Tesla Motors Inc, SolarCity Corp Merger Shadowed By Lawsuits (SCTY, TSLA)

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A few Tesla Motors Inc (NASDAQ:TSLA) shareholders aren’t pleased about CEO Elon Musk’s plan to merge the company with SolarCity Corp (NASDAQ:SCTY), and they’re hoping the arm of the law can step in to intervene.

Tesla Motors Inc, SolarCity Corp Merger Shadowed By Lawsuits (SCTY, TSLA)

But not even lawsuits can put a damper on the long-term goals of Musk, who claims that the reasoning behind the merger is “blindingly obvious.” While SCTY is the country’s biggest rooftop solar panel installer, performance has been grim, with multiple consecutive quarterly losses.

But the biggest hurdle is the unusually intimate relationship between the two companies.

SCTY, TSLA Stock Combo Not Compelling?

To placate shareholders, this merger needs to satisfy the same two concerns that every investor has when they are considering an addition to their portfolio: does this bring something new to the table, and is the price right?

Musk argues fairly compellingly — on the first point, at least. He wants to scale lithium battery production to a level that justifies mass production of electric cars, so expanding into adjacent power markets helps that happen. TSLA can use that retail presence to sell a whole lot of power storage systems to back up the panels on the roof.

The problem is that Musk hasn’t been so clear in explaining why this particular installation company is essential to that strategy, or more importantly, how he arrived at the acquisition price.

SCTY is on track to lose close to $1 billion a year for the foreseeable future, so investors are already a bit anxious about the company’s assets. A cunning buyer would have let the company run low then swooped in to pick up the pieces at a deep discount.

Instead, Musk offered a price that seems to be on the generous side of “fair value.” And considering the company is owned by his cousin, Lyndon Rive, and run by a lot of people with TSLA boardroom connections, that generosity needs to be supported with due diligence, silencing critics with sound logic and reasonable numbers.

Unfortunately, Musk simply noted that he wanted an integrated roof-to-battery solution that looked “beautiful.”

That kind of statement is problematic because it can be used to conceal ulterior motives, like using TSLA shareholder money to shore up a relative’s stalled venture. It sends the wrong signal.

The entire process could have been run more smoothly in terms of investor and public relations alike, which is really where this deal starts to sting Tesla. Nobody likes to see the head of a company that’s trading at sky-high valuations making questionable decisions.

Wall Street pays a vast premium for TSLA stock because its disruptive potential can forgive a little eccentricity here and there, but at an implied multiple well above 100X forward earnings, investors are always going to get nervous when management starts rocking the boat.

Of course, with roughly $400 million of his own money sunk into SCTY, Musk is clearly committed to bolting the two companies together and rolling out that integrated residential power solution. One way or another, the deal is probably going to go through.

But if he wants to keep all of his current minority shareholders on board, he needs to go back to the beginning of the process and give a truly independent review of the solar industry, SCTY’s place in it and what kind of deal price makes sense from an overall ROI perspective.

That’s just going to take time.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/lawsuits-tesla-solarcity-scty-tsla/.

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