His Leash Has Shortened

Tesla Motor's bid to acquire SolarCity makes little strategic sense to outsiders but does enhance the personal fortune of billionaire Elon Musk, who is the Chairman of both businesses. [bold added]

Aside from the familial connection and clean energy angle, there’s not much in common between the two companies in terms of synergies that make this deal logical. Seabreeze Partners’ Douglas Kass expects it to go through, but warns that it was “likely done out of desperation, as Solar City was probably on the way to extinction,” given its debt-heavy balance sheet and negative cash flow.

Jim Chanos has harsher words for Tesla. On CNBC, Chanos today called the deal a “shameful example of corporate governance at its worst.”

Given the state of SolarCity’s finances, and the ambitious Model 3 production schedule, further shareholder dilution may be possible even after the deal closes. Barclays’ Brian Johnson writes that the deal simply magnifies “the losses and cash burn” at both companies and it’s “far from certain” that the equity capital market would remain an “open well” for Tesla. SolarCity’s high cost of capital, which would only increase, it seems, without the deal, looks like an important factor in Musk’s decision to buy it.

Shares of both TSLA and SCTY have plunged this year.

Elon Musk controls both companies, so the motivations behind the merger look more financial than synergistic (he could have coordinated their businesses without this action). Mr. Musk risks tarnishing his image as eco-visionary by looking like a money-grubbing capitalist out to rescue a troubled investment through wheeling and dealing; SolarCity's declining financial condition will be masked by the bright light of Tesla.

Elon Musk's track record so far has earned him the benefit of the doubt, but judging from today's market reaction (TSLA dropped 10.45%) his leash has shortened.