Tesla, Slack Show Lure Of Non-Public Funding Amid High Mkt Valuations

As the saying goes, cash is king.

Amend that a bit to state that when it comes to corporate events, cash may be … well, kind of king, right along with debt. By corporate events we mean takeovers, funding rounds and the like.

A spate of headlines across Wall Street and venture capital these past several days shows a broad range of corporate actions that take into consideration, in varying degrees, cash/debt and valuation.

In the case of the former, cash is currency; in the case of the latter, valuations are getting stretched.

The biggest splash may have been made with Tesla. As the world knows, Elon Musk sent a short missive – over Twitter, where all the missives are short – that he was considering a go-private deal, with an attendant price tag of about $72 billion, or at $420 a share, where the stock ended last Monday at around $356. He noted, cryptically, that funding was “secure,” and that such funding would come from Saudi sovereign wealth funds.

A bit more detail has emerged this week, as the Tesla CEO stated that he has been in contact with Silver Lake, the buyout firm, and Goldman Sachs Group, both acting as advisers. Reuters reported that according to sources, the firms had not been hired in official advising capacity.

But then again, Silver Lake is known for leveraged buyouts, where debt and cash and all manner of financial wizardry gets firms bought. The Saudis do indeed seem interested in Tesla, as the newswire has noted that the sovereign wealth fund has a 5 percent stake in the company, and has approached Musk repeatedly over a few years to discuss going private.

Whatever you might think about the how, why and timing of the Musk disclosures (and the structure of a go-private deal), consider the fact that, as Bloomberg stated this morning, government-run funds have been actively finding footing in the U.S. through buying stakes in companies, or buying companies themselves. But it’s a decade-long trend that may see pause, partly because cross-border deal-making may find more scrutiny in the Trump era (especially amid a trade war, we hazard to guess), and also due to valuation.

One of the broadest market proxies, the Standard and Poor’s 500 stock index, trades at more than 20x earnings, a lofty level that is three years deep, and a long stretch for such a level.

Another example, perhaps of peaky-ness: Reports last week noted that Slack, the work-focused app, has been busy raising $400 million in a funding round that would value the company at about $7 billion. The numbers are eye-popping. The latest round tacks on an additional $2 billion in implied valuation since September 2017. From a standing start roughly five years ago, the app has snared 70,000 teams, with three million users, and now faces the likes of Microsoft, with its own workplace app clocking in at 200,000 teams. The pie is big enough for tech behemoths to jockey for slices.

But one glaring point comes from the report: The firm is sidestepping that traditional route of fundraising, the initial public offering (IPO).

The two examples above show a bit of disdain for public markets – one a go-private deal, the other a no-go-public deal. Might the implication be that things are frothy among publicly-traded entities? There’s that valuation angle again – and the list of companies that have put off going public in the past includes Lyft and Airbnb, among others. Till the froth dies down, direct investing seems to be the way many captains of industry want to fill the corporate coffers.