a) Michael Janovec Georgia Institute of Technology Frank T. Rothaermel Georgia Institute of fecnnology LON MUSK, CEO of Tesia Motors, sped past the security guard in his brand new Tesla Roadster without waving. Despite his rep tion asa brash leader, Mr, Musk normally took the time to exchange pleasantries in the morning, Today, however, Mr. Musk’s mind was traveling a mile a minute, The com- pany had just filed its first annual 10K with the U.S. Securities and Exchange Commission (SEC), and Musk had an important meeting with Tesia's board of directors at the end of the week to discuss the company's future, ‘As Mi. Musk walked into his olfice, a photo caught his eye. It was a picture of him ringing the opening bell at the NASDAQ on June 29, 2010, the day that Tesla went public. As he looked at the picture, he thought about how that day had changed his life and the life of his fledgling company. Tesla had gained a much-needed cepital injection, but along with the financial boost also came Increased scrutiny from the board of directors. Now instead of answering only to himself, Musk faced questions from the board about how he planned to reverse a troubling decline in Tesie’s share price over the past five months. What would be Tesla's short-term: plan? What would be its long-term plan? How did Elon Musk fit in with those plans? Mr. Musk was scheduled to meet with the board in just two days, and time was: ofthe essence Going Public On January 29, 2010, Tesla Motors filed an S-1 form (@ preliminary prospectus) with the SEC, indicating its intention to file an initial public offering (IPO),! The S-1 was underwritten by Goldman Sachs, Morgan Stanley, J.P. Morgan, and Deutsche Bank Securities.” Many analysts and investors perceived the IPO filing BS ee UR UR ORR Melt in (Orie) as a sign that Tesla's financial troubles were deeper than anticipated.* Despite these concerns, the under: writers’ road show went extremely well, resulting in an inital offering price of $17 per share, up from the target range of $14 10 $16. The number of intial shares also increased, from 2.2 million to 13.3 million, Tesl’s NASDAQ debut on June 29, 2010, marked the fist IPO by an American automaker since Ford in 1956. On the fist day of trading, Tesla’s shares closed up 40 percent at $23.89—on a day when the NASDAQ dropped 3.85 percent and the Dow fell by 2.65 percent" The IPO raised $226.1 million, ‘money that Tesla urgently needed. Despite an initial drop in share price postIPO, Tesla’s stock quickly rebounded and ose as high as $35.42 by November 2010. By April 2011, shares had corrected back down to $25 a share (Exhibit 1) Investors” initial positive out- look regarding the future of the electric car seemed to have given way to.a more realistic estimation of recent market developments. Insufficient infrastructure, slow public acceptance, and a lack of cheap batteries with adequate capacity had kept electric vehicles in their niche and prevented them from becoming much more than a technology used for company uilty-truck fleets. This, together with the fact thatthe Tesla Roadster (stil the only Tesla model available) cost more than $100,000, had kept Tesla from turning @ profit. In its first annual report, Tesla reported an operating loss of $146.8 million.’ As of June 2010, Tesla had lost a total of more than $400 million (Exhibits 2 and 3, pages C52 and C53)° Strategic Partnerships Despite financial setbacks, Tesla continued to improve its current model, the Roadster, and announced the Roadster 2.5, a spiced-up version of the original with several improvements. As of June 2010, Tesla had sold ‘more than 1,200 vehicles.” (GT MBA") aad Po Resch Acsoe Nigel Ts oz Frank 1 Rothacrne pepe his cae fom publi ours developed fe the pepe of cls cunt nen be ed for a Had of ‘ndomement source f dat, depiction o fener neti nape 50Inaustry (Case 8) ¢81 EXHIBIT 1 Tesla Stock Price, Compared tothe DJIA, NASDAQ, and S&P 500 Indices Mar 24,2011: = TSLA2233 — °DJI12,17055 — *IxIC 2796.41 *GSPC 1,309.66) m0 Aug et Nov Des Feb Mar = Volume 482,200 static Skea inti — 15M 7 " — t 10M {BM das 10 [50 | 1M [ 3M |¥rO| ont | wy | 2¥ | 5 [Max) From: [Jun 292010] To: [Apr 132011 Tesla also managed to strike some remarkable deals with big players in the automotive industry. In 2009, German automotive engineering powerhouse Daimler Purchased a nearly 10 percent stake in Tesla, worth an estimated $50 million.* Musk and his team wowed the skeptical Daimler executives by modifying an off-the- shelf Daimler Smart car into an all-electric vehicle in only six weeks.” The partnership with Daimler pro- vides Tesla with access to Daimler’s engineering exper- tise and global supply chain, and could also improve Tesla’s ability to raise capital. Daimler, meanwhile, could profit significantly from its investment in the nimble startup that lies on the forefront of technologi- cal development. In addition, Daimler has reportedly experimented with Tesla’s battery technology," but has since stated that it will use its own in-house-developed products for its Smart electric vehicle (EV) program.!! Another breakthrough came in May 2010, when Toyota announced that it would buy $50 million (roughly 3 percent) of Tesla’s stock in the upcom- ing IPO." With this deal, Tesla got ownership of the NUMMI automotive factory plant in Fremont, California." For Toyota, this deal served as advertising for the company's commitment to alternative-vehicle technologies, while Tesla’s benefits were similar 10 those received from the Daimler venture. The frst fruits of collaboration between the two companies were evi- dent when Tesla announced that it would deliver two EV prototypes based on existing Toyota models in July 2010.'* Both companies have also signed ajoint vehicle development agreement. Toyota has since announced that it plans to develop an electric SUV based on RAV4 model, using Tesla battery technology.'5 16 In addition, Tesla managed to bring Panasonic, one of the world’s electronic giants, on board. Panasonic's ‘aim is to combine its experience in battery technol- ogy with Tesla’s capabilities in electric power-train development. The goal for Panasonic is to become the52 CASES | Tesle Motors and the U.S. Auto Ind | EXHIBIT 2 Sr Motors, Inc., State PaCS i a) | | zon 200900808 (es Auton sales soe singe sue os Development ences 1608 = = Total evens Mee asa 8 Trees Atonatv sles vee nap 15883 3 Boveliinent sried so REE Total cot of evens oor tones : Gross profit ss) mom ast (nat) oe Operating expnses fesereh and deelopmant mse am STM gm Saling, general andainisratve uss a8 _ 5498 ‘eloped wate ims Dea “368 os | Loss tram operations (uses) (17) asa (aust) ia ema 28 ny 3 Inerest expense sam nha nome expense, et (6s) (Ms) ag Lose before income taxes (sss) (571) (e2685) BON) (aes Provision for income taxes 113 8 2 10 _ | Netiss sasizan $650) gaze) S785) lens) | Netiss pr sare of common stock sao) %)sii2as) 2288) \Weitted average shares used in amputing netlose pr share of common stock sorea seteam—s4sgg0s anna Sure Tesla Ans Rao number one Green Innovation Company in the elec tronies industry by 2018, the 100th anniversary of its founding.” International Expansion At the same time that Tesla was pursuing strategic relationships with leading electronic and automo- tive companies, it started to expand its network of company-owned stores. Previously, all sales had been conducted either via the phone or Internet or in per Son at corporate events or company headquarters. By February 2011, Tesla had opened 17 new sales loca: tions, spanning North America, Europe, and Asia, The company targeted major metropolitan areas including Chicago, New York, Los Angeles, London, Munich, Madrid, Tokyo, Hong Kong, and Sydney (Australia). In conjunction with the 2012 rollout of the Model S, Tesla anticipates establishing nearly 50 stores world- Wide over the next several years, at a eost of $5 10 $10 million annually To differentiate itself from its competitors and pro: vide superior customer experience, Tesla has opted not to create franchised dealers, but instead maintains all sales and service operations in-house. The company also created a wholly owned subsidiary, Testa Motors Leasing Inc. o provide a leasing alternative to its cus- tomers starting in 2010.'°cases 2 Motors and the U.S. Auto Indus EXHIBIT 3 Tesla Motors, Inc., Selected Consolidated Balance Sheet Data (in Thousands) 2010 2008 2008 2007 2006 Cash and cash equivalents Sess S$ 9677S «82S TaN _—S35A01 Restricted cash—current 73597 7 Property, plant and equipment, net 114606 73.535, 18,793, 11,998 7512 Working capital (dict) 150321 43070 (58508) (2.ga8} 58 Total assets e602 130408 51,699 3437 48.406 Convertible preferred stock warrant ability = 1794 2074 191 a Common stock warrant ibility 6088 - ~ Cepital lease obligations, less current portion 495 800 888 18 - Long-term debt n828 = = Convertible preferred st — M925 01178 wona78 i793 Total abilities and stockholders’ equity (deficit) 207,098 (253523) (199,714) (147846) (43923) Source Tesla Annual Reprs vanes Price Pressure Importantly, a study conducted by Nielsen found that in the United States, 72 pervent of people polled have considered buying or would buy an electric vehicle. However, 65 percent of Americans would not pay ‘more for an electric vehicle than for traditional car models. Of those who said they would be ready to pay more, most were willing to pay no more than an addi- tional $1,000 to $5,000." Thus, electric vehicles will need to compete heavily on price, and not on technol- ogy alone. The contents of the Nielsen report may spell trou- ble for Musk’s second generation of electric vehicles, the Model S. Tesla plans to deliver approximately 5,000 Model S sedans in mid-2012 and an additional 20,000 in 2013. Buyers will have the option to pur- chase @ model with either a 160-mile or 230-mile bat- tery life. The 160-mile edition’s sticker price will be 157,400 ($49,900 after a $7,500 federal tax eredit); the 230-mile edition will sell for $67,400 ($59,900 after tax credit). In addition, Tesla is developing a 300-mile ‘model slated for production in 2013, While cheaper than the Roadster, the Model § will still retail ata pre mium to current electtic vehicles such as the Nissan Leaf, which sells for $25,280 after the tax credit Critics are skeptical that Tesla can get its prices down toa competitive level" and still produce the Model S on time and have it be able to perform as promised”? Negative Press Adding to potential troubles, Tesla Motors and Elon Musk have received some negative press, In December 2008. the BBC show Top Gear featured a race between a Tesla Roadster and the Lotus Elise. During the epi- sode, the Tesla Roadster ran out of charge after just 55 miles, far below its advertised 200-mile range, In response, Elon Musk filed a libel suit against the show in March 2011 claiming that the scene was faked. The filing stated that Top Gear’s claim “grossly misled Potential purchasers of the Roadster"? In addition to the Top Gear disaster, a CNBC show entitled Divorce Wars featured Justine Musk, Elon Musk’s ex-wife, in an episode that aired in April 2011.% The episode discussed the couple's split and bitter court battle, during which time Mr. Musk claimed that his bank account was empty and that he was living off loans from his rich friends. His finan cial situation was further complicated by the fact that 4 Toan from the U.S. Energy Department requires Mr. Musk to retain at least a 65 percent stake in Tesla, limiting his access to cash. As the largest shareholder of Tesla stock, Mr. Musk’s purported financial position54 CASES | Tose raised eyebrows among investors about the future of the company. Continued negative press of this kind could potentially weigh down the share price and crode the board of directors’ confidence in Elon Musk as CEO On the Positive Side Despite Mr. Musk’s personal and business troubles, not all is doom and gloom at Tesla. On March 31, 2011, Tesla shares received a boost after President Obama stated that he would direct federal agencies to pur- chase alternative-fuel vehicles by 2015. In his address the President remarked, “There are few breakthroughs as promising for inereasing fuel efficiency and reduc- ing our dependence on oil as electric vehicles” ‘Along with Obama's statements, Morgan Stanley analyst Adam Jones upgraded Tesla’ stock, saying that Tesla could become “America’s fourth automaker" Morgan Stanley further projects that plug-in hybrids and pure electric vehicles will account for 7 percent of US. carsales and 5.5 percent of global sales by 2020, increasing to 15 percent of global sales by 2025. In line with his growth predictions, Jones projected that Tesla shares may rise to $70 over the next year. In onder to achieve these gosls, however, Jones believes that Tesla will need to mass-produce a vehicle with a sticker price around $30,000." Analysts from IL. Morgan are likewise bullish on Tesla, setting a target share price of $40 to $50 over the next three years pro vided Tesla can realize a lower cost structure.” Takeover Target? Despite bullish forecasts, analysts warn that liquidity could remain a challenge for Tesla, Morgan Stanley estimates that Tesla could spend 75 percent of its cur- rent liquidity by 2013." In fact, Tesla’s liquidity eri- sis has led some analysts to suggest that the company may become a takeover target. As a leader in electric vehicle technology, Tesla could provide a larger, more traditional automaker an entry into the alternative-fuel market as oil prices rise. ‘Alternatively, Tesla’s elite brand image may appeal to luxury automakers. Analysts cite Tesla’s partner- ship with Daimler as evidence that Daimler may be considering Tesla as a potential takeover target. Under their existing deal, Musk is barred from voting for a sale to any car manufacturer other than Daimler, with- out Blackstar’s (an affiliate of Daimler) consent. Nevertheless, Musk has fervently insisted that Tesla will remain independent. Musk told Bloomberg, “Their analysis of Tesla is incredibly bad. Tesla is of ccourse a potential takeover target, like almost all pub- lic companies. However, I’m also highly confident that ‘we can succeed as an independent company.” Decision Time—Again ‘As Elon Musk stared at the photo on the wall, he won: dered, What should | recommend? Could the firm pro- duce @ car priced to compete with manufacturers such as Nissan? And if so, by when? Could Tesie remain independent? IF so, how will Tesla address liquid- ity concerns? Given the distractions in his personel ife and the negative publicity from the Top Gear sul would the board remain confident in his leadership? More importantly, how would Tesla reach long-term profitability? 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