step toward the creation of one overarching, Musk-dominated tech conglomerate, in which they don’t want to be part owners with little to say and only along for the ride. 

Retail investors are generally more supportive of the idea since they bet first and foremost on Musk himself rather than Tesla. Yet Wall Street doesn’t care for broad, diversified groups with numerous moving parts and opaque internal transfer pricing that make it hard to cleanly model future cash flows. As a result, such companies typically trade at a discount to the sum of their respective parts, rather than at a premium.

“This is a terrible idea if Tesla is brought under its corporate umbrella,” Future Fund managing partner Gary Black posted on Thursday, citing the threat of valuation multiples compressing. “Investors hate conglomerates.” 

The commotion has to do with the creation of a dedicated corporate vehicle that would sit atop the Twitter ownership pyramid under the direct control of Musk himself. 

Based in Austin and incorporated under tax status–favorable Delaware law, the so-called X Holdings I, Inc. counts the centibillionnaire as its president, treasurer, and secretary. 

The theory goes the world’s richest human might eventually seek to merge it with Tesla, before then integrating SpaceX, Neuralink, and the Boring Company at a later date. 

Musk himself seemed to indicate back in December 2020 he was partial to the idea of one overarching company, to be called X. Last month, he inflamed these suspicions after revealing the third part of his master plan would include more direct linkages between his various businesses and Tesla.

The letter bears a special meaning to the serial entrepreneur. His first company, which eventually merged to become PayPal, was called X.com, and many years later Musk bought back the rights to the defunct domain name.   

In fact, the plan to take over his favorite social media platform is even dubbed “Project X” according to Wednesday’s SEC filing.

Burned by SolarCity deal

Yet last week, when confronted with the idea of forming a company whose business rationale is “creating a future that’s exciting,” he said it was likely not feasible.

Musk cited the disparate and conflicting interests of shareholders in the various companies and specifically blamed professional money managers incapable of buying into long-term equity stories. 

“Making life multi-planetary is outside of the normal time horizon of Wall Street analysts, to say the least,” he said in an interview with TED’s Chris Anderson.

In reality, numerous complications would arise with such an endeavor, since Tesla is a publicly traded company—namely lawsuits. 

“As a public company, you’re just constantly sued,” he explained. “It’s not that easy to sort of combine these things.”

Musk knows from experience what he’s talking about, since it happened the last time he tried to bring one of his business interests under the corporate umbrella of Tesla. 

Investors took him to court over a 2016 decision to acquire a failing energy company called SolarCity, founded by relatives and part owned by Musk.

Claimants argued it was nothing more than an overpriced bailout for the native South African and his family, financed with $2.6 billion worth of Tesla shareholders’ money. (Tesla does not break out the results of its solar business, but without the considerable profits from core automotive operations, its other operations would post a small loss on aggregate.)

So it’s far more likely that X Holdings could serve as a virtual safe in which Musk securely stores his own various personal equity stakes in one tax-optimized structure, rather than the cornerstone of a one diversified conglomerate, in which unwilling Tesla investors would subsequently own a share. 

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