Tesla Announces $2B Public Offering to Accelerate Model 3 Ramp Up
bloomberg.com
bloomberg.com
Super bad form and just goes to show the community- don't trust investment bankers. Such bad form.
Whether something is unethical is not evidence for or against something happening, it just informs your opinion on whether it happened. Given Goldman's past behavior, I wouldn't let it inform my opinion too much in the direction that they worked in an ethical manner.
Humans are also very good on disagreeing on a fundamental level about what is and isn't unethical in general, before even considering rationalizing their own behavior.
But my point is, ethics is not a very strong thing, and alone it doesn't stand much chance against free money lying on the table.
(What I think people miss is that moral behaviour has to be actively maintained in people, otherwise it slowly erodes. This concept goes against the zeitgeist of contemporary western societies though, because it implies there is a standard to hold oneself to.)
The zeitgeist of modern western societies very strongly holds that there is a standard to hold oneself to (it rejects some elements that used to be commonly held to be part of the consensus standard, and adds some that were not, and people who still hold to the rejected elements often portray the new reality as "no standard", when its really just that the dominant standard is now different from their preferences.)
http://qz.com/246325/goldman-sachs-aims-to-end-the-era-of-ho...
if u cud see ur way to a small drop there might be a steak in it for ya
We’re just not, we’re not allowed to have those conversations on [instant messages]
Hahaha, that's a good one! As though investment banks are afraid of regulators[0].
[0] http://www.thisamericanlife.org/radio-archives/episode/536/t...
Like what, exactly? I mean, it's not like they'd have to pay a massive fine or go to jail.
0
...in our post-prejudicial world.
Better firewall would be not even to exist within the same company.
Answers are more helpful than downmods.
> Chinese wall is a business term describing an information barrier within an organization that was erected to prevent exchanges or communication that could lead to conflicts of interest. For example, a Chinese wall may be erected to separate and isolate people who make investments from those who are privy to confidential information that could influence the investment decisions. Firms are generally required by law to safeguard insider information and ensure that improper trading does not occur.
...
> The origin of the phrase is the Great Wall of China.
That page also quotes a California Superior Court opinion that found the term was a "piece of legal flotsam which should be emphatically abandoned". The same opinion also found:
> The origin of the use of "Chinese Wall" in the context of confidentiality is unclear. Evidently, the term was casually coined in some appellate opinion, then picked up and used without question or explanation by courts and commentators.
Can you point to an SEC regulation, or other law, that refers to a Chinese Wall? Like, is there a more specific, technical definition? Wikipedia refers to Chinese wall departments in companies; do you know where to find more information about them? Perhaps links to their enforcement and compliance documents?
'He maintained that the "continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent"'
The article mentions, but does not specifically name, regulations implemented after the 1929 stock crash; it also specifically names Title V of the Sarbanes-Oxley Act of 2002. The SEC is responsible for the enforcing the provisions of the latter.
> then picked up and used without question or explanation by courts and commentators
This indicates (and was also said) that the term has no lawful basis; it is industry cargo cultism that had been copied around without basis for years.
home router systems don't have such a feature.
edit: matt levine used to work at goldman and he posted a piece that has a description of how goldman's multiple chinese wall systems works:
> Nor will [the research analysts] get any hearty back-slaps and high-fives from the bankers, because any banker who walked onto a research floor would be vaporized by powerful lasers long before he could raise his hand for a high-five.
> Remember, bankers can't just call up analysts. Their phones would explode.
https://www.bloomberg.com/view/articles/2016-05-19/goldman-p...
The wall sounds as effective as LIBOR's blind auctions.
- FINRA1 Conduct Rule 2711;
- NYSE Rule 472;
- SEC Regulation AC (Analyst Certification);
- SEC Rules 137, 138, and 139 under the Securities Act of 1933.
The Global Settlement of 2002
The Global Research Analyst Settlement (“Global Settlement”) is an enforcement agreement first announced in December 2002 and finalized on April 28, 2003, among the SEC, NASD (now FINRA), the NYSE, the New York State Attorney General and ten of the then-largest investment banking firms in the United States (the “Settling Firms”, the big 8 US banks plus UBS and Credit Suisse). The Global Settlement addressed issues related to conflicts of interest between the Research and Investment Banking departments these firms that became apparent during the “dot com” boom and then bust of the late 1990s and early 2000s.
As part of the Global Settlement, the Settling Firms agreed to several rules designed to prevent abuse stemming from pressure by investment bankers research analysts to provide favorable coverage specific issuers or securities. The Settling Firms were required to separate their Investment Banking and Research departments from each other both physically and with information "firewalls". Additionally, the budget allocation for Research was to be independent of Investment Banking. Research analysts were also prohibited from attending pitches and road shows with investment bankers during the advertising and promotion of initial public offerings (IPOs). Finally, research analysts’ previously issued ratings about issuers had to be disclosed and made available.
In addition to these regulatory actions, each Settling Firm was enjoined from violating the statutes and rules that it was alleged to have violated. The Settling Firms were also required to pay fines to their investors, fund investor education and pay for independent third-party market research. The total fine paid by the Settling Firms was approximately $1.435 billion, of which $387.5 million was restitution to harmed investors. The Global Settlement was amended in March 2010.
Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 required the SEC to address conflicts of interest involving research analysts and investment bankers. In response to Sarbanes-Oxley, the NASD and the NYSE established rules and safeguards to separate research analysts from the review, pressure and oversight of investment banking personnel. These rules are intended to ensure the integrity of research, and to protect investors from being misled as a result of a failure to disclose potential conflicts of interest.
ISO 9001 requires that there's a document stating "persons from group A do not talk to persons from group B". Auditors will: a) check that said document exists b) maybe, maybe (if the auditor is really, really thorough) check whether a random person of group A or group B knows about this document
That's the extent of typical auditing: assuring that a process is defined and cursory testing whether people actually know about a process and its definition. In no way does any auditing assure that the process is in any way actually followed in practice.
The modern Goldman banker is a unique creature with a conscience that is so complex and evolved that he can earnestly and passionately defend two positions that would seem to me and you completely opposite.
... Ok I have stopped laughing now and I am starting to get angry so I might as well get back to work ...
Further, Goldman conducted a secondary share offering for Tesla as recently as summer 2015, so it was exceedingly obvious to anyone who makes investment decisions based on the research that this conflict exists.
I have worked at several wall street firms and also worked for firms in silicon valley, and I frankly noticed more numerous and blatant conflict of interest situations in silicon valley.
EDIT/UPDATE: Prominently displayed in large font on page 1 of the Goldman research report on Tesla:
"Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
Personally saw tons of sketchy things going on with MDs on IB side influencing research analysts ratings.
Also, even if I don't trust you, your research paper might still be informative.
I mean, come on. How would you even think they might be doing something unethical at this point?
FTFY
Here's one from 2014 where the research division promised favorable research coverage in exchange for investment banking business:
http://www.usatoday.com/story/money/markets/2014/12/11/finra...
Here's one from 2011 where they promised to stop having "huddles" with some of their clients where they exchanged insider information:
http://www.reuters.com/article/us-goldmansachs-huddles-idUST...
Here's 2015, where one of their associates used his contacts at the Fed Reserve (where he worked for 7 years right before coming to goldman) to gain confidential regulatory info:
http://www.forbes.com/sites/antoinegara/2015/10/28/goldman-s...
Again 2015, when they got caught transmitting incorrect and incomplete data on 1/5th of their trades to FINRA (who monitors their activity to watch for violations of federal rules and regs):
http://www.bloomberg.com/news/articles/2015-07-27/goldman-fi...
Really.. just type goldman fine {year} into google. There's a lot of it.
source: I used to be an analyst in the equity research department at a broker dealer.
Is it an easily discoverable crime if they breach that firewall?
This sort of thing brings LIBOR to mind for me ...
/naive scepticism
If Tesla sells (heh, and builds) every one of their pre-ordered model 3's, that's over $14b in revenue.
The only question is, are they going to be able to do it. If both departments at Goldman think the answer is "YES", then what they have done is absolutely reasonable.
A simple example is, imagine making pizzas for your neighbors, and it takes you 15 minutes to make dough for 1 pizza, and at a $10/hr wage, that's $2.50 per pizza in dough labor costs. Now, imagine it only takes you 20 minutes to make dough for 5 pizzas. That's $3.33 in dough labor costs for 5 pizzas, or $.66/ea.
That said, I think its very unlikely there is any link between the offering and their analysis.
So Tesla:Ford ratio on market cap is 1:2, but on sales numbers it's 1:100. Granted, the Model S is more expensive than an average Ford, so let's call it 1:50.
How is that undervalued? It looks pretty darned overvalued to me.
You'd have to be insane to believe that Tesla is going to be making $400BB within 5 years.
Yes, there's some fudge factor when trying to estimate what a company like Tesla might look like in the future, but it still should be based on potential financials.
If you believe that electric and autonomous car is the future and that Tesla will dominate the electric and autonomous car market, especially starting in 2020 already selling 1 million car a year with 2 new even more affordable models ?
Not saying that is realistic, but if you are buying the stock of the global number 1 car maker of 2030, that is probably a good deal.
In investment banks, as a client you pay the research department for objective research into a security. By preparing research that is intentionally untrue, in order to benefit a deal team, there is a violation of duty from the seller of goods (the equities analyst) to the paying client (money manager). In today's world, that violation of duty is not only moral but legal as well.
The equivalent here would be you, as an angel investor, hiring a YC representative as an investment advisor on what companies to invest in, and the YC rep pumping whichever company in the YC program they wanted to get money for, without even disclosing conflicts of interest.
That same YC representative giving publicity to the general public ahead of demo-day has no financial conflict of interest at all. I have a hard time seeing what moral (much less legal) duty they have to not publicize their portfolio companies.
MarketBrief is sorta this (YC S11)
"Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
(I put this in the reply to a child, but I felt it was relevant enough to reply directly to the parent.)
The case where they are selling you something and are SHORT the product is a special case which requires more work usually. The most egregious case was the ABACUS deal (http://www.theworkingeconomy.com/simple-explanations-of-econ...) where Goldman was actively short the product and needed a dumb customer to unload the other side (enter Fabulous Fab and his widows orphans: http://www.reuters.com/article/us-goldman-emails-idUSTRE63O2...)
The only way they get from a $125 base case to the final $250 valuation is by assigning a disjoint probability to the idea that even if Musk doesn't build Steve Jobs-level hype, he would build Maytag Repairman-level hype around electric vehicles; therefore, they can double the probability that there is an above-fundamentals scenario. Whether or not a wall was broken, this is kind of ridiculous.
(And, regarding walls: http://www.cnbc.com/id/100774459)
Analysts are required to genuinely believe what they are saying, or at least aren't allowed to say one thing in public research reports, and another in private. Their research is considered Material Non-Public Information until it is published, and thus cannot share it with anyone in their firm that is outside the research department until they release it to the public.
It's a legit offering. The company intends to build a big factory and make stuff. Real capital assets will be bought with that money. It's not to sell stuff at a loss to gain market share in hopes of raising prices later. (Looking at you, Uber.)
Tesla just hired Audi's head of manufacturing, Peter Hochholdinger. About a week ago, the previous two top people in manufacturing quit, right after Musk announced he wanted the production line running two years sooner. Maybe Hochholdinger can do it.
[1] https://www.sec.gov/Archives/edgar/data/1318605/000119312516...
Well... there's all kinds of information asymmetry in investing. Musk generally has a clearer picture of the company's future than investors, such that signalling theory postulates that when he decides to issue equity, this may be interpreted as him viewing the equity is overvalued. i.e. selling an overvalued stock makes sense. Particularly, selling an overvalued stock prior to bad news coming out that would negatively affect the valuation, such as a growing rate of cancelled orders. Just making something up here.
As such, knowing nothing about the firm, and only the timing of the equity issue, most investors are usually inclined to interpret an equity issue as the stock being overvalued somewhat, and adjust accordingly.
So the market not liking this may just be a function of general principles of finance, and have little to do with the specifics of the company itself.
If your unit cost is $50 and your unit revenue is $100, your unit profit is $50. If you sell 100,000 units, your business revenue is is $10M. If you spend $10M on R&D (and other overhead), your business costs are $15M and your business profit is -$5M.
BUT, if you sell 1M units, your revenue is $100M, your costs are $60M ($50M unit + $10M R&D), and your profit is $40M.
That's the power of scale.
(Compare this to a business with a negative unit profit: it won't scale no matter what you do.)
$100M revenue - ($35M + $10M) ==> $55M profit.
Tesla would lose money per car if, for example, the raw materials cost more money than they were selling it for (this is not the case)
Actually they would be losing money even if the R&D line was zero.
If we assume the business is structured like most manufacturing businesses your capex, R&D, etc don't increase linearly with cars manufactured.
That means at some point Tesla will cross that threshold where the profit on each car is enough to cover those expenses and thus the company becomes "profitable" even on paper.
There is no scenario (known at the moment) where Tesla selling more cars would lead to increased medium or long term losses.
I'm a Tesla investor (from IPO) and I understand this. I knew when I bought the shares that they'd have to raise money several more times. Making cars is a capital intensive business and they've done an excellent job by making premium sporty electric vehicles to demonstrate that electric doesn't mean crap range or crap performance. Everything else is just scaling to get costs down and unit volume up.
People were also crapping on Instacart for saying they were unit-profitable in many cities but that's a good sign. It means we can see a goal line in the future made of dollar bills because the business is scaling up sales faster than expenses and eventually the two lines cross. It's also how Amazon ran their business for a decade and that seems to have worked out well for them.
Scaling up manufacturing is harder than building a low volume, expensive car.
- gross profit was $252mn
- operating expenses were $182mn in R&D and $318mn in SG&A
Even if you remove completely the "research and development" expense, the gross profit is not enough currently to cover the "selling, general and administrative" expense.
[1] http://ir.teslamotors.com/secfiling.cfm?filingID=1564590-16-...
tldr: Because if Tesla did their accounting the way Toyota does, they have a negative gross margin.
Why are you so dismissive of walmart?
They would do this strategically to build their brand, market share, to work on inefficiencies in their pipelines expecting to make it up further down the road.
Except products sold at a lost are almost always loss leaders designed to increase other revenue sources. It is fine to sell razors, printers, or game consoles at a loss if products like blades, ink, and games sell for a large premium. The problem is that Tesla doesn't have any other products to offer. They sell cars. You can't really expect to function in the medium to long term as a business if your only product sells for a loss.
Also, Tesla is still building the world's largest battery factory. "Reinvesting revenue into capital improvements" seems to parallel Amazon's early-2000s growth fairly well.
Fiscal 2015 -
Research & Development: $717 million
Net loss: $888 million
First quarter 2016 -
R&D: $182 million
Net loss: $282 million
If their R&D was $0, they'd still be losing lots of money.
Total Revenue: 4,046,024 Cost of Revenue: 3,122,521 Gross Profit: 923,503
R&D: 717,900 Selling, General, & Administrative: 922,232 Total OpEx: 1,640,132
Loss from Operations: (716,629) /* snip some other line items */
Net Loss: 888,663
http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=111...
So it's not all just R&D. Their revenue and cost of revenue includes their resale value guarantee and lease programs. I'm not enough of an accountant to know which way these tilt the numbers. Their resale value guarantee probably will help them maintain a high sticker price.
Equity offering seems likely to be much cheaper than debt right now; Tesla has great mindshare among consumers, and lots of doubters on the professional investor side.
Too much leverage? Sell shares! Not enough leverage? Sell debt!
echo "Tesla to offer $1.4 billion shares, remaining to be sold by Elon Musk.
Musk is exercising options to buy 5.5m shares and will boost overall holdings
on net basis. Developing... " | wc
1 30 176
Edit: to be clear, my point was that "twitter-like" news alerts are not new; not that Twitter is some kind of successor to newswires.
At first they were an innovative car company. Then the stock price shot well above the level sustainable by an electric car company. Elon realized this, and then builds the Giga factory. We're not just a car company, we're a power company!
Now they are raising more equity off of an inflated stock price. I'd stay away from this one.
Not a total hater, Tesla cars are great, but one of these day's Elon's moon shots and obsession with the stock price will catch up with him (he'll still be rich) and his investors (they may be significantly less rich).