Theresa May's resignation and Brexit; China Deserves Donald Trump; Shorts vindicated on MiMedx; My Tesla interview; How Tesla's greedy bankers ripped Tesla's face off; HBS and McKinsey

By Whitney Tilson

Friday, May 24, 2019

1) In the least surprising news of all time, U.K. Prime Minister Theresa May just announced her resignation amidst fury over her handling of Brexit.

She is indeed one of the worst politicians of all time (as this article notes) and the critics are piling on today (Theresa May Meets Her Lonely End), but I think she's getting a bad rap. The fact that she failed to negotiate a Brexit deal speaks far more to the foolishness and impossibility of the task rather than her lack of political skills. Disraeli himself couldn't have put lipstick on this pig...

I first wrote about this topic in my December 4 e-mail, when I said: "I've long believed that Brexit is so massively stupid that it might not go through. Can you imagine the disruption if California decided to secede from the U.S.?!"

I covered news, commentary, and debates with my readers over the next few months (December 11, December 18, January 16, February 8, February 13, February 25, February 26, and March 15), and concluded most recently in my March 25 e-mail:

The Brexit train has been picking up speed in the past week. There are only three possible outcomes: Britain leaves the EU with a deal, without a deal, or doesn't leave. The cognoscenti continue to believe that Brexit is a done deal – the only question is how. But given: a) the likely disastrous consequences of a no-deal exit, and b) I see no deal that both the EU and the British parliament would accept, that leaves only option 3. Thus, I think the U.K. will eventually revote and abandon this terrible idea.

Today's news doesn't change my view one iota.

2) New York Times columnist Tom Friedman wrote a trenchant analysis of the U.S.-China trade war (I'm not trying to be political here – I think both fans and foes of President Trump will find plenty to like): China Deserves Donald Trump. Excerpt:

A U.S. businessman friend of mine who works in China remarked to me recently that Donald Trump is not the American president America deserves, but he sure is the American president China deserves.

Trump's instinct that America needs to rebalance its trade relationship with Beijing – before China gets too big to compromise – is correct. And it took a human wrecking ball like Trump to get China's attention. But now that we have it, both countries need to recognize just how pivotal this moment is.

The original U.S.-China opening back in the 1970s defined our restored trade ties, which were limited. When we let China join the World Trade Organization in 2001, it propelled China into a trading powerhouse under rules that still gave China lots of concessions as a developing economy.

This new negotiation will define how the U.S. and China relate as economic peers, competing for the same 21st-century industries, at a time when our markets are totally intertwined. So this is no ordinary trade dispute. This is the big one.

3) Kudos to the many short-sellers who correctly identified massive fraud at MiMedx (MDXG), which even after its recent bounce is down more than 80% from its January 2018 highs. The company just released a report confirming the entire short thesis. Excerpt:

"The investigation uncovered evidence of material wrongdoing on the part of the Company's prior senior management team."

The lesson here: Short-sellers aren't always right, but ignore them at your own peril!

4) Speaking of which, I did a seven-minute interview yesterday morning about Tesla (TSLA), which you can watch here. Excerpt:

"They have built a company and a cost structure based on enormous growth," Whitney Tilson, the CEO and founder of Empire Financial Research, told Cheddar. "The problem is they sort-of met the initial demand for the early adopters." He believes that Tesla will miss its expectation to produce 90,000 to 100,000 cars this quarter.

"The vast majority of Teslas are owned by wealthy, environmentally-conscious people who live on the coasts," he added. "You don't see very many Teslas out in Middle America. It's just going to take more time for electric vehicles to really go mainstream." Another major challenge for Tesla is that it's inspired other automakers to produce competing electric vehicles, such as the Jaguar I-PACE and the Audi E-Tron...

Still, Tilson says safety concerns have created endemic liability issues would make a major player like Apple wary of one day purchasing or merging with Tesla.

"Anyone with deep pockets is going to be very hesitant to buy a company like Tesla that's got a lot of legal issues in overhang. Drivers have died using Autopilot. Whatever you think of the merits of the case, nobody with deep pockets is going to want to step into those kind of liabilities," said Tilson. "The company's not going to go away, but it may need to be restructured, and the equity holders could get wiped out."

5) My former business partner and longtime friend Glenn Tongue and I wrote an article, How Tesla's greedy bankers ripped Tesla's face off, that we sent to our Tesla e-mail list two days ago. Excerpt:

The underwriters made a fortune, largely at the expense of the company, by taking advantage of Tesla's dire situation (demand has collapsed and it's hemorrhaging cash, as I've covered extensively in previous e-mails) and its woefully inexperienced 34-year-old CFO, Zach Kirkhorn, whose background includes Harvard Business School and McKinsey – what could be worse??? (As an alum of HBS and another elite consulting firm, Boston Consulting Group, I speak from experience!)

As bad as we thought the deal was for Tesla at the time, we now believe that it was even worse than we thought. The structure of the capital raise and the greed of the underwriters has likely exacerbated the plunge in Tesla's stock since the offering three weeks ago.

In response, one of my readers asked: "May I ask why your negative stance on HBS and McKinsey/BCG? Aren't these are considered elite institutions?"

My reply (coincidentally on a day when I'm flying to Boston to attend my Harvard 30th reunion!):

They are indeed elite institutions that attract some of the smartest, most capable people. But they also attract FAR more than their fair share of egomaniacs whose hubris gets them into a lot of trouble (I speak from personal (hard) experience as well as extensive observation and countless case studies). Kirkhorn seems like Exhibit A here. At age 34, maybe he's up to the job – one of the most challenging I can imagine. But I'd bet my last dollar that he's not...

Other readers wrote to me to say they didn't think that the bankers were greedy or that Tesla got its face ripped off.

My reply:

We don't know the details on how the call spread was priced, so our assumption that it was very lucrative for the banks is just an educated guess on our part. And, yes, it's true that selling calling spreads as part of this type of financing is common.

But it is NOT common for the bankers to exercise the "green shoe" only ONE DAY after the deal was priced. A proper underwriter (who is long-term, not short-term greedy) would have waited longer to make sure the stock and converts didn't need support (which they ended up sorely needing!).

As for whether Tesla paid a very high price for this financing because of management's inexperience or the company's desperate situation – well, pick your poison... Probably some of both...

Best regards,


P.S. The Empire Financial Research offices are closed on Monday for Memorial Day. Look for the next Empire Financial Daily e-mail on Tuesday. Have a great weekend!

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor's degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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