I read an article commenting on speculation that 2014 will see Tesla Motors Inc. (TSLA) become an acquisition target for General Motors Company (GM) or Ford Motor Co. (F). In my opinion such a move would be premature and inherently damaging to all stakeholders. It is ok to be lustful about an over performing and disrupting new competitor, but as in most relationships, having a fence in-between usually accounts for most of the admiration. Tesla is infinitesimal when compared to GM or Ford and hoping that the luster of Tesla can rub off on either one is like trying to take a shower with a cup of water. For starters, an acquiring company will pay too much by current valuation and also realize that some of Tesla's value is an intangible that cannot be easily transferred. As much as I am a huge fan of Tesla, but I am also a huge fan of sensible business. An acquisition at this point in Tesla's relatively short lifespan will benefit the shareholders but rob everyone else of an opportunity that can only be stifled by conformity.
Very simple questions always get overlooked in the machinations of mergers and acquisitions. Is an acquisition necessary? Can the acquiring company organically obtain what it is seeking in an acquisition? (Competency, market share, horizontal/vertical integration, customer base, international market exposure etc.) What are the opportunity cost of an acquisition? (Integration costs, cultural clashes, overhead and the inevitable unforeseen challenges that arise.) Here are some reasons that, in my opinion, should preclude GM or Ford to go for Tesla in 2014.
- Competency Overlaps and Misalignment - GM and Ford have been adequately aggressive in their pursuit of technologies that will allow them to compete with Tesla. In addition to their technological expertise they both have luxury brands in Cadillac and Lincoln which to varying extents position them to compete directly with Tesla. It makes little sense for either manufacturer to acquire Tesla. Tesla describes itself as a designer, developer, manufacturer, and seller of electric vehicles and electric vehicle powertrain components to other automotive manufacturers. Tesla reports revenue generated from powertrain component and related sales and goes to great length in its financial statements to discuss partnerships with other manufacturers like Toyota (TM) and Daimler AG (OTCPK:DDAIF). It makes more sense to partner with Tesla than to acquire it, especially since a partnership leaves open the option of working with other companies if newer or better technologies emerge in the market. Even worse for GM and Ford, Tesla's in-house distribution system and their supercharger network, which is a critical part of its value proposition, will be misaligned with their dealerships structure and partnerships with petroleum companies. Negating the value of the network and Tesla's distribution channel will immediately erode a good chunk of the value they might pay for.
- The Elon Musk factor - the influence of Elon Musk on Tesla cannot be underestimated. An acquisition at current valuation will be a boon for Elon Musk. Any acquiring company can, however, forget about getting Elon Musk to stay on with Tesla after an acquisition. He has enough going on at the moment with SpaceX and SolarCity (SCTY). He also mentioned that time constraint was the only reason he would not pursue his proposal for the Hyperloop which has been taken up by other entities. It would be a big miss if his technical and demonstrated public relations expertise is not part of the deal if Tesla were to be acquired.
- Acquisition Cost and Potential Buyers - Tesla's market cap is currently at about $19B. At a slight premium, which is usually the case with acquisitions, it becomes a $20B acquisition on the cheap end. That price tag immediately eliminates lots of companies, leaving GM and Ford as the mostly likely auto manufacturing candidates. From left field let's throw in Apple (AAPL) and Google (GOOG), for their cash positions and technological musings. Bankruptcy allowed GM to rid itself of a lot of debt and the recent buy-out of the 40% stake owned by the Federal Government allows GM the decision making power it needs to sanction such a deal. The new GM CEO, Mary Barra, would be extremely courageous to sanction such a career defining transaction so early in her tenure. Ford has strenuously worked across its global operations to rid itself of non-core brands while refocusing on its "One Ford" strategy. There is little logic for Ford to go for Tesla after selling off Land Rover, Jaguar, Volvo and Aston Martin. This leaves only Apple Inc. and Google as potential suitors. Apple has the cash and needs a jolt. Google also has the cash and has been aggressively getting into hardware with recent projects and acquisitions. $20B, however, is still a high price to pay for a pet project with a long and potentially bumpy payback period. It makes sense for both companies to partner with Tesla and help Tesla to become a formidable competitor to the established players, rather than to buy Tesla outright and have to fend off GM, Ford, Toyota, and Daimler just to name a few.
- Timing - Time is a great equalizer and in Tesla's case, a critical stabilizer. Everything from stock price, growth, revenue, car sales, awards and recognition has been in runaway mode for Tesla in 2013. 2014 should allow better stability and a better sense of where the middle is for Tesla. The Model S beat all initial expectations but the impact of wear-and-tear, including accompanying warranty costs, lawsuits and any impacts to the Tesla brand will be more evident in 2014. As a standalone company I strongly believe that Tesla will be able to work its way through recalls or manufacturing challenges as they come up. This will not be true with another company which might already have its own baggage to deal with. The passing of time will separate the hype from reality and also allow competitors to better assess their competitive position against Tesla. Any acquisition attempts will be ill-advised and premature unless, of course, there are aspects to the deal beyond what meets the eye.
Tesla is back to the mid $150's from a 52 week high of $194.50. Rumors and speculation are exactly what the doctor would prescribe for the stock to continue to push back up towards its previous highs. With a pending new model, an expanding supercharger network, expansion into new markets, and increased production capacity to meet demand, Tesla will continue to show significant growth (revenue and car sales) over previous periods in 2014. As the clouds from the fires on the Model S start to lift, expect 2014 to be a year where the company is able to generate adequate positive headlines and provide catalysts to counteract any challenges that may emerge in the market from Model S related issues.