Tesla and SolarCity, a Family Affair Merger
Elon Musk is a man with grand visions who has lately been sleeping on the floor of his Tesla factory in an effort to deliver his electric cars on time, this time around. His next task is convincing investors in SolarCity and Tesla, two companies that are both losing money, that they should patiently give him more time to make his ambitions profitable. When the proposal of a merger was made known on June 20, stocks in Tesla dropped by more than 10pc, while SolarCity’s rose by around 15pc as the merger was seen as rescue of the company. Critics have called the plan unnecessary given that they could simply partner to achieve the same results, but Musk remains confident shareholders will approve the acquisition. Musk has called the merger worth $2.6bn, or around £2bn, a “no brainer” as it pairs Tesla’s Powerwall and Power Pack battery storage products with SolarCity’s solar power generating system.
One of the deal’s many sticking points are the familial and financial entanglements; Elon Musk, the CEO of Tesla, is the chairman of SolarCity, and it was he who, in 2004, suggested that his cousin Lyndon Rive “look into solar”. Rive had reason to follow Elon’s advice given that his eldest cousin is the billionaire co-founder of PayPal, SpaceX, and Tesla. His cousins, brothers Lyndon and Peter Rive, are co-founders of SolarCity, essentially Musk’s employees. Financier Jim Chanos, who isn’t convinced that shares of either firm are a wise investment, described the deal as a "shameful example of corporate governance at its worst".
The Grand Scheme
Last month Elon Musk released his Master Plan, Part Deux, a follow-up to the grand plan he embarked upon ten years ago, which he says is in its final stages of completion. A four-point plan, it began with the goal to “create a low volume car, which would necessarily be expensive”. Next, he would use the profit “to develop a medium volume car at a lower price”, followed by investing that income into creating “an affordable, high volume car”. Item four was: “provide solar power.”
So his newest ambition to turn Tesla into a massive clean energy jolly green giant should not come as a surprise. He hopes that Tesla stores will be able to sell not only electric autos but also solar panels that power home batteries. “This is really long-term thinking here,” said Musk. “This is an action now which is anticipating several moves ahead.” His next plans include creating a fleet of self-driving Teslas that can be shared, earning owners’ money, an imitation of the Uber model as well as lorries and buses powered by clean energy.
SolarCity would, as the market indicates, benefit most from the deal. The company provides more than a third of all US solar power with its solar panel technology, but has lost money in large part due to the high expense of sales and marketing. With Tesla taking on that burden, it is anticipated that combining the companies would save $150m in the first year after the transaction was finalised.
Another benefit is that SolarCity would be poised to adapt more quickly to emerging technologies under Tesla. The company is already shifting from financing home and business solar systems toward selling them outright to consumers, and the only way to compete with less expansive Chinese solar panels is to produce them on a large scale. Like Tesla, they are working on a ‘Gigafactory’ that will have the capacity to produce 10,000 solar panels a day. Set in Buffalo, New York, the state has promised to invest $750m in the project.
Musk has a tendency to simplify his plans, as in his statement regarding the benefits of the merger: “By joining forces, we can operate more efficiently and fully integrate our products, while providing customers with an aesthetically beautiful and simple one-stop solar and storage experience: one installation, one service contract, one phone app.” The trouble with his visionary style is that it tends to overlook details, such as the profit that finances growth. Thus, investors who were hoping the electric car company would finally turn a profit this year will be disappointed. According to Bloomberg, every Tesla model since the Roadster has been delayed by at least six months.
Tesla, with a value of about $34.6 billion, is a larger company than SolarCity, whose market value rose to $2.6 billion after Tesla made its buyout offer. This is a case of one unprofitable company purchasing another. Critics say that Tesla simply can’t afford to continue to burn through money, even if it is in its start-up stage. According to The Detroit Bureau, the electric automaker lost around $900m, or around £680m, in 2015. In 2014, Tesla was in the red for $320m. The company is increasing production this year to a projected 90,000 cars up from 50,000 last year, but has struggled with what Musk has termed the “hubris” of adding too many features to the Model X SUV. Tesla’s critics note that the company is expanding its production too soon as it struggles to meet existing production deadlines. Tesla is investing more than $2bn on production capability this year, an increase of over $750m than it originally had budgeted.
In 2015, SolarCity reported a loss of $66.51 million, because, like Tesla, the company is spending a great deal of money in hopes of returning future profits. Tesla already has advance orders for 375,000 of its forthcoming Model 3 EV which is due in March of next year in the US and priced at $35,000. The earlier Model X will be available in the UK later this year and prices start at £72,280, after a government grant, for the no-frills five seat model which includes the famous autopilot feature. The fatal accident in May of a Tesla Model S that had the autopilot engaged is being investigated by the National Highway Traffic Safety Administration and is slowing down the introduction of the technology the industry claims will ultimately save lives.
Another Savings Avenue: Job Cuts to Save Civilisation
The merger is contingent upon stockholder’s approval, after a 45-day period where SolarCity would be open to other purchase offers. If either company quits the deal without another offer in place, it owes the other a $78.2 million termination fee. SolarCity will be unlikely to accept another offer as it would then owe Tesla a $26.1m merger termination fee.
As SolarCity employs about 15,273 people, the deal would double Tesla’s workforce to nearly 30,000 employees. Since Musk has already spoken of the savings of $150m or, according to our calculator, around £113m, it is anticipated that another source of saving will come from sacking employees. It is assumed that one way to reduce costs will be to let go of about 1,000 workers. Perhaps they can console themselves in the knowledge that they are helping to save civilisation. Musk has explained his sense of urgency for accelerating green technology: "We must at some point achieve a sustainable energy economy or we will run out of fossil fuels to burn and civilisation will collapse.”