Backdrop: Tesla is at a Critical Point Right Now
If Tesla were profitable and flowing cash in, this would not even be possibility. Sure, it would be much more attractive acquisition as a profitable company, but it would also be much more expensive. Business acquirers tend to favor businesses they can acquire for a reasonable price. Tesla has captured consumer imagination by single-handedly (almost) taking the EV industry thus far. And the Elon factor is constantly at work.
However, at this time the company is looking at possibly running out of cash before the year is over if it is not able to ramp up the Model 3 production to 5000 units per day soon. Musk has clearly stated that he is not in favor of going for additional external funding.
When Strategic Acquisitions Make Sense
There are several things that have to come together for Tesla to start making sense as a strategic acquisition for Ford or GM or frankly, any of the Auto majors, domestic or overseas.
Price is Not Right
Getting a good price is of course a very important factor in whether an acquisition makes sense or not. TSLA stock has been on a tear for many years but the production and cash flow issues have been dragging the stock down of late. Currently the stock price is 8% below where it was 1 year ago.
This doesn’t make it cheap yet. Any acquirer will still be paying $47 Billion for $12.5 Billion in revenues. At 3.8x Sales, the company is priced very richly. As a comparison, Ford Motor Company stock is priced at 0.28x revenue and GM stock is priced at 0.37x revenue.
Does Tesla’s revenue deserve 10 to 15 times richer valuation than Ford and GM?
The Technology is a Commodity
Tesla did pioneer a number of innovations when it started. At this time the major pieces of the technology are commodities and offer not much of a barrier to entry. When you have companies like Google, Uber, Apple, etc dipping their toes (or the whole foot) in the self driving car segment, it implies that there is not much Tesla can do to protect this piece of its tech.
From the perspective of the electric propulsion, Tesla was not even first to the market. GM, Toyota, etc already have quite advanced capability built up in-house.
Tesla does not have Enough Market Share
In 2017 Ford produced 6.4 million vehicles. Toyota produced about 9 million vehicles in 2017. Volkswagen produced 11 million cars and trucks in 2017.
Tesla produced 101,000 cars in 2017.
This is 1.5% of Ford Motor Company’s production volume.
Put it another way, Ford makes and sells more cars in 1 week than Tesla produces in an entire year.
The EV Market is Not Mature Enough
For Big Auto, it actually makes sense for them to let Tesla prove out the market, or create one. First mover advantage is often overstated. In this case, if Tesla succeeds wildly, the big auto will not be left behind or bleed market share suddenly. They have such a huge lead over Tesla in terms of the market penetration, that the risk for them is really minimal.
So what does the end game look like?
Should Ford or GM or any other traditional auto maker spend big dollars and acquire Tesla?
I would say no. It does not make strategic sense. What actually does make a lot of strategic sense is to let Tesla create a market that they can then find ways to address. If Tesla fails, they can pick up the parts and see what they can do with it. If Tesla continues to muddle through, it is best to watch. There is enough time to make a move.
What do you think?