Drama Aside, Tesla’s Acquisition of SolarCity Makes Sense

by | Jun 28, 2016

teslaThe proposed acquisition of SolarCity by Tesla Motors, which was announced last week, may not happen. Indeed, the commentary in the of the coverage suggests that the odds are at least a bit against it.

Whether it closes or not, the proposed deal is a tangible example of how technology crosses industry borders. Of course, Tesla and CEO Elon Musk made their biggest mark in the electric vehicle arena, not in the building energy management sector. But a key element of Tesla’s portfolio – advanced batteries – is increasingly important in buildings.

The deal makes sense because the core technologies and the evolution that has to happen are shared. However, it could crater because of the nature of the relationship between the two companies and questions about whether investors of both are well served by an acquisition.

The acquisition, which must be approved by the companies, would take the form of an exchange of SolarCity and Tesla stock. Tesla would pay a premium of 21 percent to 30 percent on SolarCity’s valuation of $2.14 billion. The total value of the deal would therefore be $2.59 billion to $2.78 billion.

Skepticism on the deal springs from the close relationship between Tesla and SolarCity, which starts at the top: Elon Musk is chairman and owns more than 20 percent of both companies. There are many other close ties between the two firms. CNBC reports that “five of SolarCity’s board members work at Tesla, are on Tesla’s board or are related to someone who is.” Lyndon Rive, SolarCity’s CEO, is Musk’s first cousin.

Today, in an effort to sort through it all in a way that will satisfy investors and regulators, two people – Donald Kendall and Nancy Pfund – have been given full authority to decide on the deal by SolarCity’s board.

The deal, to say the least, is far from being a done deal. Indeed, Tesla appears to be girding for a fight and anticipating challenges, according to Fortune:

Still, behind the scenes, Musk and Tesla were making moves that indicate they will try to push the deal through over the objections of shareholders—and that they are gearing up for a bitter fight. On Monday, the same day that Tesla made its offer to SolarCity, the electric car company’s board amended its corporate bylaws, mandating that future lawsuits against it take place exclusively in Delaware courts. Such “forum selection” provisions have become increasingly common among publicly-traded firms, which adopt them “when they expect litigation might be on the horizon,” says Minor Myers, a professor at Brooklyn Law School specializing in M&A lawsuits.

The legalities and regulatory implications of such an arrangement will sort themselves out during the next few months. Regardless of the outcome, the driver of the deal – Musk’s desire to more closely marry Tesla’s energy storage capabilities with the solar technology that collects that energy – is important. Energy storage for structures is not new for Musk. Tesla offers Powerwall and Powerpack battery storage technology for residential and commercial/industrial use, respectively.

Musk is a forward thinker. After all, he is planning a manned mission to Mars. The idea behind the interest in SolarCity is a big one that is based on a couple of major evolutions. One is that renewable energy isn’t produced on a precise schedule: The sun is shining or it is cloudy, the wind is blowing or it is calm. Having a way to save solar energy is pivotal – and it wouldn’t be a surprise to see Musk get into wind power and other renewables as time moves on.

The other change is that net-metering, time shifting and other changes in the way energy is distributed put an immediate premium on the ability to store that energy as a precursor to doing something lucrative with it. From that perspective, the marriage of SolarCity and Tesla – potential conflicts and related issues aside – makes perfect sense.

SolarCity, which is one of the companies competing in the race to create the most efficient solar panel, is building a high tech facility in Buffalo, NY. The Buffalo News said that Musk mentioned the plant as a key to reducing the costs and speeding the adoption of solar energy.

It is possible that the Tesla/SolarCity deal will not be consummated. In the long run, however, the tie between advanced storage and renewable energy is strong and getting stronger.

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