Elon Musk finally found a way to turn his Wall Street fans into doubters. The bid by Musk's Tesla Motors for Musk's SolarCity for $2.8 billion, a premium of as much as 35% based on Tuesday's market close, plainly dismayed Tesla shareholders.
Tesla shares, which have been buoyed over the years by Wall Street's adoration of his visionary charm, fell to about $196, a drop of more than 10%, just prior to the end of Wednesday's trading on the Nasdaq. While some investment analysts bought into Musk's assertion that the synergies between his solar energy and his electric car firms were so obvious the combination was a "no-brainer," general opinion on Wall Street appeared to be negative.
In part that's because both companies are desperately in need of cash, so one firm's spending its capital to prop up the other didn't strike everyone as the best use of its resources. Some also observed that Tesla is about to embark on the most challenging operational phase of its short life: The company is about to gear up to produce as many as 500,000 cars per year as early as 2018, mostly its mass-market priced Model 3. But as we reported last month, the company hasn't yet finalized the design for the Model 3, hasn't selected its parts suppliers and isn't sure it can produce and deliver the car in volume and on time.
"We worry Tesla's foray into a completely different business, right at the time it needs to launch its crucial Model 3 and deliver a five-fold increase in output, will amplify execution risks materially further," Emmanuel Rosner of the investment brokerage CLSA wrote after the announcement.
Others pointed to the obvious conflicts of interest and corporate governance issues raised by a transaction between two companies in which a single individual is the largest shareholder. Musk owned 26.5% of Tesla as of Dec. 31 (though share issues and options exercises have changed his holdings slightly) and 22.2% of SolarCity as of March 31.
Investment manager Jim Chanos, who has short bets on both companies, called the deal a "shameful example of corporate governance at its worst" during an appearance on CNBC. SolarCity, he said, is "a company headed toward financial distress. It is burning hundreds of millions in cash every quarter, a burden that now Tesla shareholders will have to bear."
Musk has said that the directors with personal stakes in the deal will recuse themselves from board discussions at both companies. But the notion that the boards can possibly judge this deal independently is a joke. The seven Tesla directors include Musk and four others close to him: Brad Buss, the former CFO of SolarCity; Antonio Gracias, a member of the board of SolarCity and Musk's company SpaceX; venture investor Stephen Jurvetson, a board member of SpaceX; and Kimbal Musk, Elon Musk's brother. SolarCity's eight-member board includes Musk and four other intimates: Lyndon and Peter Rive, who are company co-founders, brothers and Musk's cousins; John Fisher, a business partner of Jurvetson's; and Gracias.
What of the rationale for the acquisition? In strategic terms, it has a certain superficial logic but otherwise is highly questionable. SolarCity, one of the nation's biggest rooftop solar companies, sells or leases its system to homeowners, the U.S. military and industry. But it has little in common with Tesla, other than Musk's ownership and its position in "green" industry.
Musk wrote in a blog post at Tesla's website that the deal would form "the world's only vertically integrated energy company offering end-to-end clean energy products to our customers," starting with "the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered."
He amplified the point in a conference call with investors Wednesday morning: "As you look ahead to the Model 3, a $35,000 car, well that same person at the same moment, we could sell them roughly an equivalent value of solar panels and a Powerwall, effectively doubling the sale at that time, and then putting it all in at the same time." (The Powerwall is a high-capacity home battery marketed by Tesla.)
But there's no reason why the providers of all these goods and services need to be under the same corporate roof and no explanation of why the consolidation necessarily would benefit consumers.
As is indicated by the decline in Tesla shares and the rise in SolarCity shares (up by more than 4% just before the close of trading Wednesday), this deal is a boon for the latter. SolarCity has been a consistent money-loser, racking up $769 million in red ink in 2015 on $400 million in revenue. It's estimated to need $2 billion in capital this year, which it would have very little chance of raising in the capital markets. Combining with Tesla would allow it to assume some of the car company's glow, though that glow may have faded a bit with the announcement of the deal.
The risks to Tesla are potentially great. "Synergies seem limited," commented Colin Langan, a Tesla skeptic at UBS Securities. The deal "adds complexity, and most importantly, it could potentially be an unneeded distraction" for Tesla management.
In the long run, however, it does strongly shore up one Musk company at the risk of weakening another that has investment strength to spare. In the long run, Musk may be the one who comes out a net winner.