The real reason why Tesla is trying to acquire SolarCity

Just read this long, yet interesting, article on the motivation behind Tesla's proposed acquisition of SolarCity.
This article mentions numerous reasons why Elon Musk and Tesla would like to acquire SolarCity. The first reason why is that the Rive brothers are Elon Musk's cousins, and that SolarCity is struggling. This is shown in this quote, quotes Musk's announcement is about saving the planet. But it's also about saving SolarCity, the company his cousins, Peter and Lyndon Rive-who are in the audience-launched with Musk's support in 2006 to bring solar power to the masses. The business, an industry-rallying success for nearly a decade, had recently run into challenges. [/quote] In addition, The shareholders of Tesla and SolarCity will vote in about 3 weeks on the acquisition, but most of the shareholders of Tesla and SolarCity believe that the acquisition will get approved. This is evident in this quote, quotes Three weeks after Musk's presentation, 85% of shareholders approved the Tesla–SolarCity merger [/quote]
There are several challenges for the merger and acquisition. This is especially shown in this quote from the article, quotes There was a lot for shareholders to think about-and even more for corporate governance experts and company analysts to scrutinize. Tesla's and SolarCity's boards and investors represent a weave of overlapping interests, both financial and familial. Six of Tesla's seven directors have clear ties to SolarCity. Tesla's board includes SolarCity's former CFO, a SolarCity director, and two VCs whose firms also have seats on SolarCity's board, along with Musk's brother, Kimbal. Musk chairs both companies and is SolarCity's largest shareholder. He has taken out $475 million in personal credit lines to buy more shares in SolarCity and Tesla when advantageous. SpaceX, his aerospace company, has purchased $165 million in bonds issued by SolarCity. Some analysts cautioned that Musk might be self-dealing, rescuing his own investments and his cousins' company through this purchase. Hedge-fund manager Jim Chanos, who had shorted Tesla and SolarCity, called the acquisition a "shameful example of corporate governance at its worst," a "bailout" of SolarCity that "strikes us as just the height of folly." [/quote]
Also, this proposed acquisition seems to be similar to Musk's other ventures. quotes Musk has always approached innovation this way: as a massive bet on the inevitability of tomorrow, rather than what he can deliver today. He designs the future and wills it into existence, despite the disbelievers. Tesla and SpaceX, which many viewed as the wild gambles of a stretched-thin entrepreneur keen to waste billions of his (and others') dollars, have proved more risky to bet against. This year, in fact, Tesla became the most perilous stock to short, costing speculators billions-more than the combined losses of those trading against Apple, Amazon, and Netflix. In that sense, Musk has become the face of salvation to some, and motivation to others. "BMW is using a picture of me to scare their executives into taking electric vehicles seriously. I'm not kidding," Musk says. "It's sort of a backhanded compliment." All of this makes him the-to use his word-obvious person to lead the solar-energy industry forward: Lyndon Rive, SolarCity's CEO, announced on May 15 that he'd be leaving the company. [/quote]
This venture would lead the way for private enterprise to help the "private sector for environmental leadership, with Musk leading the charge," due to America's exit of the Paris Climate Accord.
Since both of these companies already work close to one another, their partnerships would be greatly expedited through the Tesla's acquisition of SolarCity. This would be a more efficient change because, currently, when the companies work together the process is slow. The following quote discusses this more in depth. quotes Musk stresses that such collaborative engineering couldn't have happened before the merger. Because they were previously separate public companies (with those many conflicts of interest), SolarCity and Tesla were required to operate at an "arm's length." Whatever partnerships they pursued had to be audited to make sure they were in each company's interest. "Every time we wanted to do something, it had to go through two org committees. It was incredibly slow," Musk says. "Now we can make decisions immediately instead of it taking a month." [/quote]
I believe that the most important take away from this article is about Tesla's goal of vertical integration through acquiring SolarCity. The article covers this in more detail. quotes SolarCity isn't the first company ever to produce a solar tile, and most in that space have floundered. But the merger with Tesla allows the company to offer vertical integration, potentially meeting all of its customers' energy needs. "If you just created a solar shingle, you're kind of fucked," Peter Rive says. "I don't think anybody but the combination of SolarCity and Tesla can pull this off." [/quote]
Again, this article is a lengthy read, but it highlights the key factors that influenced Tesla's decision to try to acquire SolarCity, while also covering SolarCity's rise and fall.
What do you think of Tesla's proposed acquisition of SolarCity? Do you think SolarCity will drag Tesla down? What do you think of vertical integration, especially in the case of Tesla? Would you buy or sell TSLA? Would you buy or sell SCTY?

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Comments (33)

 
Dec 31, 1969 - 7:01pm

Tesla Makes Offer to Acquire SolarCity (Originally Posted: 06/22/2016)

Looks like Elon Musk is preparing to consolidate his empire: Tesla is making an offer to acquire Solar City.

Subject to completing due diligence, we propose an exchange ratio of 0.122x to 0.131x shares of Tesla common stock for each share of SolarCity common stock. This proposal represents a value of $26.50 to $28.50 per share, or a premium of approximately 21% to 30% over the closing price of SolarCity's shares, based on today's closing price of SolarCity's shares and the 5-day volume weighted average price of Tesla shares.

https://www.teslamotors.com/blog/tesla-makes-offer-to-acquire-solarcity

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

  • 1
 
Dec 31, 1969 - 7:07pm

MMBanker14:

HFer_wannabe:

Don't think it works that way, bro

Enlighten me then, bro. I get that they could participate in upside as they get TSLA stock, but senior management will think they can get back to a higher share price without a deal if they can put together 1-2 decent quarters.

Senior management is going to get a 7 or 8 figure payoff called a golden parachute. They aren't worried.

Array
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Dec 31, 1969 - 7:05pm

So...I have no real basis for this comment, other than my (rather large) gut feeling.

Something about this doesn't sit right.

Director of Finance and Corporate Development: 2020 - Present Manager of FP&A and Corporate Development: 2019 - 2020 Corporate Finance, Strategy and Development: 2011 - 2019 "An investment in knowledge pays the best interest." - Benjamin Franklin
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Dec 31, 1969 - 7:06pm

I think it's just Musk trying to move stuff around. I read somewhere that he once took up a personal $475mm credit line to help two of his ventures when they needed cash flow.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

 
Dec 31, 1969 - 7:08pm

If I was a Tesla shareholder I would be pretty choked about this deal. Acquiring an unprofitable, highly-levered solar company so the Musk family can consolidate and receive better paper. Elon says he is not voting on the deal, let's see how this plays out.

 
Dec 31, 1969 - 7:10pm

bluegold:

If I was a Tesla shareholder I would be pretty choked about this deal. Acquiring an unprofitable, highly-levered solar company so the Musk family can consolidate and receive better paper. Elon says he is not voting on the deal, let's see how this plays out.

I'm a Tesla shareholder and I'm super stoked about this deal.

It's the equivalent of a traditional car manufacturer purchasing an oil and gas company; it's vertical integration of the highest order.

20 years from now, when all/most new cars being produced are electric, every driver will have to go to Tesla to purchase energy.

It's an unbelievably brilliant move, and I'm shocked that no one else sees it.

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Dec 31, 1969 - 7:11pm

You're forgetting that you must first assume that solar will actually become a viable source of energy. Right now they're just expensive wafers with really high installation costs. All solar city is at this point, and for the foreseeable future, is a net cash user. Tesla could've stuck with cars sold at really high premiums, but has now turned into a levered up solar company. It's not exactly a sweet deal.

 
Dec 31, 1969 - 7:12pm

iBankedUp:

You're forgetting that you must first assume that solar will actually become a viable source of energy. Right now they're just expensive wafers with really high installation costs. All solar city is at this point, and for the foreseeable future, is a net cash user. Tesla could've stuck with cars sold at really high premiums, but has now turned into a levered up solar company. It's not exactly a sweet deal.

It's important to also consider that Musk said Tesla has been doing significant research into improving battery technology.

 
Best Response
Dec 31, 1969 - 7:21pm

surferdude867:

I'm not forgetting anything. I've seen the math behind projected growth rates in solar panel power efficiency and it checks out.

Its ok guys. The market clearly doesn't agree with the decision but the "math" checks out according to this guy.

On a side note- what the fuck kind of math are you talking about? Projections on energy are amusing because the unbelievable amount of assumptions in them. Please tell me how solar is going to become so popular when it has been around for a while and has basically gained no traction. Are you going to have panels on your car? Or just build these massive non-existent batteries that will hold power all night and allow people to transfer it to smaller batteries for transportation purposes? I get that technology will improve, but I wouldn't count on solar being the place that passes oil for our number 1 transportation resource.

 
  • Anonymous Monkey's picture
  • Anonymous Monkey
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Dec 31, 1969 - 7:13pm

You say that as if Solarcity has a monopoly on supplying electricity. Last time I checked I have a power point at home, and it works.

 
Dec 31, 1969 - 7:14pm

This is barely bundling never mind vertical integration. People use all kinds of ways to charge Teslas like, you know, plugging it into the outlet in their garage. This would be exciting if Tesla was acquiring the supplier of their most expensive input but they don't have the balance sheet for that, and they're already fully integrated down the supply chain. This is more comparable with Google buying a company that manufactures Ethernet cables than it is an auto manufacturer buying an oil company.

 
Dec 31, 1969 - 7:17pm

If you don't agree that solar energy will be the plurality of power in 2-3 decades, then you're correct and your analogy is more accurate than mine.

My assumptions are based on photovoltaics continuing their trip down the price/performance curve.

 
Dec 31, 1969 - 7:31pm

I actually agree with you but I think the move is bad from a financial perspective. Can Tesla continue to lose money forever? It's one thing to operate at a loss and print cash the way Amazon does, but Tesla bleeds money and is facing expiring green energy credits.

 
Dec 31, 1969 - 7:32pm

It isn't what John Malone would call optimal capital allocation, that's for sure.

No Tesla can't continue to lose money forever, but for the time being Musk gets access to absurdly cheap money; now is the time to take bold risks.

 
Dec 31, 1969 - 7:20pm

CuriousCharacter:

bluegold:

If I was a Tesla shareholder I would be pretty choked about this deal. Acquiring an unprofitable, highly-levered solar company so the Musk family can consolidate and receive better paper. Elon says he is not voting on the deal, let's see how this plays out.

I'm a Tesla shareholder and I'm super stoked about this deal.

It's the equivalent of a traditional car manufacturer purchasing an oil and gas company; it's vertical integration of the highest order.

20 years from now, when all/most new cars being produced are electric, every driver will have to go to Tesla to purchase energy.

It's an unbelievably brilliant move, and I'm shocked that no one else sees it.

Umm...an auto manufacturer buying an oil company isn't vertical integration.

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Dec 31, 1969 - 7:19pm

They are more akin to a financing company than a solar company.

 
Dec 31, 1969 - 7:09pm

Literally just a bailout of SolarCity by Tesla. If I was a Tesla Shareholder, I'd be pretty peeved. the market has already dropped the price of Tesla by more than the entire value of Solar City, so its being valued as....literally worthless. Especially if you consider that Musk sold shares just a couple weeks ago...I'd be pretty peeved.

 
Dec 31, 1969 - 7:28pm

He sounded ok in his TED talk...

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

 
Dec 31, 1969 - 7:29pm

Matrick:

He sounded ok in his TED talk...

I'm not sure which one you're referring to.

I'm not saying Elon isn't a smart guy - he's undoubtdely one of the greatest entrepreneur of our time. Even so, it's well-known that he has problems with public speaking. It isn't bad but it is noticeable.

 
Dec 31, 1969 - 7:30pm

I don't know which it was. I didn't claim you're saying he's dumb. I'm just saying that in the TED talk I saw he seemed ok to speak publically.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

 
Dec 31, 1969 - 7:33pm

Tesla Shareholders approve Solarcity Acquisition (Originally Posted: 11/18/2016)

Any thoughts with regards to the financial/legal implication(s) of this Acquisiton? Surely this won't end well.

From Bloomberg:

Elon Musk's Tesla Motors Inc. officially moved beyond cars and became a clean-energy company Thursday, as shareholders overwhelmingly approved the acquisition of SolarCity Corp. The deal, valued at about $2 billion, will integrate the maker of all-electric cars and batteries with the installer of rooftop solar panels. More than 85 percent of Tesla shares voted in favor of the merger.

http://www.bloomberg.com/news/articles/2016-11-17/tesla-seals-2-billion…

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