Taking Tesla private


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The Conversation

Elon Musk was right to drop his bungled plan to take Tesla private

August 28, 2018

Author

Erik Gordon

Clinical Assistant Professor, University of Michigan

Disclosure statement

Erik Gordon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Partners

University of Michigan provides funding as a founding partner of The Conversation US.

Elon Musk shocked the world – including his own car company’s board – on Aug. 7 when he tweeted that he had the “funding secured” to take Tesla private. A little more than two weeks of uncertainty, confusion and a wildly fluctuating stock price later, the billionaire entrepreneur abruptly called the whole thing off.

While he said the reason for the change of heart is that investors urged him to keep Tesla public, Musk could have simply glanced at the history of leveraged buyouts, more commonly known as LBOs.

It is a history replete with both successes that made some people very wealthy and failures that resulted in big losses – as well as bankruptcies and layoffs.

In my experience, as an expert on mergers and acquisitions, Tesla’s situation looks more like the failures than the success stories. Nonetheless, Musk’s aborted attempt raises an interesting question: What separates success from failure?

The LBO era begins

While the history of taking a company private goes back to at least to the 1930s, the current chapter relevant to Tesla began in the 1980s when deal makers first began to raise large amounts of debt to buy companies. This era marked the birth of the LBO.

Using debt, or leverage, to raise the funds necessary to buy a company increased the payoff if a deal succeeded – but also the risk of large losses should it fail.

The 1982 acquisition of Gibson Greetings by a group that included former Treasury Secretary William Simon became the archetype for later LBOs. The investors acquired the greeting card company for US$80 million and financed all but $1 million with debt and by selling off its real estate holdings.

It was a huge success for the investors and management. Eighteen months later they re-took the company public with a valuation of over $290 million. Simon alone made $70 million on his investment of less than $350,000, an astonishing 80,000 percent gain in a very short period.

Despite the leverage, the deal was conservative in one important sense: The company generated twice as much cash as it needed in order to meet its debt obligations.

Other successful buyouts, such as Blackstone’s takeover of Hilton Worldwide in 2007 and founder Michael Dell’s buyout of his eponymous computer maker in 2013, also had lots of so-called free cash flow – the cash left over after paying the bills.

As we’ll see, that made all the difference.

‘Barbarian’ buyouts

Perhaps the most famous LBO ever illustrates the perils of going private.

In 1988, private equity firm KKR bought out RJR Nabisco for $24 billion after an intense bidding war with the tobacco and food conglomerate’s own CEO, Ross Johnson, who started it all by trying to do an LBO of his own.

The classic business book “Barbarians at the Gate” immortalized the deal’s ups and downs and colorful personalities.

But it ended badly for KKR when RJR’s debt burden limited its ability to compete with Philip Morris and makers of low-priced cigarettes. It ended even worse for the 40 percent of the company’s employees who lost their jobs.

Not everyone lost, however. Johnson walked away with $53 million. This led to the typical criticism of LBOs: They make a few people rich but ruin the lives of many others.

Great for investors

Academic studies on the success of LBOs have produced differing results, depending on the time period they examine and how they measure success. Overall, they show that buyouts tend to be good for investors but more mixed for employees.

A 2011 study found that LBO investors on average earned over 3 percent per year more than had they simply invested in the Standard and Poor’s 500 from the 1980s through the 2000s.

As for workers, studies indicate that, as a whole, there is little net gain or loss of employment as a result of an LBO. That’s because while about 3 percent of a target’s workforce is cut in the first two years, other jobs are eventually created that make it a wash.

Of course, that is little comfort to the thousands of employees or even tens of thousands who suddenly lose their jobs.

Show me the money

So what separates the LBO winners from the losers?

Recent post-LBO bankruptcies by Texas utility Energy Future Holdings and Toys R Us has put the spotlight on the risks of acquiring too much debt. The $45 billion buyout of Energy Future in 2007 was financed by $37 billion in debt, while Toys R Us has struggled to pay down the more than $5 billion it took on from its 2005 deal.

But that only tells part of the story. Both failures suffered from managerial mistakes and changes to their business environments. Energy Future was clobbered by a drop in energy prices. Executives at Toys R Us failed to adapt to new competitive conditions as retailing moved online.

The key point is that excessive leverage leaves a company vulnerable to a single bad decision, market swoon or other surprise. This is where we come back to the importance of free cash flow. Highly leveraged companies must use a lot of cash to repay debt. That leaves them with little to handle problems or invest in the business.

For example, when RJR Nabisco faced shrinking sales, its pile of debt left it with too little cash to battle stiff competition. In other words, debt magnifies the effects of mistakes and twists of fate.

But a company like Gibson with steady or growing free cash flow is more likely to have the money it needs to service its debt and handle surprises. And such a company is more likely to succeed after an LBO.

Tesla is thoroughly in RJR Nabisco’s camp, except infinitely worse. RJR had low debt and capital expenditures and expected to generate over $3.5 billion in free cash flow in the three years after the deal – and that still wasn’t enough. Tesla is burning through every dollar it takes in and more and carries about $10 billion in debt. In 2017 alone, its free cash flow was a negative $4.1 billion, which means more cash went out its doors than into its coffers, in part because of significant capital expenditures.

Musk suggested the buyout price tag would be $80 billion. Even if he borrowed only a third of that, that would still require significant amounts of cash to cover interest payments.

A charismatic founder

A final distinguishing factor worth noting is whether or not a founder or current manager is part of the group taking the company private.

With Tesla, some investors I’ve spoken to thought that having the charismatic CEO lead the buyout would be a big advantage – and would help offset the risks of too much leverage and not enough cash. They pointed to the success of Dell’s privatization for $24 billion in 2013. But once again, Dell was a cash machine, with over $5 billion in free cash flow at the time of the LBO.

Some research questions the “special” powers of a charismatic CEO, while companies like Macy’s that were taken private by management ended up in bankruptcy as well – with tens of thousands of job losses.

When you sum the factors that are likely to lead to LBO success or failure, Musk’s idea to take Tesla private looked bad. Luckily for Tesla stockholders, he wasn’t able to implement it. As history reminds us, some LBOs are better left not done.

Tentative deal to replace NAFTA puts pressure on Canada in win for Trump

August 28, 2018

Author

Tim Meyer

FedEx Research Professor of Law, Vanderbilt University

Disclosure statement

Tim Meyer represents the plaintiffs in a lawsuit challenging the constitutionality of Section 232 of the Trade Expansion Act of 1962, which is the legal basis for the Trump administration’s tariffs on steel and aluminum, as well as the possible tariffs on autos.

Partners

Vanderbilt University

Vanderbilt University provides funding as a founding partner of The Conversation US.

President Donald Trump on Aug. 27 announced an agreement that he said would replace NAFTA, an almost 25-year-old deal that allows most goods produced in North America to move duty-free across the continent.

Pointedly, the deal excludes Canada, one of the three original North American Free Trade Agreement signatories. All three had been working on a new deal since last August, but recently Mexico and the U.S. began negotiating on their own.

Although Trump said he hoped Canada would join the new U.S.-Mexico agreement, he threatened Canada with new auto tariffs if it didn’t “negotiate fairly.”

As an expert on international economic law, I believe there are two key takeaways from this deal.

A tentative deal designed to pressure Canada

First of all, it does not appear that the U.S. and Mexico have actually concluded negotiations.

The United States Trade Representative said only that they’ve reached a “preliminary agreement in principle, subject to finalization and implementation.”

Therefore, details and legal language remain subject to further negotiation – which means the final agreement could change significantly. Moreover, a new trade agreement with Mexico would require Congress to pass implementing legislation by a majority of both houses before it could come into force. Absent a signed agreement, the Trump administration cannot ask Congress for that legislation.

In addition, Trump threatened to terminate NAFTA to clear the way for the new agreement. But it is unclear whether the president has the legal authority to do so without congressional approval, and his lead trade negotiator later said the United States would not withdraw. Even if Trump were to withdraw from the accord, the legislation implementing NAFTA would remain in effect until Congress repeals it.

It’s more likely that the new deal and Trump’s threat to terminate NAFTA are designed to increase pressure on Canada to reach an agreement on his terms.

Trump’s triumph?

The agreement does appear to resolve – at least between Mexico and the U.S. – two contentious issues that would represent big wins for the Trump administration.

For instance, under NAFTA, cars exported from one signatory to the next are free of tariffs as long as 62.5 percent of their content comes from a country in the agreement. The new deal would increase that to 75 percent.

It would also require that 40 percent to 45 percent be made by workers earning at least US$16.

Officials have said that the agreement would remain in force for 16 years, with a review every six. NAFTA, in contrast, doesn’t have an expiry date. Mexico and Canada both initially opposed including a sunset provision.

Although much could change in negotiating the final language and Canada’s participation, these compromises would represent significant victories for Trump.

State Bonded Obligations Report

New Report Proposes Solutions to Prevent States’ Default

$1.1 Trillion in Bonded Obligations Must be Managed Effectively

Arlington, VA (August 28, 2018)—The American Legislative Exchange Council (ALEC) today released a first of its kind report entitled “State Bonded Obligations, 2018.” The report surveys the State Comprehensive Annual Financial Reports (CAFRs) of all 50 states and analyzes their bonded liability structures along with total liabilities and liabilities per capita.

While some states have avoided large amounts of debt accumulation by budgeting properly and maintaining healthy budget stabilization funds, many states have taken a different approach and now have unsustainable debt burdens. The new report details the history of state obligation structures, debt management and past deliberation over state default. It also provides options for policymakers as they examine ideas to restructure state obligations and determine best practices for state financial reforms.

“While the unfunded state pension crisis has started to receive needed scrutiny from taxpayers, investors and elected officials, many states also bear a massive burden of bonded obligations,” said Jonathan Williams, Chief Economist and Vice President of the Center for State Fiscal Reform. “States like Indiana, Wyoming, and Nebraska have prudently avoided crushing debt burdens, while Connecticut, Rhode Island and Massachusetts have taken a far riskier path and accumulated massive amounts of bonded obligations. Our report provides unbiased data and comparative analysis to begin a much-needed discussion on the bonded indebtedness of states.”

The top ten and bottom ten states for 2018 for Bonded Obligations are:

States with Most and Least Amount of Bonded Obligations (per capita)

Top Ten

Bottom Ten

1.Wyoming

2. Indiana

3. Nebraska

4. Tennessee

5. Florida

6. Missouri

7. Montana

8. Colorado

9. Arizona

10. North Carolina

41. South Carolina

42. California

43. Vermont

44. Washington

45. New Jersey

46. Hawaii

47. Massachusetts

48. Rhode Island

49. Connecticut

50. Alaska

To download a copy of State Bonded Obligations, 2018 visit www.alec.org

The American Legislative Exchange Council is the largest nonpartisan, voluntary membership organization of state legislators in the United States. The Council is governed by state legislators who comprise the Board of Directors and is advised by the Private Enterprise Advisory Council, a group of private, foundation and think tank members. For more information about the American Legislative Exchange Council, please visit: www.alec.org.

The Conversation

Cracking the sugar code: Why the ‘glycome’ is the next big thing in health and medicine

August 28, 2018

Authors

Emanual Maverakis

Associate Professor- Departments of Medical Microbiology & Immunology and Dermatology | Member- Foods For Health Institute | Member- Comprehensive Cancer Center | Director- Autoimmunity | Director- Immune Monitoring Core, University of California, Davis

Carlito Lebrilla

Distinguished Professor of Chemistry, University of California, Davis

Jenny Wang

Clinical Research Fellow, University of California, Davis | Medical Student, Albert Einstein College of Medicine, Yeshiva University

Disclosure statement

Emanual Maverakis, M.D. receives funding from NIH.

cblebrilla@ucdavis.edu receives funding from NIH. I am co-founder of Evolve Biosystems, a probiotic company making product for infants.

Jenny Wang does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Partners

University of California provides funding as a founding partner of The Conversation US.

When you think of sugar, you probably think of the sweet, white, crystalline table sugar that you use to make cookies or sweeten your coffee. But did you know that within our body, simple sugar molecules can be connected together to create powerful structures that have recently been found to be linked to health problems, including cancer, aging and autoimmune diseases.

These long sugar chains that cover each of our cells are called glycans, and according to the National Academy of Sciences, creating a map of their location and structure will usher us into a new era of modern medicine. This is because the human glycome – the entire collection of sugars within our body – houses yet-to-be-discovered glycans with the potential to aid physicians in diagnosing and treating their patients.

Thanks to the worldwide attention garnered by the 2003 completion of the Human Genome Project, most people have heard about DNA, genomics and even proteomics – the study of proteins. But the study of glycans, also known as glycomics, is about 20 years behind that of other fields. One reason for this lag is that scientists have not developed the tools to rapidly identify glycan structures and their attachment sites on people’s cells. The “sugar coat” has been somewhat of a mystery.

Until now, that is.

While most laboratories focus on cellular or molecular research, our lab is dedicated to developing technology to rapidly characterize glycan structures and their attachment sites. Our ultimate goal is to catalog the hundreds of thousands of sugars and their locations on various cell types, and then to use this information to tailor medical therapies to each individual.

Why do we care about glycans?

In the future, it is likely that analysis of an individual’s glycans will be used to predict our risk for developing diseases like rheumatoid arthritis, cancer or even food allergies. This is because glycome alterations can be specifically tied to particular disease states. Also, biological processes like aging are linked to inflammation in our glycome. It remains to be tested if reversing these changes can help prevent disease, or even slow aging – an intriguing possibility.

Along with DNA, proteins, and fats, glycans are one of the four major macromolecules essential for life. Of these four, glycans are the final arbiters of how our cells behave.

DNA orchestrates what we look like, our capacity to think and behave, and even determines the diseases to which we are most susceptible. Within our DNA are short segments, genes, which often contain instructions for how to synthesize proteins. Proteins in turn are the “workhorses” of the cell, carrying out many of the functions necessary for life.

However, how a protein behaves often depends on what glycans are attached to it. In other words, these sugar molecules can greatly influence how our proteins do their work, and even how our cells will respond to stimuli. For example, if you change a few glycans on the outside of a cell, it might trigger that cell to migrate to a different location in our body.

The main job of glycans is to modify the proteins and fats that sit on the surface of our cells. Together, they create a thick sugar coat around the cell. If we consider the surface of the cell to be soil, then glycans would be the wonderfully diverse plant-life and foliage that sprout up and bring color and identity to the cell. In fact, if you were able to see a cell with your naked eye, it would look very fuzzy. Picture a peach with 10 times more fuzz.

Every single cell in the human body is covered with a collection of glycans which are assembled using various simple sugars like glucose, mannose, galactose, sialic acid, glucosamine and frucose as building blocks. By sensing the type of sugar coat present, our immune cells can identify other cells as friend or foe. This is because bacteria have sugars on their surfaces that are never seen on human cells – the pathogen’s sugars are sensed by the immune system and that identifies the bacteria as ‘foreign.’

Glycans label our own cells and identify them as ‘self’

The fuzz around a cell is its glycan coat. Being on the outside of our cells, glycans are the first point of contact for most cellular interactions and thus influence how our cells communicate with one another. You can also think of the glycans as a unique cellular “barcode.” Thus, a kidney cell’s fuzz will look different from an immune cell’s fuzz. But there are also similarities. In fact, the immune cells that survey our body searching for pathogens know not to attack our own “self” cells because of common features in the glycan “barcode” which are shared by all cells of our body.

In contrast, bacteria and parasites like malaria have different “sugar coats” that are not seen on human cells. When bacterial sugars are tagged as “foreign,” a person’s immune system targets the bacterium for destruction. However, some harmful bacterial pathogens like group B streptococcus, which commonly cause severe infections in babies, can avoid immune detection by impersonating human cells by carrying similar glycans as a disguise – like the wolf dressed in sheepskin.

Unfortunately some pathogens are also able to use our glycans to help them cause disease. Deadly viruses like HIV and Ebola have evolved to grab hold of specific glycans which they then “lock” onto as they infect our human cells. Therapies that either block these viruses from interacting with our glycans, or that attack virus-specific glycans may be a new avenue to treating these infections.

The sugars on our cells and on bacterial cells label them as friend or foe.

New research has also shown that glycans play a huge role in the development of autoimmune diseases like rheumatoid arthritis and autoimmune pancreatitis. This is not surprising since glycans directly influence the function of immune cells.

Normally, our immune cells act as our body’s “defense system,” and identify and destroy foreign invaders like harmful bacteria or viruses. But when the body mistakenly labels our own cells as the enemy and launches an internal attack on itself, autoimmunity is born. Interestingly, in such instances, it is the glycans present on the misbehaving self-attacking antibodies that will dictate the strength of the attack on the body. This abnormal immune response can even be directed against glycans. For example, the immune system can mistake “self” glycans as if they were “foreign” molecules. Our research team recently published an article that introduced the glycan theory of autoimmunity, which explains some of these relationships.

Glycans in our food can trigger immune responses

There have been many studies linking consumption of red meat with diseases like atherosclerosis and diabetes, but they have not been able to show why or how this occurs until recently. One intriguing study suggests that the culprit was a sugar with the unwieldy name, nonhuman sialic N-glycolylneuraminic acid, or Neu5Gc for short. Neu5Gc is found in all mammals except humans, because the early humans that could make Neu5Gc died from an ancient malarial parasite.

However, although we now lack the ability to produce Neu5Gc, our bodies still have the ability to incorporate it into the glycans on our cells if we obtain it by eating red meat. Once it becomes part of our cells’ glycan coat, our cells then have a “foreign” substance – Neu5Gc – surrounding them. This can trigger inflammation throughout the body because our immune system recognize Neu5Gc as “foreign” and attacks it. The chronic inflammation caused by these internal attacks can lead to heart attack, stroke and even cancer.

Our bodies synthesize tens of thousands of unique glycans, often with branching structures formed from simple sugar building blocks. Proteins or fats can also be modified by dozens of unique glycans. These countless combinations make mapping glycans a difficult task because we need a practical and efficient way to analyze hundreds of thousands of glycan patterns.

Our research team has now developed methods to rapidly and robustly monitor the human glycome. By capitalizing on engineering advancements and improvements in sample processing, our technique can monitor thousands of glycans at once, which allows us to characterize the glycans in cells from healthy controls and patients with a variety of different diseases. Our goal is to use this data to develop predictive models to help clinicians diagnose and treat all human diseases. We believe that a new wave of medical advancements will arrive as we unlock the “sugar code.”

Jenny Wang was the co-lead author of this article.

Thanks for this article. I did not expect to see major advances in this field in my lifetime. I have long wondered when we would be in a position to examine the roles of sugar compounds in our cells and in our bodies. No other class of compounds is clearly involved in a greater variety of roles than saccharide derivatives. Wherever you find lipids and proteins, there will be sugars as well, and as for the nucleic acids, they are partly sugar anyway.

So I wish you and your fellow researchers the best of progress in your work; you are tackling an exceptionally intimidating field. Progress will not be as straightforward as the rest of molecular biology; proteins and nucleic acids have their characteristic basic structures, largely simple or at least limited, so that every major breakthrough opened a basis for systematic advances, but the saccharides are an undisciplined lot, with assorted reactions and connections; they have no equivalent of the peptide bond or double helix.

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