Tesla Motors Inc. (NASDAQ: TSLA) reported on Monday that it had agreed to buy SolarCity Corp. (NASDAQ: SCTY) through an all-stock deal valued $2.6 billion, which is also Elon Musk’s electric-car company combine with his solar-energy company.
Elon Musk, the chief executive of Tesla, owns about 21% shares of SolarCity, is also the chairman and the largest shareholder in both companies. His cousins Lyndon R. Rive and Peter J. Rive are SolarCity’s chief executive and chief technology officer, respectively.
Independent members of both boards approved this deal with $2.6 billion based on last week’s average price, according to Tesla. SolarCity shareholders would receive 0.11 Tesla shares per SolarCity share. SolarCity shares fell Monday morning, diving 7.33% to $24.74, and Tesla shares were down 1.08% at $232.25.
Tesla believes the combination would accelerate Tesla’s transition from electric-vehicle automaker into an innovated energy products company. It plans put electric vehicles, rooftop solar systems, energy storage batteries for homes and businesses, and software systems that tie everything together, all under the banner of a single company. This merger would also double Tesla’s workforce to nearly 30,000.
While the combination between Tesla and SolarCity would raise some potential problems, like money troubles. The new company would tie up two-money losing entities, dependent on borrowing from the market together, adding potential for risk along with its opportunity to vertically integrate its products. Neither company is profitable and, more seriously, cash flow is being sustained more through drumming up investment capital and less through product sales.
Tesla said that a joint company would plan to cut about $150 million in costs through the transaction in the first full year after the deal closes. Tesla may want to reduce the SolarCity’s cost but balanced by Tesla’s strong brand recognition and retail store locations. They expect customers to benefit through lower hardware and installation costs, and plan to use Tesla’s 190 stores to expand SolarCity’s reach.
In addition to shareholder approval, both companies must receive regulatory approval. If they obtain all necessary closing conditions, the deal is expected to be completed by the end of the year.