Tuesday evening, when Tesla Motors Inc (NASDAQ:TSLA) CEO Elon Musk first proposed the idea that the electric car maker should acquire solar panel installer SolarCity Corp (NASDAQ:SCTY) to integrate the similar businesses, shares of SCTY stock soared, while the value of TSLA shares plummeted.
Although it was less than compelling to most Tesla investors, it didn’t appear as if much could be done by the naysayers to prevent the pricey purchase of SCTY, that struggling solar company.
With the dust finally settling two days later, though — and a couple more things coming to light — owners of SCTY stock have good reason to worry that the lucrative deal might not go through after all.
600 Million Conflicts of Interest
On the off chance anyone reading this hasn’t already heard, on Tuesday, Tesla Motors CEO Elon Musk announced TSLA was moving forward with an effort to dish out $2.8 billion worth of Tesla stock to acquire cash-burning SolarCity.
The plan immediately raised red flags, not the least of which was the fact that Musk is not just the CEO of Tesla, but the chairman of the board of directors for SolarCity. He also happens to be the biggest single holder of SCTY stock, and would personally stand to gain something on the order of $600 million on the planned deal.
That’s an enormous conflict of interest, though in and of itself, it’s not necessarily a reason the deal could fall through.
But there’s more. And some people realize it, though most people may not realize the extent to which it’s a problem in this particular instance.
That is, there’s more than a little overlap of leadership between Tesla and SolarCity, and there’s a surprising amount of familial overlap within that leadership.
Case in point? SolarCity CEO Lyndon Rive also happens to be Musk’s first cousin, and Musk has had a hand in the company’s development from day one. Again, he’s also the biggest shareholder. The SCTY board also includes Peter Rive … Lyndon’s brother, and another cousin of Musk’s.
Even beyond blood relations, however, it’s worth noting that Tesla’s current board includes Brad Buss, who was SolarCity’s CFO until February of this year, and Elon’s brother, Kimbal Musk. Venture capital outfit Draper Fisher Jurvetson also holds a board seat at both companies, making it tough for the organization to be truly impartial.
With that much overlap in mind, Musk’s comment on Monday that “The board opinion is unanimous at both companies” almost becomes laughable. Of course they all agree. Even the ones that don’t have to face a conflict of interest still have to face the other board members.
And yet, that’s still not even the most suspicious aspect of the proposition to owners of SCTY stock.
Suspicious Timing
It went largely unnoticed — or at least uncirculated — until after the acquisition idea was put on the table, but earlier this week, Tesla Motors amended its bylaws to require any future lawsuits against it to be levied only in a Delaware court.
That won’t upright prevent as class action suit that seeks to quell the union of the two companies (if the majority of shareholders agree to it), but it does create a tall logistical hurdle that may not be worth attempting to clear.
The move to require a Delaware venue in the case of a lawsuit has been increasingly used of late when a company suspects litigation is brewing. The fact that Tesla Motors put such changes in place right before the acquisition ambitions were unveiled speaks volumes now, even if it didn’t at the time.
Not that it’s not a savvy use of the law. If Tesla were taken to court, Musk & Co. would have to justify the selection of SolarCity as an acquisition target over any other solar power player. It wouldn’t be easy to do, given the company’s lackluster operating history to date.
Regardless of how a Delaware court may rule if it comes to that, though, there are no actual winners in a court case. At best, Elon Musk would be branded a bully. At worst, a crook. He’s not apt to risk either.
Bottom Line for SCTY Stock
Interestingly, a (relatively unscientific) poll found that despite all the inherent reasons to distrust Musk’s recommendation — as well as simply not like the fact that Tesla Motors would be buying a money pit — investors of both companies love the idea of a merger. SCTY stock holders love the idea, obviously, as it’s an “out” for them, but surprisingly enough, nearly three-fourths of TSLA shareholders say they’re on board with the idea.
But that doesn’t necessarily mean it’s going to happen. Credit Suisse analyst Patrick Jobin guessed there’s only “a low 20 to 40% probability” the planned pairing of the two companies will ever actually pan out … especially now that the whole story is coming to light.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
