The real reason why Tesla is trying to acquire SolarCity

Kamchowder's picture
Rank: Gorilla | 625

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,

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.

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,

Three weeks after Musk's presentation, 85% of shareholders approved the Tesla-SolarCity merger

There are several challenges for the merger and acquisition. This is especially shown in this quote from the article,

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."

Also, this proposed acquisition seems to be similar to Musk's other ventures.

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.

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.

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."

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.

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."

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?