SpaceX, a company that makes reusable rockets and plots colonies on Mars, is at the moment the most stable outfit in Elon Musk’s portfolio. Turns out that space travel might be an easier business than Tesla’s electric cars.
That has Musk musing over whether SpaceX might provide the financing for his controversial plan to take Tesla private (a scheme that has reportedly earned Musk an SEC investigation). As a private company itself, SpaceX’s finances are opaque, but it is valued at nearly $30 billion by its investors, and executives have said that it is cash-flow positive and has no debt.
This wouldn’t be the first, or even the fifth, time that Musk has used one futuristic enterprise to backstop another. One hedge fund manager told me that Musk has “created some of the most brilliant schemes to destroy shareholder value in the history of American finance.”
That likely depends on where you’re standing. Here’s how it plays out:
Musk’s first company was Zip2, an web 1.0 pioneer that worked with newspapers to help bring classified ads and other local information online. Compaq purchased Zip2 in 1999, leaving Musk with around $20 million. He plowed much of that into a new startup, x.com, an “online bank” that merged with Peter Thiel’s Confinity to form PayPal. Musk briefly became CEO of PayPal before being pushed out, but when the company was purchased by eBay in 2002, he wound up with about $180 million—almost all of which was ultimately put into SpaceX and then Tesla. There’s no ethical problem with these investments, but they do demonstrate Musk’s love of risk: Few successful entrepreneurs put their entire fortunes into risky new ventures.
Putting his money into his startups has left Musk in need of personal funding. That means he takes loans worth hundreds of millions of dollars, secured against stock in his companies. Sometimes Musk even reinvests that money in different companies, as in 2009, when he borrowed $20 million against his SpaceX holdings to fund Tesla, a year after the former received a $1.6 billion contract with NASA and $20 million investment from Founder’s Fund. The loan was paid back in 2010, as Musk sold stock when Tesla went public. Still, Tesla’s 2018 annual report notes that Musk’s borrowings are a risk if falling stock prices lead him to sell shares and pay off debts. As of 2017, he owed $625 million against his Tesla stock, which is currently worth more than $10 billion.
When one of his companies is in trouble, Musk doesn’t hesitate to send others into the fray. SolarCity, a solar energy firm founded by Musk’s cousins, is one such recipient of intra-Musk assistance: When it retailed bonds backed by long-term solar panel leases in 2014, SpaceX purchased most of the $214 million offering. Musk called the move a good investment. But SolarCity was still in trouble afterward, due to pressure from regulators and the high cost of attracting customers and installing equipment. In 2016, Musk had Tesla acquire SolarCity in a controversial $2.1 billion all-stock transaction that some saw as a bailout. Still, the synergies between two companies focused on electricity storage are easy enough to see.
In many of these cases, Musk’s family members—his cousin Lyndon Rive and brother Kimball—and business partners like Antonio Gracias are on the boards of multiple Musk companies, raising questions about whether public shareholders are receiving fair representation. Beyond governance issues, Musk tends to run his enterprises as a loosely connected family, too, with SpaceX and Tesla informally sharing facilities and even some executives. New startups such as the Boring Company, and technology like the Hyperloop, have been developed at SpaceX before spinning out into the world.
SpaceX purchasing Tesla, akin to Tesla’s purchase of SolarCity, would be an ambitious transaction to say the least. While SpaceX and Tesla executives talk about synergies including automated manufacturing and materials science, business analysts have a tougher time seeing how a company focused on making rockets for a handful of clients will integrate with one that makes automobiles for the consumer market.
An acquisition by SpaceX would involve taking on Tesla’s $10 billion in debt, plus whatever borrowing may be needed to buy out other shareholders. Though the rocket company’s finances appear healthy, it still has to pay down significant investments in technology development, and any launch failure, like those in 2015 and 2016, could cost the firm hundreds of millions of dollars. With Tesla itself struggling to stay profitable and meet manufacturing goals, managing the debt could be a real challenge, perhaps putting all of Musk’s enterprises in peril.
Correction: A previous version of this article misstated the size of SolarCity’s bond offering.