Is Musk Biting Off More Than He Can Chew With SolarCity Proposal?

It was a little terrifying watching the question-and-answer session near the end of Tesla’s livestreamed annual shareholder’s meeting, and it wasn’t just the lady asking about goji berries.

All of the speakers — well, the majority of them — seemed to possess a stratospheric level of admiration for Tesla CEO Elon Musk. Like religious (or political) disciples, the trust they placed in the man’s brilliance and decision-making abilities seemed limitless.

Well, after this week’s announcement that Tesla is offering to buy SolarCity — a solar energy provider co-founded and chaired by Musk — cracks are forming in his circle of supporters, especially in the financial realm.

The proposed share-for-share deal would be worth somewhere in the area of $2.8 billion. Each company is embarking on its largest project to date: Tesla is readying its California assembly plant and battery-making Gigafactory for next year’s Model 3, while SolarCity is trying to get its massive Buffalo, New York solar panel factory off the ground.

The potential for a financial cushion lifted SolarCity’s stock yesterday, but Tesla’s share prices made like Gerald Ford exiting an airplane.

When trading opened yesterday, Tesla shares were suddenly twenty bucks lower than they were at 4 p.m. the day before ($199.31, down from $219.61). At last read, values had eroded further, to $194.32. Not a Volkswagen-level drop, but a negative reaction to the SolarCity proposal nonetheless.

Today, Morgan Stanley’s Adam Jonas, normally an enthusiastic believer in Tesla’s business abilities, lowered his recommendation of the stock, as well as his 12-month target price. No longer predicting a $333 per share value, Jonas now sees the number $243.

Writing to clients, he said, “we believe many of the benefits could have been achieved through arm’s length/strategic partnership and without the risks inherent in exposing Tesla shareholders to the financial and capital markets risks faced by (SolarCity).”

Over at MarketWatch, investing columnist Philip Van Doorn warned investors not to expect to make much money in the near term. In his column, he quoted David Bechtel, a principal at Barrow Funds, who called a possible merger between the two companies “downright frightening.”

Financier Jim Chanos called it a “shameful example of corporate governance at its worst,” adding that neither company is financially strong enough to handle a merger.

Some critics worry that a deal would cause Tesla to take its eye off the ball (meaning the Model 3), risking the company’s fortunes and future. Musk claims the merger makes sense, as both companies are pursuing different ends of the same market. He’s also said a merger wouldn’t affect Tesla’s cash flow.

Despite some investor panic over Musk’s actions, not all Tesla shareholders are getting cold feet. Reuters quoted Joe Dennison, portfolio manager at Zevenbergen Capital Investments (a holder of 600,000 shares), who called the plan “a natural evolution of (Tesla’s) mission to transform transportation into a sustainable business.”

[Sources: Bloomberg, MarketWatch, Reuters, BBC]