Apropos the current startling developments with respect to Tesla and Musk (he tweeted he may have Tesla go private at $420 a share, above current prices), I have some thoughts I’ve been meaning to eventually get out there for comment and critique. I wonder, suspect, that what I’m thinking is related to the idea that Tesla going private is a good thing for the company and its customers, and for the cars themselves. The following scenario is what I suspect (but do not know) happened in relation to a well known company that I will anonymize here by using a different name. I’ll call it “Pastas.”
So, there was this food emporium called Pastas. The idea was to specialize in Pasta, since everybody loves Pasta, and to provide a range of options of pasta at a good price. You would go to a counter to order the pasta, but someone would bring the food to your table, along with a napkin-wrapped set of silverware. When you were done eating, they would bus your table for you. This placed Pastas clearly outside the normal range for fast food, yet in the same comfortable (and fast) ball park.
Over time, Pastas stock went up, as more and more stores were open. People buy the stock because it is going up. This investment fuels more franchises, advertising, other development. The value of the company goes up because its numbers look good, and that adds to the value of the stock itself, because people want to buy it.
Eventually, every strip mall and commercial zone in America that can have a Pastas, almost, has one.
When stores were being added, income streams were being added. Earnings went up because of this, plus, because an older franchise can have a higher profit margin than a brand new one. But once the market was saturated with stores, the income stream could not grow that way any longer. This caused the value of the stocks to stop going up as much as they were. Instead of always going up, a lot when the overall market went up, a little when the overall market went down, Pastas stock now went both up and down. And every time it went down, there was the stock market equivalent of a stern look. News report: “Pastas stocks have gone down for the first time since the company did yada yada” and that sort of thing.
Pastas needed to increase its own value somehow to keep stock holders happy, else they put Pastas stock in their “sell when you need the cash to buy into the Next Big Thing” category. But most of the previous increases were from opening new stores, and all the stores that could exist, pretty much already existed. There had to be other ways to increase value.
Note: At this stage, everybody loves Pastas. No stores are closing. There are no layoffs. The restaurant continues to do well, people buy lots of Pastas product (pasta), vendors and employees get paid, etc. Everything is just fine. The only thing that is off is the value of the stock, stabilizing or dropping slightly, not because of a change in inherent value of the company, but because the company had filled its space.
Everything is just fine but one thing: The stock market does not understand that the store has value, and needs to see earnings increase — not just stay the same but go up — or they don’t hold the stock.
So, what does Pastas do?
In order, roughly:
1) Stop bringing silverware and napkins to the table. One might think this would make very little difference, but it saves money because it saves a measurable bit of time. It is also one less thing for employees to get right, so one can spend less time training.
2) Stop clearing tables. This saves even more money for similar reasons.
3) Reduce quality of some of the ingredients if it saves money.
4) Reductions in pay to employees, or slowing down raises, or less training.
As these or similar steps are carried out, the earnings go up because costs go down. Not by a lot, but enough to stop the bleeding.
As this sort of thing happens, Pastas starts to decline in quality. No longer to people say,”Hey, this new place is great, try it out.” People keep going to eat there, sure, but only out of habit and because while quality has gone down, it is tolerable.
Over time, a measurable number of customers become annoyed when their local Pastas gives them a dose of extra bad service, and are less inclined to go there.
The number of customers stops increasing, which offsets the small gains from increased stinginess. The number of customers who walk away and come back less frequently or not at all goes up, which exacerbates the problem.
Earning drop. Stockholders, believing as they do in the perfection, wisdom, and sanctity of the Free Market, don’t understand that the real reason the value of the stock drops is because of their prissy irrational behavior. They blame it on — well, whatever excuse they can think of that does not incriminate themselves. More stocks sell. Value drops. Pastas starts to cut its losses any way they can. Eventually, Pastas, a good idea well done, disappears from the American landscape, cast aside by the invisible, and brainless hand of the Free Market. Pastas is gone, having died of its own success.
But the cause of death isn’t only success. What really killed Pastas is the fact that it was a publicly owned company.
Perhaps something like that is why Musk wants Tesla taken out of public ownership.