Tesla's purchase of Solar City in
November of 2016 was easily their
biggest and definitely most
controversial acquisition to date the
proponents pegged it as the last
critical piece of vertical integration
for Tesla to produce products from
sustainable energy generation and
storage to consumption the detractors
said it was pure corporate fraud and a
2.6 billion dollar family bailout in
this video I'll present all of the
information to let you decide which it
is there's also still a lawsuit underway
in court documents have recently been
unsealed shedding light on new
information Solar City was launched in
2006 with a 10 million dollar investment
from Elon the initial business model was
to drive costs down in the industry by
controlling everything from the sale to
installation with third-party
manufacturers providing the actual
panels they hired 150 employees the
majority of them construction workers
and within a year they were installing
around 70 solar systems per month in
Northern California the key part of the
business model was allowing customers to
lease the panels instead of purchasing
them outright
other companies had explored the notion
but no one was able to bring it to the
residential market Solar City kept at it
and found a way to develop an
arrangement where the homeowners were
not required to make any down payment
Solar City handled all of the upfront
costs consultations rooftop layout
blueprints and the installation of the
panels working with banks to help front
the necessary capital in return Solar
City would get long-term recurring
revenue with the homeowners paying them
back over the course of a 20-year lease
had a monthly cost that would hopefully
be lower than a traditional utility bill
a big part of what made this model
feasible was the 30% federal solar tax
credit which Solar City could claim on
the value of each installation Solar
City went public at the end of 2012 at
$8 a share and the stock surged 47% on
the first day of trading as the company
was effectively doubling its sales each
year in early 2014 it had more than
70,000
customers and the stock hit $86 a share
in all-time high SolarCity was a clear
industry leader owning a third of the
residential market in dling more
installations than the next 50
competitors combined even Google got
involved investing 300 million to fund
some of the installations as a means to
take advantage of the Associated tax
credits shortly thereafter however with
the rise of two polarizing executives
the company culture underwent a dramatic
shift many employees said the atmosphere
became testosterone-fueled and sales
obsessed some compared it to tree
huggers getting replaced with a
fraternity house with the sales team
demographics becoming more
male-dominated in addition to this some
inside the company grew leery of the
zero money down concept many felt the
concept was just a way to hook customers
without any concern of whether the
customer would follow through with the
actual lease purchase a former sales
director said quote essentially you had
all these poorly trained reps saying
just sign here don't worry you can
cancel anytime
people were treating it like signing off
on an iTunes terms and conditions end
quote in addition to this the company
publicly said it was changing the
business model in an attempt to become
profitable rather than focusing on
simply doubling sales each year as they
confessed it was going to be difficult
to keep growing at that rate the plane
was this instead of leasing the panels
to homeowners their core strategy would
now be to sell them primarily through
loans which would lower solar city's
burden of debt this means that customers
would own their systems no more monthly
payments eventually the once
industry-leading success ran into major
financial challenges at one point the
stock dropped 77% from its February 2014
peak the debt had snowball to 3.4
billion the sales growth had slowed and
they faced a major cash crunch with
regard to a Solar City conference call
in 2016
Jim Cramer said on CNBC afterward quote
the
is a company that I regard any first
class crisis that acts as if everything
is fine it was the worst conference call
of 2016 end quote
in steps Elon Musk which unfortunately
is the crux of the situation at the time
of the acquisition Elon was Tesla's
largest shareholder owning 22% of the
stock as well as being chairman and CEO
he also happened to be Solar City's
largest shareholder at the time holding
approximately 22% of their shares as
well Solar City was founded by Elon
Musk's first cousins Linden and Pete
arrived who have both left the company
within one year of the acquisition as
SpaceX chairman Elon also purchased 90
million dollars of Solar City bonds in
March 2015
75 million in June 2015 and another 90
million in March 2016 these purchases
were said to have violated SpaceX's own
internal policy and SolarCity was the
only public company in which SpaceX made
any investments Tesla was also going to
have to take on almost three billion
dollars in SolarCity debt and they were
burning more cash than Tesla despite
being one tenth of their size at the
time these factors combined with the
financial risk of Solar City gave the
impression too many shareholders that
this was a family bailout given the
conflicts of interest it came as no
surprise that amid the controversy a
judge granted a group of shareholders
permission to pursue their lawsuit
almost immediately after the acquisition
closed Solar City's auditors at Ernst &
Young confirmed that Solar City was in
fact insolvent
their year-end audit conducted in
January 2017 determined that Solar City
did not have sufficient cash to meet its
obligations and could not operate on its
own Tesla shareholders filed suit in the
Delaware Court of Chancery in 2017 where
most complex corporate merger related
litigation happens the suit argues that
email and used his influence as director
and controlling stockholder to push the
Tesla Board to pursue the transaction
using faulty data and without doing
sufficient due diligence which was in
violation of his fiduciary duty to the
shareholders the plaintiffs in the suit
Tesla Motors and core
berated stockholder Litigation are using
the analysis as part of their case to
illustrate the web of conflict and to
show that Ilan was desperate to save all
three companies when Solar city's growth
slowed and debts mounted newly unsealed
documents in the lawsuit portray Solar
City as being completely insolvent not
just carrying a heavy debt load they
also show that Elon knew at the time of
the acquisition that Solar City was
facing a liquidity crunch
according to emails between him and X
CFO brad bus accounting firms are
supposed to act as independent auditors
but in the end it's the audited company
paying their bills and while they won't
outright fabricate a report there is
somewhat of a tendency to accommodate
certain accounting decisions made in
ways that are not optimal for external
parties in this case the shareholders
who are interested in the financial
health of the company the shareholders
also allege in the suit that Elon
planned the unveiling of a product that
did not yet function the Solar glass
roof tiles to convince investors that
there was real intellectual property and
a product close to commercial viability
speaking of this during alongs first
deposition on june 1st 2019 he
acknowledged to the court something he
had never disclosed to shareholders that
the company reallocated every possible
employee from the solar division to work
on the model 3 ramp a move that
effectively starved the solar business
and ruined any chance of growth
this included everyone from engineering
management sales and service Elin also
revealed that as of June 2019 Tesla had
not yet made the solar glass roof tiles
into a commercially viable product keep
in mind the solar glass tiles
presentation was back in 2016 a few
directors of Tesla involved in the
lawsuit have recently settled
this leaves Elon as the lone remaining
defendant facing claims that Tesla paid
2.6 billion dollars for a worthless
solar energy system installer according
to the court documents the five
directors including Robin Denholm and
Kimball musk settled for 60 million
dollars which came as the 10-day trial
was scheduled to start on March 16th in
Delaware with the shareholders seeking
the full 2.6 billion dollars in damages
the suit is being pursued at this point
by an individual investor in five
investment funds at the heart of the
current case are allegations that Elon
and other board members did not fully
disclose the depth of solar city's
problems or their own internal cash
constraints at the time within Tesla
this acquisition was however of course
approved by a majority of shareholders
so as with most stories there is another
side joining Tesla and SolarCity was
central to the continued execution of
IANS master plan which aimed to provide
customers full-stack in-house solutions
to owning their own energy production
storage and consumption combining
companies allowed both entities to have
easier and more efficient collaborations
and discussions and Elon said that they
would now be able to make decisions
immediately instead of having to wait a
couple of weeks
Pesa plan to reduce customer acquisition
costs by cutting advertising spending
selling solar products in tussel stores
and shifting from leasing to selling
solar energy systems which would be a
continuation of the business model shift
that Solar City wanted to implement
before running into problems
it was supposed to be an opportunity to
create the only vertically integrated
sustainable energy company from a solar
city panel to a Tesla battery the
in-house supply chain would scale up
clean energy for all and provide cost
synergies to the businesses and
shareholders these synergies were at the
heart of the acquisition which ended up
being an all-stock deal in which Elon
Solar City investments were converted to
about 500 million dollars in Tesla stock
as a result of the deal there are still
many eyes on gigafactory Buffalo many
residents and locals are tracking the
story closely as they were promised
thousands of high quality jobs many of
which are yet to come to fruition many
locals there also want to become a part
of the future rather than being stuck
hoping for a revival of industries of
the past this story is clearly
open-ended and is one that deserves far
more attention than it gets it's Tesla's
biggest acquisition and could be argued
as elands biggest misstep given the
current status of things it can also be
argued that if Tesla's solar glass roof
tiles become a hit and Tesla can deploy
the necessary resources to grow this
division that this deal is what
ultimately takes them to an entirely new
level becoming the world's first fully
integrated bull solution sustainable
energy company only time will tell
thank you for watching I hope you learn
something new feel free to subscribe we
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the rest of your day
