Markets were shook up yesterday when Tesla Motors Inc (NASDAQ:TSLA) announced a proposal to acquire SolarCity Corp (NASDAQ:SCTY) for a 21-30% premium. Investors worried about a possible conflict of interest because Elon Musk, the CEO of Tesla, is also the co-founder of SolarCity and the largest shareholder. A contributor from EconMatters expressed his concerns with Tesla, which has cash flow negative generating business model and loses $7.83/share acquiring another company that loses $0.63/share.
Tesla is categorized as a Tech company, but the contributor states its books look more like a manufacturing company. Unlike most technology companies, Tesla has a low cash to debt ratio, with $1.4 billion in cash and $3.4 billion in debt, due to high inventory and capital expenses. SolarCity is in even worse financial shape than Tesla with less than $4 million in cash and over $3.2 billion in debt. The contributor predicts SolarCity will be bankrupt in a year and Tesla would have been better off acquiring a business with positive cash flows, a strategy Warren Buffett often implements.
Elon Musk is known to be a visionary and a risk taker, but the contributor states that there is a difference between risks and irresponsibility and would rather see Musk, “tempering his ambitions, so as to actually have a much higher probability of being successful.” Musk’s irresponsible actions remind him of David Crane from NRG who was fired because he couldn’t stick to a budget. Additionally, he is worried that Tesla may be headed down the same path as Sunedison Inc (OTCMKTS:SUNEQ), whose downfall began with questionable acquisitions.
Even if SolarCity’s board or the shareholders vote down the deal the contributor expects Tesla’s stock to go down. He thinks the proposed deal will “reinforce the fact that Tesla is going to be burning cash at a much higher rate because [it’s] actually a manufacturing company trying to build a business which doesn’t have a good consumer base.” The contributor expects to see debt levels increase and the quality levels of the cars decrease as Tesla attempts to increase production levels.
Regardless of the decision to approve the deal or not he predicts several stock dilutions and for the stock price to drop below $100 within 3-6 months, a decrease of around 50% from current levels.
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