Would Elon Musk Sell Tesla To GM Or Ford In PayPal Redux?

Posted: Dec 27 2013, 9:06am CST | by , in News

Would Elon Musk Sell Tesla To GM Or Ford In PayPal Redux?
Photo Credit: Forbes

Tesla has been on a remarkable run this year, with the stock up nearly 360% as the company rolled out its award-winning Model S to thousands of new customers. But perhaps that means its a perfect time to sell out to an established player like Ford or GM.

That’s what Yra Harris of Praxis Trading speculated on CNBC this week, predicting that Tesla may be sold to General Motors in the coming year. Such a move would come as surprise to many, given billionaire Tesla CEO Elon Musk’s rock star status. But Musk has already made such a play before: when he sold PayPal to eBay in 2002.

Back in 2002, PayPal was the upstart disruptor. It had an initial public offering in February 2002 and was quickly valued over $1.2 billion. At the time, eBay was trying to introduce its own e-payments system, but PayPal was already catching on. Why re-invent the wheel? eBay grabbed PayPal for $1.5 billion and has never looked back. PayPal now accounts for roughly 40% of eBay’s revenue.

Musk made out well, too. He owned over 11% of PayPal stock at the time of the deal, making him the largest shareholder. Musk pocketed a big financial windfall which helped fund his new endeavors, including Tesla, SpaceX and SolarCity.

Why not do that again? General Motors, for example, would have plenty of reason to do a deal. Like eBay struggling to create its own electronic payments system, GM is working on its own electronic-powered cars. Jumping to Tesla’s award-winning platform would be a much easier path. Tesla also might like the financial stability and operations know-how of a global automaker. The company’s Model S car is largely limited by production capacity, rather than demand, and GM could fix that.

Musk, of course, would also gain. He’s again the largest shareholder, with over 27% of Tesla including options. The total could be worth $5 billion or more in a deal. With that kind of windfall, the itinerant entrepreneur could fund SpaceX, his pet Hyperloop project, or other new ventures — just as he did with his PayPal winnings. The question is whether he is interested in continuing his uphill battle in the car space, especially dealing with mundane details like regulators investigating Model S car fires.

The biggest obstacle to such a deal, in reality, is Tesla’s sky-high price. Tesla generates barely more than 1% of GM’s total revenues, but is trading at a market cap about one-third as large as GM. It’s 11x price to sales ratio (ttm) compares to GM’s 0.37x and Ford’s 0.41x. With that kind of valuation, Tesla may be too expensive for any of the market leaders to make a play.

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In Pictures: Elon Musk’s Hyperloop

Source: Forbes

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