Soler city
Tesla's purchase of Solar City in November of 2016 was easily their biggest and definitely most controversial acquisition to date. The proponents pegged it as the last critical piece of vertical integration for Tesla to produce products from sustainable energy generation and storage to consumption. The detractors said it was pure corporate fraud and a 2.6 billion dollar family bailout.
Solar City was launched in 2006 with a 10 million dollar investment from Elon the initial business model was to drive costs down in the industry by controlling everything from the sale to installation with third-party manufacturers providing the actual panels. They hired 150 employees the majority of them construction workers and within a year they were installing around 70 solar systems per month in Northern California. The key part of the business model was allowing customers to lease the panels instead of purchasing them outright other companies had explored the notion but no one was able to bring it to the residential market Solar City kept at it and found a way to develop an arrangement where the homeowners were not required to make any down payment. Solar City handled all of the upfront costs consultations rooftop layout blueprints and the installation of the panels working with banks to help front the necessary capital in return Solar City would get long-term recurring revenue with the homeowners paying them back over the course of a 20-year lease had a monthly cost that would hopefully be lower than a traditional utility bill a big part of what made this model feasible was the 30% federal solar tax credit. Which Solar City could claim on the value of each installation Solar City went public at the end of 2012 at $8 a share and the stock surged 47% on the first day of trading as the company was effectively doubling its sales each year. In early 2014 it had more than 70,000 customers and the stock hit $86 a share in all-time high. SolarCity was a clear industry leader owning a third of the residential market in dling more installations than the next 50 competitors combined even Google got involved investing 300 million to fund some of the installations as a means to take advantage of the Associated tax credits shortly thereafter however with the rise of two polarizing executives the company culture underwent a dramatic shift. Many employees said the atmosphere became testosterone-fueled and sales obsessed some compared it to tree huggers getting replaced with a fraternity house with the sales team demographics becoming more male-dominated in addition to this some inside the company grew leery of the zero money down concept many felt the concept was just a way to hook customers without any concern of whether the customer would follow through with the actual lease purchase. A former sales director said quote essentially you had all these poorly trained reps saying just sign here don't worry you can cancel anytime people were treating it like signing off on an iTunes terms and conditions end quote
In addition to this the company publicly said it was changing the business model in an attempt to become profitable rather than focusing on simply doubling sales each year as they confessed it was going to be difficult to keep growing at that rate the plane was this instead of leasing the panels to homeowners their core strategy would now be to sell them primarily through loans which would lower solar city's burden of debt. This means that customers would own their systems no more monthly payments eventually the once industry-leading success ran into major financial challenges at one point the stock dropped 77% from its February 2014 peak the debt had snowball to 3.4 billion the sales growth had slowed and they faced a major cash crunch with regard to a Solar City conference call in 2016 Jim Cramer said on CNBC afterward quote this a company that I regard any first class crisis that acts as if everything is fine. It was the worst conference call of 2016 end quote.
In steps Elon Musk which unfortunately is the crux of the situation at the time of the acquisition Elon was Tesla's largest shareholder owning 22% of the stock as well as being chairman and CEO. He also happened to be Solar City's largest shareholder at the time holding approximately 22% of their shares as well. Solar City was founded by Elon Musk's first cousins Linden and Pete arrived. Who have both left the company within one year of the acquisition. As SpaceX chairman Elon also purchased 90 million dollars of Solar City bonds in March 2015, 75 million in June 2015 and another 90 million in March 2016. These purchases were said to have violated SpaceX's own internal policy and SolarCity was the only public company in which SpaceX made any investments. Tesla was also going to have to take on almost three billion dollars in SolarCity debt and they were burning more cash than Tesla despite being one tenth of their size at the time. These factors combined with the financial risk of Solar City gave the impression too many shareholders that this was a family bailout given the conflicts of interest it came as no surprise that amid the controversy a judge granted a group of shareholders permission to pursue their lawsuit almost immediately after the acquisition closed Solar City's auditors at Ernst & Young confirmed that Solar City was in fact insolvent. Their year-end audit conducted in January 2017 determined that Solar City did not have sufficient cash to meet its obligations and could not operate on its own. Tesla shareholders filed suit in the Delaware Court of Chancery in 2017 where most complex corporate merger related litigation happens. The suit argues that Elon used his influence as director and controlling stockholder to push the Tesla Board to pursue the transaction using faulty data and without doing sufficient due diligence. Which was in violation of his fiduciary duty to the shareholders. The plaintiffs in the suit Tesla Motors and core berated stockholder Litigation are using the analysis as part of their case to illustrate the web of conflict and to show that Ilan was desperate to save all three companies when Solar city's growth slowed and debts mounted newly unsealed documents in the lawsuit portray Solar City as being completely insolvent not just carrying a heavy debt load. They also show that Elon knew at the time of the acquisition that Solar City was facing a liquidity crunch according to emails between him and X CFO brad bus
Accounting firms are supposed to act as independent auditors but in the end it's the audited company paying their bills and while they won't outright fabricate a report there is somewhat of a tendency to accommodate certain accounting decisions made in ways that are not optimal for external parties. In this case the shareholders who are interested in the financial health of the company. The shareholders also allege in the suit that Elon planned the unveiling of a product that did not yet function the Solar glass roof tiles to convince investors that there was real intellectual property and a product close to commercial viability speaking of this during alongs first deposition on june 1st 2019. He acknowledged to the court something he had never disclosed to shareholders that the company reallocated every possible employee from the solar division to work on the model 3 ramp a move that effectively starved the solar business and ruined any chance of growth. This included everyone from engineering management sales and service. Elon also revealed that as of June 2019 Tesla had not yet made the solar glass roof tiles into a commercially viable product keep in mind the solar glass tiles presentation was back in 2016. A few directors of Tesla involved in the lawsuit have recently settled. This leaves Elon as the lone remaining defendant facing claims that Tesla paid 2.6 billion dollars for a worthless solar energy system installer.
According to the court documents the five directors including Robin Denholm and Kimball musk settled for 60 million dollars which came as the 10-day trial was scheduled to start on March 16th in Delaware with the shareholders seeking the full 2.6 billion dollars in damages. The suit is being pursued at this point by an individual investor in five investment funds. At the heart of the current case are allegations that Elon and other board members did not fully disclose the depth of solar city's problems or their own internal cash constraints at the time within Tesla. This acquisition was however of course approved by a majority of shareholders so as with most stories there is another side. Joining Tesla and SolarCity was central to the continued execution of Elon's master plan. Which aimed to provide customers full-stack in-house solutions to owning their own energy production storage and consumption.
Combining companies allowed both entities to have easier and more efficient collaborations and discussions and Elon said that they would now be able to make decisions immediately instead of having to wait a couple of weeks. Tesla plan to reduce customer acquisition costs by cutting advertising spending selling solar products in tussel stores and shifting from leasing to selling solar energy systems. Which would be a continuation of the business model shift that Solar City wanted to implement before running into problems. It was supposed to be an opportunity to create the only vertically integrated sustainable energy company from a solar city panel to a Tesla battery the in-house supply chain would scale up clean energy for all and provide cost synergies to the businesses and shareholders. These synergies were at the heart of the acquisition which ended up being an all-stock deal in which Elon Solar City investments were converted to about 500 million dollars in Tesla stock as a result of the deal.
There are still many eyes on gigafactory Buffalo many residents and locals are tracking the story closely as they were promised thousands of high quality jobs many of which are yet to come to fruition. Many locals there also want to become a part of the future rather than being stuck hoping for a revival of industries of the past. This story is clearly open-ended and is one that deserves far more attention than it gets. It's Tesla's biggest acquisition and could be argued as elands biggest misstep given the current status of things it can also be argued that if Tesla's solar glass roof tiles become a hit and Tesla can deploy the necessary resources to grow this division that this deal is what ultimately takes them to an entirely new level becoming the world's first fully integrated bull solution sustainable energy company only time will tell.
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