It’s been a couple of weeks since Elon Musk stunned investors by admitting that Tesla (NASDAQ:TSLA) would be open to conducting merger talks with possible interested suitors. With Tesla stock trading within 4% of its all-time high of $654.32, it’s going to take an awful lot of begging to work a deal.
Although there are still Tesla stock bears out there, I think his latest comments provide investors with an excellent reason to hang on to its stock despite trading at 23 times sales, almost five times its five-year average price-to-sales ratio.
Here’s why I feel this way.
Tesla Is a Very Attractive Target
The one thing I’ve learned about Elon Musk over the years is that he always does and says the unconventional.
When asked in Germany recently about his thoughts about a possible merger, Musk responded with his usual candidness.
“I think we’re definitely not going to launch a hostile takeover,” Musk told Axel Springer CEO Mathias Doepfner on Dec. 1. during an interview.
“If somebody said, ‘hey, we think it would be a good idea to merge with Tesla,’ we’d certainly have that conversation. But we don’t want it to be a hostile takeover situation.”
He stated that Tesla stock might appear to be made of money given its valuation. Still, the reality is that it must remain vigilant about its spending if electric vehicles are to become the norm.
“In order to make the electric revolution happen, we must make electric cars, stationary batteries and solar affordable to all.” Musk told Doepfner.
Think about his words for a second.
Here is the second richest person on the planet — and closing fast on Jeff Bezos, thanks in large part to the Amazon (NASDAQ:AMZN) founder’s divorce settlement combined with a $127 billion increase in Musk’s net worth — worrying about how he’s going to get Tesla to a place in the world where its products are as normal a part of life as a bottle of Coke or Big Mac.
And so, to get there, he realizes it might be necessary to join forces with a legacy automaker to make it happen. To me, that says leadership and vision in a big way.
You might not like everything he says, but you don’t have to be friends with the guy to invest in his company.
What Would a Tie-Up Look Like?
That’s a heck of a good question.
The first time I proposed that Ford (NYSE:F) buy Tesla was when its market capitalization passed the legacy automaker in April 2015. Now, Detroit’s Big Three have a combined market cap of $130 billion or one-fifth Tesla’s value.
A conversation today with Ford chief executive officer Jim Farley would go as follows:
“Elon, we know you could buy us 10 times over, but the Ford Mustang Mach-E is really gaining ground with non-Ford owners. In fact, 65% of preorders are from people who’ve never owned a Ford before.
We’ve developed an electric vehicle that traditional SUV owners will be far more comfortable owning than anything you’re currently making.
So, from that perspective, we could bring something to the table other than the fact we produced 4.3 million vehicles on a global basis over the trailing 12 months ended Sept. 30.
How many vehicles have Tesla produced over the same period?
Approximately 435,000 based on 330,000 in the first nine months of 2020 combined with 105,000 in the fourth quarter of 2019.
Ford’s produced almost 10 times the amount of vehicles and we’ve got our electrification program gaining momentum by the day.
As a potential partner, Ford makes more sense than General Motors (NYSE:GM) — it’s much farther along the electric highway than we are and Fiat Chrysler (NYSE:FCAU) hasn’t a clue what it wants to do — making us a natural choice.”
The Bottom Line
Let’s assume that a tie-up between Ford and Tesla would have an enterprise value 50% higher than the current combined value of $149.2 billion for Ford and $607.1 billion for Tesla.
That’s $1.13 trillion.
However, almost 100% of that premium would go to Tesla, meaning in an all-stock merger, Tesla shareholders would own 87% [$985 billion] of the combined entity with Ford shareholders [$149 billion] owning the rest.
It would be a bitter pill to swallow for the Ford family but a smart decision for long-term shareholders.
As crazy as it sounds, I could see it happen, but that doesn’t mean it will. In the meantime, it’s just another reason to hold Tesla for the long haul.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
