Analysis of the Proposed Tesla/Solar City Merger

This was sent to us by Brian Henry, Assistant Professor of Finance at Benedictine College and listener to the show. Thanks Brian!

Elon Musk’s company is going to buy Elon Musk’s other company, which seems to be a strange sort of event. There is a lot going on with this sort of deal, and it will be a very high profile one, so let us look at some of the most important parts and what they might mean for the possibly resulting company.

In a deal with a clear conflict of interest, Elon has recused himself, meaning he will not be in on any board discussions for either company or vote with his shares if it comes to that. As the largest shareholder of both companies this is the only way a deal like this can be done without the other shareholders taking you to court. This may or may not solve the conflict of interest however. Depending on how loyal the boards are to Musk, this could play out in a few different ways. If they are loyal and do his bidding, then the deal will be done and the only safeguard will be other shareholders voting it down (if it is a bad deal for them). What I think is most interesting though is if the deal does not get done by the boards. This could end up looking like a referendum on Musk. If either of the company boards do things to fight the deal it may signal that Musk is not in as much control of the company as he thought, and he has a history of being forced out as leader of his own company.

So far the markets have reacted by punishing Tesla’s stock (acquiring company) which dropped over 13% initially and has come back a little bit, and SolarCity jumped up over 25% initially and has since lost about half of the initial gain. This is very typical of acquisitions. The acquirer tends to have to pay more than the current market value of the stock, otherwise the stockholders of the company being acquired would have no interest in the deal. There are hedge funds who live off of this even, called risk arbitrage or merger arbitrage funds, though arbitrage is used rather loosely here as there is no guarantee that the deals will get done.

There are two big questions for me, the first is if these two companies would be better together than apart. Elon is selling this as vertical integration and of course the word that goes with all business deals “synergies”. The vertical integration is that they can sell people an electric vehicle and the solar panels to power said vehicle. Whether or not people want to buy both things at the same time or from the same place is yet to be seen, and I am skeptical that people are going to head to the Tesla dealership to buy solar panels for their house. Whether or not these two companies will synergize well is questionable as well. I cannot see how making solar panels and making cars are similar enough to benefit from being under the same roof, but I have never made a car or a solar panel so maybe I am wrong. There are products that overlap, the Powerwall batteries and Supercharging stations for the cars, so maybe being combined will help streamline some operations. The two companies’ finance arms are probably the most similar parts, so maybe in making loans to customers bundling car and solar loans or something could be helpful.

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