Elon Musk has proposed fusing electric vehicle Tesla Motors and solar panel company SolarCity, both of which are headed by Musk, prompting critics to wonder if the move would be ethical.
“This is something that we have been thinking about and debated for many years,” Musk, who recused himself from the vote, said in a call with reporters Tuesday. “But the timing seemed to be right now” because Tesla is attempting to accelerate production of Tesla batteries, as well as introduce new products for SolarCity.
The move to meld the two companies has all the earmarks of being a family affair.
Musk’s cousin, Lyndon Rive, is SolarCity’s chief executive officer – Rive, who told reporters he would also be recusing himself from the “decision-making process,” said the offer represented a value of between $26.50 and $28.50 a share. “Ultimately, the shareholders will decide,” he added.
Yet, Kimbal Musk, Elon Musk’s brother, a director on the Tesla Motors Board of Directors, has yet to recuse himself from the voting process, despite the long history he and his brother have building Internet-based companies.
JB Straubel, the co-founder of Tesla Motors, is now on the SolarCity’s Board of Director, and has managed the design of the Tesla’s electric vehicles, focusing on their batteries, motor, power electronics, as well as their software systems. Straubel, despite his entanglement with both companies, has not announced a decision to recuse himself from the voting process.
Tesla, as it attempts to produce more than 400,000 Model 3 pre-ordered vehicles, isn’t expected to be profitable until 2020, and recently launched a share sale to raise $1.7 billion for capital expenses, according to The Wall Street Journal.
Despite the fact that SolarCity is perceived as the more viable of the two companies, Tesla’s proposed takeover comes at a volatile time. SolarCity’s stock prices tumbled more than 60 percent during the past 12 months, and it lost $283 million during the first three months of 2016.
SolarCity’s entire business model is predicated on leasing rooftop panels to homeowners for as long as 20 years, which gives the company a built-in revenue stream, whereas Tesla is now betting the house on the success of its supposedly wallet-friendly Model 3.
Musk claims the incorporation of the two companies is not meant to help finance the building of the Model 3, nor was it meant to prop up SolarCity’s flailing finances.
Tesla sold off $2 billion worth of stock in May to help finance the production of the Model 3 electric vehicle as well as cover tax obligations for the options exercised by Musk.
The California-based automaker will cough up roughly $1.4 billion in common stock to cover the expenses associated with the vehicle, and says it expects to raise a total of nearly $1.7 billion after fees, while Musk will receive the remaining portion, all of which will go toward covering the $5.5 million in stock options.
Tesla’s exotic financial instruments could complicate the acquisition.
Devonshire Research Group, a tech investment firm specializing in valuing and devaluing tech companies, shorted Tesla’s stock in late May after issuing a report stating the company’s financial model is a kind of “Ponzi scheme” strikingly similar to the one created by “Enron.”
“Tesla’s financing model is fragile; it is attempting to manage multiple financial instrument models under the same accounting umbrella — to our knowledge, one of the last companies to attempt this level of financial innovation was Enron,” a Devonshire Research Group’s report states. One minor “misstep in the next two years,” the group adds, “risks entering a death spiral.”
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