Family business: Tesla to acquire Solar City. Is Musk right or not?

SolarCity Lyndon Rive, left, with his PayPal cousin, Elon Musk

Elon Musk (left) with his cousin Lyndon Reve CEO of Solar City

Only a week ago Elon Musk, founder of Tesla, Solar City and SpaceX, announced a $ 2.8 billion bid for the acquisition of Solar City by Tesla, disrupting the financial markets and all the high tech media. Tesla, just while approaching the mass automotive market with its Model 3, placed a daring bid to acquire the sister company Solar City with an overprice stock assessment (aprox +20% above the market value).

Important media criticized the operation: the Wall Street Journal has written that the “transaction has no industrial logic and shows weak governance” both for the overpriced stock value and the weakening of the current companies balance and hierarchy as well as the production routines. Not to mention the cash hungry attitude of both the companies, with a huge debt and a continuous loss registered every year, due to the increasing amount of R&D spending and investment.

solar city stock price

How the financial markets reacted to the news

Investors too aren’t very confident about the smartness of the move. SolarCity’s shares have edged up by just 5 percent to $22.20 since the all-stock bid was made, well below the $23.56 to $25.30 currently being offered by Tesla. Meanwhile, Tesla’s stock has sank by 12 percent to $193.15. Many observers pointed out that is quite usual when a company is targeting another one in a merge operation, with the target company experiencing a stock price increase, but other observers are interpreting this as a lack of confidence widespread.

tesla model 3

Tesla model 3

Actually is only one more step beyond in the Muskonomics universe we’ve been into with a detailed analysis few weeks ago. The three companies are strongly connected each other in a Japanese-like model that is pretty close to the keiretsu. Practically Musk tied up the companies through strong connections in financial and production aspects. Every manufacturing startup (like Tesla and Solar City) is usually making its best efforts to gain scale, increase the production and sales volume and consequently gain a better bargaining power on labor and supply, together with a lower production cost per unit and a strong capital basis to finance R&D and technology investments.

Tesla move could be a wise approach to the growing battery market, while its Gigafactory project is years away from hitting the complete production volume target. Actually not all the commentators agree on criticizing the last Musk out of the box move: Techcrunch interviewed several importat hi tech market players and collected also positive feedbacks. Many commentators agree on expecting few changes in the way the companies do business even after the transaction is completed, even to keep the companies independent and working. It could be a winning bet on the growing battery market and will lead hopefully to the future keen integration with the Tesla car models.

Time will say whether Musk is right or not, meanwhile we’ll wait and see how the investors react to the potential conflicts of interest that could have a negative impact on the whole operation.

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Solar City crew at work

 

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