Discussion: Tesla-SolarCityDea

On August 1, Elon Musk announced that Tesla will buy SolarCity for $26Billion (that is 0.110 Tesla common share per SolarCityshare)

http://www.wsj.com/articles/tesla-and-solarcity-agree-to-2-6-billion-merger-deal-1470050724 (Links to an external site.)

Elon Musk is on both sides. He owns 20% of both companies. He is CEO of Tesla and Chairman of Solar City. A few other Tesla executives have deep ties with Solar City as well

http://strictlybusiness.buffalonews.com/2016/07/13/the-deep-ties-between-tesla-and-solarcitys-boards-of-directors/ (Links to an external site.)

These ties have raised major questions about conflict of interest in the deal. Elon Musk responded to the issue in this article:

http://www.businessinsider.com/elon-musk-answers-tesla-solarcity-merger-question-2016-8 (Links to an external site.)

As both companies are entering the final stage of the merger, the market is still skeptical about the deal:
http://money.usnews.com/investing/articles/2016-09-19/will-the-solarcity-corp-scty-deal-with-tesla-motors-inc-tsla-go-through (Links to an external site.)

https://www.bloomberg.com/gadfly/articles/2016-09-08/solarcity-tesla-deal-spread-trouble-for-elon-musk (Links to an external site.)

-Are there conflicts of interest in this deal? If yes, will they help or hurt the deal?
-Are there real potential synergies in this merger? Will this deal create value for the shareholders of Tesla?
-Is the deal rightly priced?
-If the deal goes through, which way do you expect Tesla's stock price to go?
-Is this a smart deal?

Comments:

1. Wenjie Gao

The merge of Tesla and SolarCity is debated controversially in the financial market. Broadly speaking, the counterviews are more than applause.

It is obviously conflict of interest in this deal, mainly comes from Chairman of Tesla Elon Musk is biggest shareholder of both Tesla and SolarCity. Moreover, some other internal relationship between those two firms are reported in many articles i.e. Musk's cousin Lyndon Rive is SolarCity's CEO. Some investors are holding both firms' stock at the same time, such as Stephen Jurvetson and John H.N. Fisher and they are in partnership. Just as Dieter Waizenegger said, in the BI's article: six of Tesla's seven board member have ties to SolarCity. I think those kind of conflict interests definitely hurt this deal's legitimacy even though suppose that the deal is truly mutually beneficial. Even as Musk said that all those relatives are recused including himself, Musk will vote proportionally and he require two third of agreement vote to pass the deal and two independent are nominated to assess the deal etc. Musk who is the biggest shareholder and those fellows who either control daily business of firms or has investment in those two firms will highly influential to other voters. Actually, I would say that those people really control those two companies. However, it is true that Tesla and SolarCity has business relations, and this may justify the merge as Musk said that the conflict interest if not merge. It is true that if merge happens that this profits within proposed merged companies could be eliminated and SolarCity could get new customer though Tesla and Tesla could share workforce of SolarCity and so on... But for any single merge deal has their reasonable benefits for company to do so. I think the question is all about timing and price of offering. For example, if Musk decide to inject SolarCity into Tesla for free and then everyone is happy and no argument anymore but the only unhappy men should be Musk and his fellows.

Second, I think it will have potential value created by the merge. Those two companies are in the same chain of production. It is reasonable for companies to vertically integrated with their supplier or customer to complete the production line. But my question is about the price, did the SolarCity' per share deserve 0.11 of Tesla's share? Is this the right time to do so? Firstly, the price offered by Tesla is $2.6 billion and 0.11 share of Tesla's share. We could not exactly gauge the intrinsic value of value such Tesla and SolarCity, because we cannot place a value on the future. Basically, if you visit Tesla and Solarcity's website they are all reported net loss for recent quarter. Therefore, we may not get precise value of those share price with out cash flow returns form income. So, we only can predict it. So, we may think another way, on this price, until now, there is no other entity would like to pay more than $2.6B. This tell me that, like an auction, this price is either overvalued or just on the highest price the market could accept. Adding that Musk borrow personal loan on the collateral of his shares and oddly this merge happed when SolarCity's share price loss its 50% of value and the timing of this merge made it like a bailout. Further the context of this deal is all stock deal no cash involve we could consider this is only a capital game means Tesla's high price could lever up SolarCity's price. The capital game also defined by another means that, as filed with SEC Tesla will borrow again before end of this year to sustain its expansion plan. But Tesla already on the heavy load of debt, therefore Tesla need new asset as collateral base or novel story if you like to issuing new debt or shares. Another fact could help us to reach the conclusion about mispriced deal is reaction of stock market. Normally, the investor will short sell the higher price of merged stock and to buy lower one. This kind of arbitrage trading did not observe during this case. This at least shown that the faith of merge is not so strong enough to make the market take is seriously. Therefore, I think the price is reasonably high given there is no price bargaining happened and so many incentives for Musk to offer higher price.

I think if this deal goes through, I expect the price of Tesla would go up first in short period since financial market like new story about creative industries. And then the price of Tesla will go down, since it basically buying a nearly default company on relative high price. Unless Tesla could prove this merge is value creative in short-time.

More recently news about this deal is Tesla involves in legal issue about this deal and may delay the acquisition. The reason of suing is: Tesla's executive and board breach their fiduciary duty. As said in following link:http://www.bloomberg.com/news/articles/2016-09-19/tesla-solarcity-merger-could-be-delayed-by-shareholder-lawsuits (Links to an external site.).

All in all I do not think this is a smart deal, both Tesla and SolarCity are cash demanding company and actually this is basic nature of creative industries. Therefore, the reputation of symbolic figure is important in borrowing or attracting capital. This deal, if success, will definitely damage image of Musk beside to show he enjoys domination power of controlling company. However, in my view, this is all about venture capital market and venture angles like this kind of way to reap capital gains or protect capital loss.