Tesla and SolarCity: For Elon Musk, it's Personal (and a Family Affair)

Jim Motavalli

Jim Motavalli | Jun 23, 2016

Do you think Elon Musk wants to buy SolarCity and combine it with Tesla Motors because he’s, you know, really into photovoltaics? Well, maybe there’s some of that. But this is personal, and a family story, pure and simple.

Elon Musk, thinking about the implications of a Tesla/SolarCity merger. (OnInnovation/Flickr)How so? Well, SolarCity CEO Lyndon Rive is Musk’s first cousin, and the idea to create the company was Musk’s—with plans hatched out on a trip to the wild Burning Man festival in Nevada. Musk subsequently became chairman of SolarCity and its biggest investor. He’s wanted to do this deal for a long time, notwithstanding the fact that he’s already running two other companies. (You didn’t forget about SpaceX, did you?)

The merged companies will bear the Tesla name, with up to 30,000 employees. Wall Street seems undecided about whether the $2.8 billion all-stock deal makes sense. Predictably, SolarCity’s stock went up three percent, but Tesla’s lost a tenth of its value, cutting the company’s valuation by a whopping $3 billion. It’s taken dips like that and promptly recovered, because Tesla remains, rightly or wrongly, an unbeatable glamour stock.

Rive told me:

The idea came about in 2004 as Elon and I were driving in a car toward the Burning Man festival in the Nevada desert. I told Elon that Peter [his brother and also Musk’s cousin] and I were tired of enterprise software [they eventually sold their company, Everdream, to Dell in 2007] and wanted to do something with environmental impact. His recommendation was to look at solar. When we got back from Burning Man I told Peter about it, and he loved the idea. We launched SolarCity two years later.   

 When I talked to him in 2014, Rive seemed in awe of Musk’s intellect, which comes with the ability to quickly focus on big-picture issues and find the flaws. Musk is “definitely an advisor,” Rive said. “We go to him with challenges, and he sees us through them.” Asked about the deal today, Rive says he’s “very excited,” though like Musk he’s recusing himself from actually voting on it. 
Lyndon Rive: Elon is his Burning Man running buddy, and his most trusted advisor. (Steve Jurvetson/Flickr)Tesla and SolarCity were already close and working together. The solar company has been selling Tesla’s lithium-ion batteries to store electricity from its intermittent source.

Most normal people wouldn’t even contemplate running three companies simultaneously, but as readers of Ashlee Vance’s biography are well aware, Musk is far from normal. Woe to the employee who comes to him with excuses for not getting their job done. Musk tells the hapless employee he’ll take on their job, despite the fact he’s CEO of two companies, and get it done on time and under budget. Anyone who doubts that hasn’t met one of the world’s most driven executives.

There’s definitely synergy in the deal. In addition to SolarCity selling batteries, Tesla can market photovoltaics to make its car charging a 100 percent clean energy loop. Musk said during an analyst call, “I have no doubt about this—zero. We should have done it sooner.” He added that it won’t affect Tesla’s financial position, and “amplifies the possibilities for both companies.” Casual discussions about the merger have been going on for years, he said.
Musk has multiple distractions, including launching the Model X (left) and getting ready for the Model Three (right). (Steve Jurvetson/Flickr)The naysayers have a point, however. Everyone agrees that Musk is a genius, but both Tesla (soon to launch its all-important Model Three) and SpaceX (focused on recovering its Falcon rockets) are making heavy demands on his time. The guy apparently thrives under pressure, but this is a bit ridiculous. Also, buying SolarCity will take available cash away from Tesla, which still suffers from a big burn rate. Combined, the two companies could run through $5 billion annually.

“This deal feels like [Musk] has lost his Midas touch,” complained Jeffrey Gundlach, chief executive of DoubleLine Capital (not a Tesla investor). “I also feel like Musk is trying to do too much.” But Joe Dennison, a portfolio manager at Zevenbergen Capial Investments (which does own Tesla stock) praised the deal as “a natural evolution of their mission to transform transportation into a sustainable business.” He said that analysts who actually own the stock understand Tesla’s long-range vision.

I talked to Sam Abuelsamid, a research analyst at Navigant Research, another negative vote. “In a word, no, it doesn’t make sense," he said. "Both companies are in a weakened financial state and well short of sustainable profitability, with a high cash burn rate. Of the two, SolarCity is in a more precarious position, although Tesla has substantial capital commitments in the next few years as it develops the Model Three and attempts to ramp up production by an order of magnitude.”
Elon Musk (right) with his cousin Lyndon Rive at a SolarCity event. Musk had the idea for SolarCity, and is both its chairman and its biggest investor. (The NASDAQ OMX Group, Inc.)Abuelsamid says that Tesla could achieve the same solar synergies without actually buying his cousin’s company. The two companies were already working together.

My own guess is that Musk will indeed be distracted, and SolarCity will be an initial drag on the bottom line, but the deal could prove prescient in the long run. To me, it certainly doesn’t feel like it's fatal to Tesla’s prospects.

Right now, the solar company, hit by declining federal and state incentives, is losing money. It went public in 2012, and had a net loss of  $375.2 million last year. But solar leasing (acquiring a rooftop array for no money down, through a power purchase agreement) remains an attractive option. SolarCity pioneered the approach, but it has a lot of competition now.

Ultimately, this is a deal made with the heart, not the head. That’s not a condemnation, just an interesting fact. As of this writing, Tesla stock (after taking the initial hit) is holding steady (at around $190 a share; it actually went up a dollar on Thursday). But some investors, who took the initial hit, are speaking out. Here's one on Fox video:

 

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