The water is chummed. @elonmusk already hooked a whale, an endless supply of dumb money in the S&P committee that compelled its passive followers to buy $TSLA shares at any price, providing it the ongoing capital it needs to grow (because it doesn’t produce it internally)... 1/

Elon is now hunting the greatest great white of them all. Suggesting this week in the media that he’d be open to a “friendly” merger with an established auto manufacturer, Elon is zeroing in on pulling off perhaps the greatest casino heist of all time, his coup de grâce. 2/

Warren Buffett knows, and Henry Singleton knew, if your stock is an expensive currency, spend it. Elon has fire in the bottle with his shares at a $650B cap and needs his own Jerry Levin. To wit: 3/

20 years ago, Steve Case pulled off arguably the single greatest feat of capital allocation. In the same deal, Case’s contemporary on the other side, Jerry Levin, cemented one of the worst deals ever made. 4/

For the uninitiated, Case, a marketing guy by background, had become CEO of America Online. Like Elon, Case was a “visionary.” AOL had made a number of incredible pivots. It began as Control Video which sold a video game download for Atari. 5/

It moved on as Quantum Computer Services, developing the first IM service (“You’ve Got Mail”). It IPO’d as America Online in 1992, w/ a 28% gain over its offer price. Case developed a home page, then chat (“Buddy List”), bought CompuServe and then Netscape for $4.2B in 1999. 6/

With the browser, IM, chat, news and email, because it was the late 1990’s the stock price was insane, straight up from the IPO, and Case knew competition was coming fast. The business was literally going to die, so Case sought a bride. 7/

Over three months of heavy, secret courtship (and lots of first growth Bordeaux), AOL announced they would tie the knot with Time Warner, headed by Jerry Levin, in a “friendly, merger of equals” in January 2000, two months before the tech bubble began its implosion. 8/

What did each side bring to the party? AOL brought its soon to be dead dial-up internet business, $4.7B, in revenues, aggressive accounting and 12,000 employees. Time Warner brought its movie and studio assets, $14.7B, or 3 times the revenues and 68,000, 5.7x the employees. 9/

Each side had a $168B market cap and Time Warner also bore $17B in debt. AOL shareholders got 55% of the “deal” and its shares rose over 30% on the news! Jerry Levin would be CEO and Steve Case the big picture Chairman. 10/

The company had a combined market cap of $336B and enterprise value of $354B, on $19.5B in combined revenues. In today’s goofy market the valuation would seem reasonable. The deal would close, the stock would decline by 90% and Levin would be out by the end of 2001. 11/

Case had pulled off the sale of the century, using AOL’s high-priced currency @ 35x revenues to buy a durable, not dying business for 11x revenues. Down from a combined $354B market cap, $T ultimately bought Time Warner last year for $85B plus assumed debt. But back to $TSLA: 12/

With 48k employees and plants in Fremont, Shanghai and 2 under construction in Germany & Austin, $TSLA, with $30B in revenues will sell ~500k, cars this year and only make a profit thanks to temporary emissions credits from $GM & $FCAU, drawing on reserves and cutting R&D. 13/

The new factories should allow for 1.5-2M vehicle capacity. Fully diluted, the market cap is now not small, at $650B, 22 times revenues! Elon has already been given an obscene number of option shares, 100M shares in the most recent grant, though with not all tranches vested. 14/

Musk hooked $SPX inclusion. To “grow into” a $650B market value, $TSLA will need to make more cars. A LOT OF THEM. To make more cars, they will need more people and plants, A LOT OF THEM. To build or to buy, that is the question. $TSLA can’t internally finance its growth so…15/

Suppose Elon is courting Mary Barra at $GM. Envisioning a full conversion to EV, GM’s stock has been on a tear, up from $14 in March and hitting a new, post-restructuring IPO high of $46.46 last week, a $66B market cap, approximately 2/3 of revenues. 16/

GM shareholders would probably be ecstatic if Mary could sell GM at twice the highest price this decade, post its bankruptcy, yes? Elon could offer her a price at twice the current high. 17/

At a $132B takeout, GM's share of the combined entity on a pro-rata $782B market cap (plus GM’s more than $100B in net debt), $GM would own 17% of the combined entity. To the party, Elon brings his 4 plants and 48k people. 18/

Mary Barra brings 165k people, 11 assembly plants, 25 stamping, propulsion, component and battery plants, 19 parts distribution centers and 2 engineering campuses. GM produced 7.5M vehicles last year and has capacity to make 10M, which would be ~10% global market share. 19/

Total capacity w/ Tesla would be 12M vehicles. At $20K per, sales capacity is $240B. Doubling GM’s net margin to Toyota’s envious 6% yields $14.4B in theoretical profit. But Tesla sells software too! Add in $5K per at a 30% net software margin, profits balloon to almost $16B. 20/

What’s the P/E? What’s your market cap? At 20x, market cap is $320B, half of Tesla’s alone today and 40% of the hypothetical combo. Remember, Mary Barra doubles GM’s current price for her shareholders and gets 17% of the combined entity, $40B against the current $66B. What? 21/

For perspective, GM’s P/E multiple has averaged 7 for the last decade…

Elon becomes Steve Case. His option fully vest and he walks away with $140B. 22/

When @elonmusk approaches @mtbarra @GM, Akio Toyoda @Toyota, Mark Manley and @JohnElkann @fiat, @Herbert_Diess @VW or @jimfarley98 and Bill Ford @Ford, ask, over steak and first growth Bordeaux (or, ahem, weed in the case of Elon), “What am I giving up and what am I getting?” 23/

If you are the great white, don’t negotiate like the minnow. Highly recommended not to listen to the counsel of investment bankers. Guaranteed Elon won’t propose a cash deal because he can’t. Elon has managed to engineer one of the most overvalued currencies of all time. 24/

Outside of the $TSLA cult of drivers & shareholders, there’s only one man hoping for an all-stock merger of equals among Tesla and an auto major. That guy sold Time Warner to AOL and is hoping for a successor to his title. Who will be the Jerry Levin of the auto industry? 25/25