Elon Musk’s announcement that he was considering taking Tesla off the stock market should not have been a total surprise.
If Musk goes through with his plan he will join a long line of entrepreneurs who have floated their businesses only to become frustrated by the demands of running a public company.
Virgin’s Richard Branson, Hugh Hefner of Playboy and Michael Dell of the computer maker have all taken their companies private in the belief that they would fare better out of the glare of the markets.
Other well-known brands taken private by founders after a spell as a public company include Iceland, Caffè Nero and Matalan – but Tesla is of a completely different scale and would require Musk raising tens of billions of dollars in funding.
The main reasons for taking a company private include:
Getting away from the glare of publicity
A public company is just that – owned by external investors – mainly through pension and other investment funds that buy shares. Management therefore has to be publicly accountable and subject to scrutiny by investors and in the press. Most chief executives accept that attention but some company founders resent being in the spotlight. After Virgin floated in 1986 Richard Branson, an extrovert when it comes to marketing his products, never warmed to the task of explaining his finances and decisions to the City and two years later he took Virgin private again.
Stock markets are too short term
The City and Wall Street face regular criticism for demanding constantly rising profits and not thinking enough about a company’s long-term health. If a publicly listed company’s targets are missed, the share price reaction can be swift and punishing.
Explaining his thinking to Tesla employees, Musk said: “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term.”
Musk’s view echoes that of many entrepreneurs who have floated their companies and thought better of it. Since reversing his decision to take Virgin public in the 1980s, Richard Branson has often criticised institutional investors for demanding quick returns instead of investing for the long term.
Malcolm Walker, Iceland’s founder, has said a profit warning in 2001 would have been treated as a blip if the company had been privately owned but that as a public company it was seen as a disaster. Iceland returned to private ownership in 2005 with Walker at the helm. “Now we’re a private company once again I don’t give a shit what the City thinks,” he said in 2010. “It’s not ‘how will it affect profits?’ it’s ‘will it be right for the business?’ Bugger the profits. The profits sort themselves out.”
Dealing with analysts and investors
Once a company’s shares are publicly traded its management has to report results up to four times a year to be pored over by analysts at investment banks and fund managers who hold the shares. Many chief executives despise analysts but are savvy enough to hide their irritation.
Musk, on the other hand, has grown increasingly tetchy with analysts’ questions about Tesla’s finances. In May he complained about “boring bonehead questions” and took a question from a YouTuber instead of answering a detailed query. “These questions are so dry they’re killing me,” he explained. On his next analyst call, on 2 August, Musk apologised to the people he was rude to.
More freedom to appoint board directors
A private company can have anyone it wants on the board but public companies require directors who are more or less independent and can represent the interests of wider investors. Public companies are under increasing pressure to increase the diversity of boards and for directors to challenge management on strategy, pay and other matters.
That can be frustrating for entrepreneurs who believe they know best and that the company is still their baby. When Matalan’s founder, John Hargreaves, took his budget retail chain private in 2006 one of his non-executive directors said: “He was a fish out of water trying to run a FTSE company with corporate governance.”
Investor short-termism can be frustrating for entrepreneurs in the best of times. But if the company needs a major overhaul there is more temptation for its founder to say goodbye to critical scribblers. Michael Dell led a $25bn private equity-backed buyout of Dell in 2013, saying the company he founded in 1984 needed room to invest in better products and rebuild for the cloud computing age. Five years later Dell took the company public again, keeping control of about half the shares compared with 14% before the buyout.
No room for mavericks
The single-mindedness required to build a business from scratch often rubs up badly against the legal constraints and governance standards of a public company. Musk is an extreme example. No orthodox chief executive would tweet abuse at a diver who had helped save the lives of boys trapped in a flooded cave as Musk did. But a founder with a big stake in a public company will almost always be frustrated by the processes and limits of a public company.
When Sports Direct floated in 2007 some commentators questioned whether Mike Ashley, who opened the company’s first shop in 1982, was suited to public markets. Ashley has run the company more like a private enterprise, employing relatives, holding management meetings in the pub and buying stakes in rival companies. Despite recurring speculation, Ashley has insisted he has no plans to take the company private.