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Tesla s purchase of SolarCity is a bold bet, but a worrying one
Jun 25th 2016 | From the print edition
ELON MUSK, a South African entrepreneur, embodies the creative daring of
Silicon Valley. He has defied sceptics and overcome setbacks over the years,
all the while pushing on with innovations of improbable ambition. Yet even a
man of his self-belief will have been taken aback by the negative response to
an announcement on June 21st that Tesla Motors, the electric-carmaker and
battery-manufacturer he runs, would buy SolarCity, a company that makes solar
panels and that counts Mr Musk as its largest shareholder. Tesla will pay with
up to $2.8 billion of its own shares if investors vote the deal through (Mr
Musk says he will not take part in the ballot).
Mr Musk s pitch is that combining Tesla and SolarCity creates a vertically
integrated energy company that can sell consumers all they need for green
living. The rich and virtuous can already buy an electric car from Tesla, and a
Powerwall, a battery that stores solar energy and powers the home at night. A
combination of Tesla and SolarCity could put solar panels in the carmaker s
retail stores, expanding SolarCity s range of customers and helping them charge
their cars in a cleaner way.
Investors were unconvinced. The day after the announcement Tesla s shares fell
by around 10%, shedding some $3 billion from its market value. Some think the
deal looks suspiciously like a bail-out for SolarCity, which has been losing
money and failing to hit targets. The firm s debts and the fears of some
analysts that California, its biggest market, is becoming swamped with solar
panels make any synergies pale in comparison with the risks.
SolarCity and the larger, more successful Tesla, are also ravenous for new
capital. The carmaker recently announced plans, met with widespread
incredulity, to double its production target for 2020 to 1m cars. Combined, the
pair would burn $2.8 billion in cash between them in 2016 alone, says Barclays,
a bank.
The deal shows how Mr Musk, chairman of SolarCity and boss of both Tesla and
SpaceX, a rocketry firm he founded, is willing to combine his professional and
personal interests. That has advantages. Mr Musk is one of the world s busiest
bosses. Combining two of the three firms he cares about could, in theory, focus
his energies, streamline decision-making and bring his assertive personality
more effectively to bear on promoting the companies.
There is a downside, though. SolarCity was founded in 2006 by two of Mr Musk s
cousins, Lyndon and Peter Rive. Lyndon is the current boss. When SolarCity was
trying to raise money this year and last, SpaceX quietly bought most of the
bonds on offer. Mr Musk has also taken out around $500m in personal credit
lines and bought shares in Tesla and SolarCity when they needed capital. This
network of ties allied to Mr Musk s tendency to make expansive promises and
willingness to use unconventional manoeuvres makes some investors
uncomfortable.
Mr Musk s risk-taking has paid off in the past. He put around $180m (which he
got from the sale in 2002 of PayPal, a firm he co-founded) into Tesla and
SpaceX, and struggled to keep them afloat when they ran into trouble in 2008,
forcing him to borrow money from friends. His confident, all-in bets have made
him a Silicon Valley star. This latest one is a high-stakes strategy that could
tarnish his image, whether or not shareholders vote against it.