Could Ford Buy Tesla? Here’s How Likely A “Doomsday” Scenario Is
Former Tesla bulls have been bailing on the company. The stock continues to drop. Bond prices are at low levels. The auto maker is burning through $ 1 billion in cash a quarter, the cash from the latest $ 2.7 billion funding round will be gone within ten months, and demand is falling off.
One of the classic business solutions would be an acquisition. Maybe a white knight with the cash and managerial and operational wherewithal to come in, buy the company, fix the broken parts, and let Tesla become what it had the potential to be. Or for a hostile takeover, where people who see an opportunity scoop up the company, break it apart for its value, sell off the pieces, and discard the remaining empty husk.
As its circumstances drive an ever more expensive cost of obtaining funding, that might be the future for Tesla. There are just two questions: who might be interested in the deal, and would CEO Elon Musk ever assent to such a scenario?
One expensive target
Making a deal work would be a challenge. At the moment, even with the battered stock, Tesla has a market capitalization of close to $ 34 billion. Many experts say that Tesla has some extraordinary strength in batteries and powertrain, the most basic fundamentals of an electric vehicle, and in artificial intelligence, a key to automated operation. Companies with a current interest in electric and autonomous vehicles include Google’s parent Alphabet, GM, Ford, Volkswagen, and possibly even Apple. Just last year, Apple hired a senior Tesla designer, renewing speculation that Apple might want to get into the car business.
Some of these companies could almost drop that much money from petty cash. Google had about $ 113.5 billion in cash and short-term investments on its latest published balance sheet. Apple had $ 80.1 billion plus another $ 145.3 billion in long-term investments.
Auto manufacturers don’t have that type of wealth. GM has $ 24.7 billion in cash and investments. Ford shows $ 26.6 billion in cash and investments, while Volkswagen shows cash, cash equivalents, and time deposits of $ 22.3 billion. Not enough to write a check but strong enough to do a deal.
If it made sense. That’s the hitch, because at the moment it doesn’t.
“If you add up the technologies where you think they’re strong and say what would it cost to reproduce those technologies on a timeline that would fit a product roll-out of whoever’s acquiring them, how much is that worth?” said Erik Gordon, a clinical assistant professor at the University of Michigan’s Ross School of Business. “At a $ 30 billion market cap, that’s an outrageously expensive price to pay for its technology assets.”
Gordon thinks the price would have to come down to between $ 10 billion and $ 20 billion for a company to take an interest. In other words, the stock would have to drop to roughly half its current price to become attractive.
Even that might be a stretch, particularly for GM or Ford, which “would rather try to compete with Tesla than buy it,” wrote David Whiston, equity strategist in U.S. autos for Morningstar Research Services, in an email to Fortune. The chance of either car company acquiring Tesla “could only potentially happen if Tesla’s stock fell well into the single digit billion market cap because it’d be too expensive for GM or Ford otherwise.” That would represent a catastrophic drop of 80% to 90% in value. At that level, the number of other potential investors could include private equity, SoftBank, TenCent, a sovereign wealth fund like Saudi Arabia’s, or possibly even a wealthy individual like Larry Ellison. In a bidding war scenario, the big car manufacturers would be unlikely to win because private equity firms could raise more money than the auto makers would be willing to spend.
Friendly Fire?
A friendly acquisition would need a buyer that could afford the price tag and believe that it could set the operations aright separately or integrate them into its own. At this point, there may not be many that fit the bill.
“If this had been in another era, an obvious one would have been a Chinese company,” Gordon said. Trade wars with the U.S. make that unlikely.
“There’s a lot of other companies with better management doing R&D and putting a lot of money into the electric car sweepstakes,” said Robert Johnson, a professor of finance at Creighton University’s Heider College of Business. Between the financial problems, history of inability to deliver on promises, and recent news of cars going up in flames, a big company either already has its own operations or could have other choices. Ford recently invested $ 500 million in Rivian Automotive, which is working on an electric pickup and SUV with 400-mile ranges.
What Tesla would need to do, assuming anyone could get a proud Musk to admit a measure of defeat and welcome help, is “create an acquisition,” said Dave Cantin, CEO of Dave Cantin Group, an advisory firm that does extensive work in automotive acquisitions. By that, he means Tesla would have to reform operations, and perhaps drop its own expectations, so that a buyer would have a chance to make a return on its investment.
But getting Musk to step away, or listen to others, would be a challenge.
“How do you get the founder and an individual that is as tied to any company as Elon Musk is to Tesla to agree to give up control and allow others to make those kinds of decisions?” said Johnson. “The biggest obstacle to a friendly or unfriendly takeover with respect to Tesla is Elon Musk himself. And it’s such an idiosyncratic thing. With Elon Musk at the helm, it’s hard to imagine how [possible deals] would happen.”
At the end of the day, “If Tesla got acquired, unless a buyer is willing to let Elon do whatever he wants, I don’t see him being part of an acquired Tesla,” Whiston wrote. “He doesn’t strike me as someone who would tolerate constraints and being told what to do. So he’d have to be willing to sell his roughly 22% stake and in my opinion that’s something he would only do if it was the only way to keep Tesla alive.”
More must-read stories from Fortune:
—The winners and losers in a $ 1 trillion buyback year
—Too many companies are paying too much for stock buybacks
—This year’s tech IPOs are raising $ 2.2 billion on average
—How to invest during a trade war
—Listen to our new audio briefing, Fortune 500 Daily
Don’t miss the daily Term Sheet, Fortune‘s newsletter on deals and dealmakers.
