The Tesla and Solarcity Acquisition from Start To Finish


The Tesla and Solarcity Acquisition from Start To Finish

Merging Tesla and Solarcity together would seem to be the best choice for business. Even though it may seem like it would be wise in the beginning, one of the businesses would rapidly decline in the end.

Tesla was able to come to a deal with Solarcity by buying the majority of its stocks from a $2.6 billion deal. Elon Musk knew that combining the companies together would allow them to succeed in the high profit margin.

When making an attempt to buy stocks from a company, pursuing a deal that would be beneficial for any company will always come at its price. Allow us to explain how Tesla and Solarcity became a successful solar-based company!

The Beginning of a New Business Venture

Before Musk had decided to reach out to his cousins at Solarcity, he had always wanted to invest in marketing solar products.

According to Business Insider, “The overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy, which I believe to be the primary, but not exclusive, sustainable solution.”

Musk thought it would be wise to pursue this business venture because it would play a part in his solar plan. As a part of his solar plan, Tesla would be co-marketing renewable energy products along with his cars in an attempt to provide zero emission electric power that would generate multiple options that would contribute to his plan.

This would bring him one step closer to creating a solution for improving the Earth’s atmosphere from the dangerous pollutants that invade its space. Once he heard of the continuous fall of Solarcity, this would give him an opportunity to step in and not only save his cousin’s company, but also help the environment.

The Near Fall of Solarcity

Before it became a subsidiary of Tesla, Solarcity was a company that specialized in selling solar panels and roofs. The company was doing fairly well with its sales. At some point, however, it began to run into woes with their sales and finances.

According to Fast Company, “Its stock, once unstoppable, had dropped roughly 77% since its February 2014 peak. Its debt had mushroomed to $3.4 billion, sales growth had slowed, and it faced a cash crunch.”

On the brink of ruin and bankruptcy, Elon Musk decided to step in and offer his help and support to his cousins by offering to purchase Solarcity from them as a subsidiary of Tesla. The choice would be up to Peter and Lyndon on whether they would want to save their company from financial collapse, or help it rise and succeed in the profit margin.

The Proposal to Solarcity

The next step in the attempt to acquire Solarcity for Tesla was for Elon Musk to extend an offer to his cousins that could save their company. Musk would offer Peter and Lyndon a whopping $2.6 billion to purchase their company from them to combine with Tesla.

This deal is not only beneficial for the Rive brothers to save their company, but they could capitalize off of the sales they would earn with Tesla. This made sense because both companies share one common goal: to sell products that can create a healthier environment that will be more eco-friendly.

According to Tesla, the added benefit of the companies merging together would help create the only vertically integrated renewable energy company in the world. Tesla would offer storage while Solarcity would offer products that are completely integrated into three different parts:

  • Residentially
  • Commercially
  • Grid-scale

Both companies would be able to benefit from this deal in the long run, but it was up to the shareholders of each company to come to a mutual agreement and approve the proposal.

The Approval of the Deal

As previously stated, the last step in Musk acquiring Solarcity to become a part of his growing empire was to get the approval of the shareholders from both companies. One thought that prolonged the process was the question of the potential fallouts that could happen from this deal.

According to the New York Times, in the eyes of the Tesla investors, approving the deal to purchase Solarcity would be seen as a bailout that may not have been worth moving forward with in the end; but their thoughts would later change.

Musk convinced his fellow shareholders the profits that would be achieved if they approved of their deal. The companies’ combined would create a green-energy company that would sell products that would be more energy efficient. What the companies would do together included:

  • Selling electric cars
  • Selling solar panels for homes
  • Creating cars with solar panels to conserve energy

More than 85% of Tesla’s independent shareholders saw the opportunity from Musk’s perspective to expand the company while excelling in the profit margin at the same time. Therefore, they all voted in his favor and approved the deal.

How Merging the Companies Would Benefit Them Both

The opportunities and benefits that came out of Tesla and Solarcity merging seemed beneficial in more ways than one. Merging the companies together helped them excel in the following areas:

  • Strategic rationale
  • Financial gain
  • A better execution for marketing

Let’s look at how each area will profit and help the companies excel.

Acquiring Solarcity Provided Strategy for Profit

As previously stated, Tesla has become the only integrated sustainable energy company in the world. With Tesla merging with Solarcity, the solar roof and Powerwall 2 was primed to create, develop, and transform energy generation and storage.

Solarcity Takes Off on the Profit Margin

Merging Solarcity with Tesla would prove to be an added bonus to Tesla’s sales while also giving the boost that Solarcity needed. Solarcity managed to increase its cash from Q2 to Q3 in 2016. They anticipated that it would continue to increase to Q4 that same year, which eventually it did.

The Start of Legal Troubles

It may have seemed like the start of merging Tesla and Solarcity together would be best for business initially, but things would end up going from good to bad.

Solarcity promised to provide nothing but the best for their customers and would provide cost synergies for both businesses and shareholders; but the trouble would start with financial woes.

Deep Debt Plagued Solarcity

Solarcity had gone into deep financial debt. According to Arstechnica, “Newly unsealed documents in an investor lawsuit say the situation was far worse than that. They allege that SolarCity wasn’t just carrying a heavy debt load: it was completely insolvent.”

Some of the shareholders within Tesla believed that if they were going to sell some of their stocks over to Solarcity, they expected to get the profit back from the sales in return. Gradually over time, the sales were not being met at the quota that it was supposed to.

This would lead to some of the shareholders taking legal action against Solarcity. In August of 2020, the case was ruled in the favor of the shareholders with a $60 million settlement.

Depleting Sales Equals Unsatisfied Customers

The fact that Solarcity was not profiting in the sales like they promised was validated by the feedback they were getting from their customers.

According to reviews from Consumer Affairs, the majority of the customers were less than happy with the service they had received. One customer had an issue with scheduling an appointment with them to repair their roof and they did not get it repaired until two months later.

Another customer stated that they had just purchased a new solar panel system and it went out after only three weeks. It took another three weeks before Solarcity came to their home to troubleshoot the matter, but they still had to pay PG&E and the financing charges for the solar system once a month.

When asked if they could be reimbursed for those fees, they were told that Tesla doesn’t guarantee production of their solar systems.

The other reviews on the site pretty much fell in line with the other customers who gave negative reviews.

Out of the majority of the reviews, there were only a few that were positive. The flaws that are shown on the surface when it comes to providing excellent customer service is another indication that Solarcity is not meeting some of their customers’ expectations.

Hanging by a Thread

The value of Solarcity’s products and services for their customers continue to display nothing but poor results for Tesla. It was reported that Solarcity was worth approximately $5 billion, but other evidence seems to negate this information.

According to Forbes, “Tesla’s energy generation and storage segment only generated $375 million in revenues in the first three months of 2018. Some of those revenues were composed of sales of Tesla’s Powerwall residential battery product and in larger-scale energy storage projects.”

To better understand what this means, the energy generation and storage only run off of battery cells where Tesla is obligated by contract to purchase these from Panasonic. In order to succeed in these sales, Solarcity would have to provide those products, but they only sell solar cells, which wouldn’t suit that metric.

This adds on to the terrible sales and the unsatisfactory customer service that has been provided to hundreds of thousands of people. Solarcity continues to move down a slope of failures that might ultimately lead them to their demise.

On the Path to a Horrible End

Solarcity continues to fail in meeting the expectations of both customers and shareholders. Now there are other areas where they fail to satisfy everyone that could lead to a possible end for their company.

According to Fool, Solarcity was suffering in other areas, too. All of which include:

  • Shrinking cash-flows
  • Gross margins that were lower than expected
  • Cost-cutting

Solarcity was on a dangerous path to the destruction of their company, and things would eventually take a turn for the worse. On March 1, 2019, the company announced that it would be closing the majority of its stores across the United States.

There are other contributing factors that played a role in Solarcity being on the verge of bankruptcy once more. In order to provide a better understanding of their continuing downfall, we will further elaborate.

The Loss of Sunrun

Shortly after Tesla purchased Solarcity, the pricing for their products went lower, which would not help improve their sales one bit. At the beginning of 2017, Solarcity stopped selling their solar panels from door-to-door. In the same year, they would lose their top installer for their products: Sunrun.

This was only the beginning of a series of obstacles that would later happen for the struggling company. But things would only continue to go downhill from there.

Tesla Cuts Ties with Home Depot

Seeing that Solarcity was struggling to stand on its own, Elon Musk made the decision to partner with Home Depot to try to boost their sales in February of 2018. They would sell their products in kiosks in approximately 800 of Home Depot’s stores, but the collaboration would soon be cut short.

In June of 2018, Musk decided to discontinue their partnership with Home Depot. Musk came to this decision because he wanted to concentrate on selling their products through their stores and online only.

Tesla Carries the Weight for Solarcity

Today, Tesla has only suffered a minor setback due to Solarcity. And although their vehicle sales were down, they would eventually make a comeback from. According to Statista, annual deliveries for Tesla would increase by 36% from 2016 up to now.

The company was not able to meet their sales quota of 500,000 cars being sold by the end of the year unfortunately. However, they were still able to reach their percentage goal for each year since 2016.

During this time, they achieved their goals of obtaining $1 billion in their financing projects, but the credit could not go to Solarcity. Solarcity was heading down a decline in sales and customer service and they haven’t had much luck getting back on their feet.

Since they continue to show lack of improvement, this leads Tesla to pick up the slack to keep things going for both businesses.

Tesla Succeeds in Executing Their Goals

Tesla managed to successfully achieve profitability with the Generally Accepting Accounting Principles (GAAP) and accumulated a free cash flow during the third quarter in 2016. They also managed to pay off their convertible debt of $422 million while also adding in a third-party leasing capacity in the total amount of $675 million.

Achieving goals like this in any business is incredibly hard, and the level of incompetence from Solarcity’s end didn’t make things any better.

With the right strategies, Tesla was able to carry the weight and managed to pull through with the best marketing and sales tactics that would get them out of the hole. With the financial slump on Solarcity’s end, it became clear that Tesla would be better off working on its own.

Gradually Phasing Out Solarcity

The business that Solarcity would continue to provide would only get worse. After closing the majority of Solarcity’s stores, Elon Musk decided that they would only be selling their products via phone and online.

This would leave Tesla’s website as the only source of sales for solar installation. Since this decision was made, Solarcity does not appear anywhere on Tesla’s website.

The only place you can find a reference to Solarcity is through Tesla’s archives and reports. Their name is also listed again in financial statements as “Energy Generation and Storage.”  Now, they are only listed on the site simply as “Energy.”

This further emphasizes the deterioration of Solarcity’s business. When they were first purchased by Musk, they saw this as a great opportunity to make a comeback from their financial issues and collect profit while satisfying their customers and fellow shareholders. But in the end, however, all they gave was nothing but disappointing results and broken promises.

A Sign It’s Time to Move On

Tesla mainly specializes in manufacturing cars, which has been their primary focus since the beginning. With Solarcity continuing to be on a downfall that now seems inevitable at this point, Elon Musk can easily make the decision to switch back to keep his primary focus on his cars.

Eighty six percent of the company revenue is based solely on the automotive side, while the other 7.2% is based on energy contributions.

It goes without saying that with the constant problems Solarcity continues to face, it is clearly apparent that Tesla is better off kissing Solarcity good-bye.

Starting Together, but Not Finishing Strong

Initially believing that it would be a great idea for the two companies to combine, it only proved that Tesla was better off doing business on their own.

Musk saw an opportunity to profit from partnering with Solarcity while trying to help them with their financial obligations, but ultimately it only ended up hurting him in the end. The failures and underachievement that Solarcity have brought upon themselves only shows that Tesla is better off standing strong on their own.

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Greg

Hi, I'm Greg. My daily driver is a Tesla Model 3 Performance. I've learned a ton about Teslas from hands-on experience and this is the site where I share everything I've learned.

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