Tuesday afternoon, Tesla Motors Inc (TSLA) CEO Elon Musk submitted to shareholders the idea of acquiring solar panel installation outfit SolarCity Corp (SCTY) … to the tune of $2.8 billion worth of Tesla stock.
Musk described the potential pairing as a “no brainer,” integrating an all-electric vehicle maker with a company that’s equally eco-friendly for people’s homes and business buildings. And truth be told, there’s a modicum of logic to the idea. In a philosophical sense, both outfits use technology to make the planet a better place.
The trouble is, there’s a subtle but critical flaw in Musk’s rationale that didn’t escape most TSLA shareholders — never even mind the conflict of interest.
See, Musk is also the Chairman of the Board of Directors of SolarCity, and also just happens to be its biggest shareholder. If the Musk-led deal goes through, he’d reap about $600 million worth of personal fiscal benefit.
Nice work if you can get it.
Impact on Value of Tesla Motors
The response to the idea has been mixed, though in light of the more than 8% plunge in the price of TSLA shares in the meantime, it’s pretty clear investors are less than thrilled with the proposal.
And that’s arguably as it should be. SolarCity is not just losing money. It’s consistently losing money despite strong annual improvements in revenue.
Fans and followers (and presumably owners) of SolarCity stock will be quick to point out that one owns SCTY not for where it is but for where it’s going. It’s difficult for anyone to truly know where SolarCity is going though — let alone if it will get there — when the organization’s business model is still in flux.
As for the specific numbers, SolarCity drove just under $400 million worth of revenue last year, losing $58 million in the process. The top line is expected to soar to $587 million this year and $841 million next year, but that’s still not apt to be enough to pull the company out of the red.
Oh yeah … SolarCity would also bring $3 billion worth of debt with it.
In other words, at best, SolarCity is going to be a money pit for the foreseeable future; it may be a money pit (as we know it) for even longer.
Reality Check for TSLA
But a conglomerate of like-minded companies can work together and be more efficient as a team rather than disparate entities? That’s certainly how Musk made a point of justifying the idea, saying:
“I think most of our customers have an interest in solar, I’d be shocked if they don’t. Tesla’s customer base will expand dramatically with the Model 3, [so] I think there are going to be a pretty huge number of customers where we can provide them the complete solution from energy generation, to storage, to transportation.”
And this is where the flaws in the logic start to appear.
Above all else, Musk doesn’t actually know how many of each companies’ customers also own or use a product made by the other company … a pitfall in itself. But, his estimate that only one-fourth of Tesla owners also own solar panels isn’t exactly a screaming endorsement of the idea.
The premise also ignores the reality that most consumers have to have a vehicle of some sort, and just bite the bullet when it comes to making a payment. No consumer absolutely has to purchase a solar panel system though, even if a PPA and attractive financing terms sweeten the pot.
Still, even if his logic doesn’t hold as much water as he’d like to think it does, there’s no denying such a pairing would present significant cross-selling opportunities. Musk already mentioned the ease with which the same crews that install at-home charging stations for Tesla vehicles could just as easily install solar panels and PowerWalls. Some observers have even suggested Tesla’s electric vehicle sales offices could double as venues to sell solar power systems.
That’s not necessarily a game-changing possibility though. In fact, the mix of two distinctly different products in the same sales office could cheapen the mystique of both.
And as for manufacturing efficiencies, none would actually be created. The merger is almost entirely a cross-marketing oriented one. The Wall Street Journal‘s Charley Grant and Spencer Jakab column Heard on the Street bluntly explained “(it) is the sort of move that, even for the most Panglossian Silicon Valley investor, stretches the bounds of industrial logic.”
Bottom Line for TSLA
While the steep selloff from TSLA shares since the acquisition idea was presented last night makes it pretty clear where owners of Tesla stock stand on the matter, there’s still a faction of shareholders in love with the idea. To them, a duo of obscure but relevant wisdom nuggets merit consideration.
The first is from Eric Sevareid, CBS news journalist for nearly forty years. He once opined “Better to trust the man who is frequently in error than the one who is never in doubt.”
Yes, Musk is a visionary, and has redefined what a car can be, but humility has never been his strong suit. So far it has not been too much of a liability. At some point though, his luck will run out.
The second piece of pithy advice comes from, of all people, poet Robert Frost. He once recommended “Don’t ever take a fence down until you know why it was put up.” If SolarCity and Tesla Motors were better off getting started on their own (even if just for focus reasons), how are they really better off together now?
The answer to that question requires at least a little detail, and not just assumptions.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
