Lazard's $400m Mistake

etx's picture
Rank: Senior Gorilla | 873

I read an interesting article on Reuters this morning. In regards to Tesla's deal with SolarCity, Evercore was Tesla's sole advisor, with Lazard working on the SolarCity side.

Evercore will earn an estimated $15-20 million in buy-side advisory fees, according to the consultant Freeman & Co., while Lazard will earn between $20-25 million.

According to a regulatory filing by Tesla on Wednesday, Lazard made an error in its analysis which discounted the value of SolarCity by $400 million. An analysis by Lazard for SolarCity that indicated an equity value of between $14.75 and $34.00 per share was wrong because it double-counted some of the company's projected indebtedness

While the purchase price was within the valuation range that Lazard came up with for SolarCity even after accounting for the miscalculation, the error illustrates how even leading investment banks can make mistakes on some of the highest-profile deals.

SolarCity and Tesla agreed however that the error would not change their view of the deal, according to the filing. The purchase price, to be paid with Tesla stock, equated to $25.37 per share.

Lazard, SolarCity and Tesla declined to comment.

What do you think will happen to the Lazard team working on the deal in terms of bonuses etc? I'm just a tad curious.

Comments (34)

Sep 2, 2016

Very much doubt LAZ is getting $20M+ here. Their role is as advisor to the special committee, not full sell-side banker.

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Sep 2, 2016

Wonder how badly the analyst(s) on that deal is getting reamed right now. Really the blame shouldn't be on them exclusively but still haha.

Sep 2, 2016

Seriously how do you mess up projected indebtedness...

but also, who failed to review this?

Sep 2, 2016
NuclearPenguins:

Wonder how badly the analyst(s) on that deal is getting reamed right now. Really the blame shouldn't be on them exclusively but still haha.

While this a pretty monumental fuck up on the analyst's behalf, should the blame not ultimately fall on those responsible for checking the analyst's work? This wasn't a minor line item which slipped through the cracks, this is something which should have noticeably stuck out.

Sep 2, 2016

You're 100% correct, but this is never how it works in IB. The analysts are always the first to get thrown under the bus.

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Sep 2, 2016

This isn't a fireable offence is it? Would their bonuses be cut (analyst and MD)?

Sep 2, 2016

Honestly the associate should get the blame. Analysts make busts all the time but the associate's entire job is to catch them

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Sep 6, 2016

Totally agree with that!

Sep 13, 2016

Yeah, especially on a high profile deal like this. Why would you not double check everything, especially if the deal looks a little too good to be true.

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Sep 2, 2016

.

Sep 2, 2016

sure wouldn't want to be in their shoes haha. ill stick to my boutique

Best Response
Sep 2, 2016

There could be a lot more to this. The SolarCity-Tesla merger was pretty clearly orchestrated by Elon Musk as a sort of bailout of the former by the latter, with relatively unclear and highly objectionable projected synergies. Mistakes happen but when they occur during a somewhat opaque, highly criticized transaction and to the tune of a sum close to a half a billion dollars, I'm skeptical.

Then again, I could just be talking out of my ass, and probably am for that matter. Any thoughts?

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Sep 2, 2016
OleBurnSides:

There could be a lot more to this. The SolarCity-Tesla merger was pretty clearly orchestrated by Elon Musk as a sort of bailout of the former by the latter, with relatively unclear and highly objectionable projected synergies. Mistakes happen but when they occur during a somewhat opaque, highly criticized transaction and to the tune of a sum close to a half a billion dollars, I'm skeptical.

Then again, I could just be talking out of my ass, and probably am for that matter. Any thoughts?

Aren't most projected synergies highly objectionable? I think there are studies out there that management typically has overconfidence in projected synergies.

Sep 2, 2016

Yes, but they're typically at least legitimate arms-length transactions.

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Sep 5, 2016
RobberBaron123:

OleBurnSides:There could be a lot more to this. The SolarCity-Tesla merger was pretty clearly orchestrated by Elon Musk as a sort of bailout of the former by the latter, with relatively unclear and highly objectionable projected synergies. Mistakes happen but when they occur during a somewhat opaque, highly criticized transaction and to the tune of a sum close to a half a billion dollars, I'm skeptical.Then again, I could just be talking out of my ass, and probably am for that matter. Any thoughts?

Aren't most projected synergies highly objectionable? I think there are studies out there that management typically has overconfidence in projected synergies.

Dude, if it weren't for the questionable projected synergies, IB would've been a lot smaller.

Sep 2, 2016

I agree. I could be incorrect, but double indebtedness doesn't hurt the valuation of the entire company, just moves some asset claims around? But definitely feels like Laz was pressured by the mobster Musk.

Sep 4, 2016

The opinion was not on total enterprise value, it was equity/share value. For total company value you are correct there wouldn't be a difference but if debt goes up 400, there is 400 less for the equity.

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Sep 9, 2016

When it came to Evercore's and Lazard's work on the deal, Damodaran had some things to say. Any senior monkey volunteers to post the link to the Youtube vid? Title: "The Keystone Kops of Valuation: Lazard, Evercore and the TSLA/SCTY Deal "

Sep 9, 2016

Added, thanks.

Sep 2, 2016

While I admit I don't know all the fact, I wouldn't be surprised if Lazard were given a ridiculously short time to provide their opinion so although I don't want to defend them, you have to accept that errors will be made if you ask for the impossible. That being said, as I former analyst that didn't have the best attention to detail, I really feel for whoever fucked up

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Sep 2, 2016

I could MAYBE see it happening if you were grouping certain line items together but the materiality of it alone should've been caught by the associate, vp, and / or director.

I feel bad for that analyst - at least he has a big deal to talk about in PE interviews after he gets destroyed by the MD.

Sep 2, 2016

they will be taken out behind the shed ... and over barrels ... and a bunch people will go all "Deliverance" up in their ass.

Sep 3, 2016

What I got from this whole thread, is that Elon Musk just got pwned?

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Sep 3, 2016

The best part about this thread was the featured picture. Damn Lizard!

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Sep 3, 2016

This mistake probably didn't even matter. The DCF is only one of the methods to wrap your head around what you should pay, and probably not even the most decisive one. Also the range was so big that people probably didn't even look at it.

Also most DCFs are made like this: "Hey analyst A, can you make a DCF for company B so that valuation will be around 2B?". Without the mistake he probably would have lowered the value in some other way.

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Sep 4, 2016

hhh, fucking sell side. i actually had to do something similar once.

Sep 5, 2016

If you make the journal / reuters obviously it matters.

Analyst / associate / VP all probably got reamed.

Sep 12, 2016

JPM recently cut SCTY by about 16% from 25 to 21, citing business model uncertainty. Apple is laying off its workforce for its car project. Potential opportunity?

Sep 12, 2016

How do you even double count debt in equity value? Makes no sense. Only I see it happening is if they started with EV and backed out 400mm of debt twice to get to Equity Value - which just seems very obvious. I guess that's why it's a big deal.

Sep 13, 2016

This video is a great explanation of investment banking deal in details for those trying to understand what ib is. Damodaran is one of the people who is all valuation. His VALUATION book is in many MUST READ lists along with THE INTELLIGENT INVESTOR by Ben Graham. I too feel bad for the analyst who has been working on it but again its up to other and more experienced eyes to spot these kinds of things.

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Dec 27, 2016
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