In today's Finshots we discuss the acquisition of SolarCity and see why Musk is being made to testify in court.


The Story

SolarCity made and sold solar generation systems. Like solar panels for instance. But the company offered its own twist to make the promise more appealing. The killer pitch was that they would revolutionize the industry by taking apart your ordinary roof — you know the ones made of old shingles and tiles, and replace it with state-of-the-art solar panels. Basically promising to co-opt the solar cells into your roof in a bid to harness the power of the sun

On paper the idea was great. It was simply brilliant. It had the potential to significantly accelerate the adoption of solar energy by bringing a more aesthetic solution to ordinary homeowners in the US.

But alas things didn’t quite pan out as they had hoped.

The company hit multiple roadblocks as they began prepping for a mass rollout. American roofs came in all shapes and sizes. Some were old, some were dingy, some couldn’t even hold the weight of the solar panels. You can’t standardize a product when there’s so much variation. Then there was the issue of mass-producing these panels in a cost-effective manner. The first prototypes weren’t cheap by any stretch of the imagination. Only a select few people could get their hands on the product and even they complained about the astronomical price the company was quoting to install and maintain the roof.

Soon it became evident that the company had probably overstretched itself, by making promises that were a bit too ambitious. And their financials weren’t exactly pristine.

But then, a ray of hope.

Elon Musk, the CEO of SolarCity and someone who held a sizeable stake in the company decided to do something drastic. He believed the entity still held a lot of promise and he was convinced it could shape the future of solar energy. So he decided it was best to merge SolarCity with Tesla.

And he kind of had a point. Tesla was in the business of selling electric cars. SolarCity was in the business of harnessing solar energy and generating electricity. Then there was the Tesla PowerWall — a battery system that could store energy for long durations. Put together, you have an opportunity to leverage a lot of synergies i.e. A Tesla car owner could use solar roofs to generate electricity and store them in a Tesla Powerwall.

As Musk himself elaborated in his “Master Plan” — “We can’t do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies. That they are separate at all, despite similar origins and pursuit of the same overarching goal of sustainable energy, is largely an accident of history. Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together.”

Eventually, Musk had his way and Tesla bought SolarCity for a whopping $2.6 billion. But unfortunately for Elon, a section of Tesla’s shareholders didn’t see the potential. All they saw were a bunch of red flags.

SolarCity was founded by Musk’s cousins Lyndon and Peter Rive. Also, Musk had a clear incentive to save SolarCity. He happened to own a 22% stake in the company and helped build the enterprise. Even SpaceX — another Elon Musk venture had lent the company big money by buying SolarCity bonds worth $255 million.

And since there was some conflict of interest here, a group of Tesla shareholders decided to sue Elon Musk and the board for $2.6 billion. They accused them of breaching their fiduciary duties and improperly using Tesla assets to acquire a loss-making company. Tesla and the board meanwhile insisted there was nothing sinister about the SolarCity acquisition. The company highlighted the fact that 85% of Tesla’s shareholders had voted in favor of the deal and pointed out how Elon Musk had voluntarily recused himself from the board’s deliberations when the deal was set to go through (although new evidence suggests that this bit may not have been entirely true).

However, considering they were suing for $2.6 Billion, the board of directors decided to settle with the shareholders for $60 million without admitting to any wrongdoing. The board of directors, except Elon Musk that is. Musk was adamant that he had done no wrong and he was willing to go to court to prove it. So right now, a judge in Delaware is reviewing evidence to see if Elon Musk was in fact guilty of any wrongdoing or if the acquisition was simply a strategic decision made without ill intent. That’s why Elon Musk was in court this week.

Until next time…

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