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Apple Inc. Vs. Tesla Motors Inc: Would Hedge Funds Approve Of a Merger?

Yesterday we took a look at  Tesla Motors Inc (NASDAQ:TSLA) and Apple Inc. (NASDAQ:AAPL) and analyzed the confidence of investors in both companies among the 700+ hedge funds that we track. Both companies are very popular and are always on the radars due to their innovative products aimed towards revolutionizing the industries in which they are operating. However, investors are more confident to invest their money in Apple Inc. (NASDAQ:AAPL), rather than Tesla, which is supported by the fact that Apple for years has been among top three most popular stocks among hedge funds. At the end of 2014 there were 149 investors reported holding $20.88 billion worth of Apple’s stock, versus 25 funds holding long positions in Tesla, with an aggregate value of $1.38 billion.

Should this Concern Apple Inc. (AAPL) and Google Inc (GOOG)?

Apple Inc. (NASDAQ:AAPL)’s financial results for the fourth quarter and full year 2014 have been very impressive. Among other things, what really excited investors is the fact that Apple has around $178 billion in cash, which can be used for many purposes such as acquisitions, dividends and buyback programs. This already sparked a lot of rumors and speculations, one of the most common being a possible acquisition of Tesla Motors Inc (NASDAQ:TSLA). It makes sense, since Tesla currently has a market capitalization of $24 billion, so Apple could buy it and still have a pile of money left. Moreover, such a deal would be a great addition to Apple’s portfolio of products and work team, especially taking into account latest reports that Apple might be working on its own electric vehicle. Apple’s interest in cars is also supported by the latest developments of the company, which recently released its CarPlay system designed to offer drivers an easier and safer interaction with their iPhones.  In case Apple Inc. (NASDAQ:AAPL) decides to acquire  Tesla Motors Inc (NASDAQ:TSLA), the combination of technology, design and innovative forces of both companies would create a great symbiosis that could lead to the creation of a staggering vehicle. Let’s only hope that they are not going to make a gold version of it.

However, before we jump to any conclusions, let’s see what would shareholders of both companies think?

This is important, because even if Apple goes through and makes a bid to acquire  Tesla Motors Inc (NASDAQ:TSLA) and let’s assume that Tesla will accept the offer, the last word will be said by shareholders who will have to vote in favor or against the deal. We already know that Apple has more than enough money to buy Tesla. However, Apple Inc. (NASDAQ:AAPL) could also use its pile of cash to increase its buyback program and dividends. Apple already pays a decent dividend and we even observed that it has been one of the most popular dividend stocks among the funds that we track. Another issue is the fact that Tesla’s stock is currently significantly overvalued and if Apple decides to buy Tesla, the offer will have to involve a premium, which will be money paid out of the pockets of Apple’s shareholders. Tesla’s stock spiked by 300% in the last three years, although it lost around 20% in the last 52 weeks. The fact that the stock is overvalued was voiced by many analysts and even by Elon Musk himself last year.

Nevertheless, there is a bigger chance that Apple shareholders will not vote in favor of buying Tesla Motors Inc (NASDAQ:TSLA), rather than Tesla’s shareholders rejecting a sale to Apple. If we take a quick look at the numbers, we can see that the majority of hedge funds are net long Apple, but they are net short Tesla. It is very likely that a large number of the hedge funds that are long Apple may also be short Tesla. The number of Tesla shares shorted stood at 23.29 million at the end of February, while its short ratio amounted to 4.50. Basically this means that if Apple Inc. (NASDAQ:AAPL) makes a bid for Tesla and offers a premium, in case the deal goes through, the sky-high valuation of Tesla will go even higher and investors that are short Tesla will lose a lot of money. That’s why we think hedge funds in aggregate would vote against such a deal. We don’t know exactly how many big investors are short Tesla, but from previous reports, Jim Chanos of Kynikos Associates said that he is short Tesla Motors Inc (NASDAQ:TSLA) earlier this year, and Doug Kass of Seabreeze Partners Management also stated during an interview last year that he is short-selling the stock. Among the shareholders that own the largest long position in the company is Daniel Benton’s Andor Capital Management that holds 1.25 million shares as of the end of 2014.

Disclosure: none