On April 2, 2017, Elon Musk announced that Tesla produced 25,000 cars in the first quarter, setting a new company record.1Within two weeks, Tesla’s market value zoomed past Ford Motor Company (which manufactured more than 1.5 million cars per quarter) and General Motors (which made more than 2.5 million cars per quarter) to become the most valuable U.S. car manufacturer.2Elon Musk used the occasion to needle his naysayers, writing on Twitter: “Stormy weather in Shortville.”3By most measures, Elon Musk was on a roll: Beyond promising to scale Tesla by a factor of 10 between 2015 and 2018, Musk was vowing to deliver fully autonomous driving and an automated car-sharing service.4To support hisaggressive plans, Tesla was constructing a giant battery factory in the desert outside Reno, Nevada. Everything about the factory was massive: when complete, it would be the largest building in the world.5This so-called “Gigafactory”would require $5 billion in investment and would ultimately produce 105 gigawatt hours (GWh) of battery cells per year, more than the entire capacity of the world’s li-ion(lithium ion) production in 2015.6Musk also wanted to turn Tesla into a renewable energy company.In the fall of 2016, Musk made another big bet by orchestrating Tesla’s acquisition of the rooftop solar installerSolarCity, where Musk was the chairman and largest shareholder. While the automotiveand solar businesses were starkly different, Musk insisted that they were part of Tesla’s goal of “accelerating the advent of sustainable energy.”7The Gigafactory plus SolarCity would transform Tesla from an automaker into what Musk called the “world’s only vertically integrated energy company offering end-to-end clean energy products to our customers.”8In his spare time, Musk wasalso the CEO of the commercial space flight company SpaceX. Musk insistedthat SpaceX would begin transporting people to Marsby 2025, achieving his stated goal of making humanity a “multiplanetary species.”9Transforming transportation, pushing forward renewable energy generation and storage, and colonizing Mars: such was the scope of Musk’s ambition. Little wonder that a former colleague said that “Elon thinks bigger than just about anyone else I’ve ever met.”10Even though Tesla and SolarCity were unprofitableand burning cash, for Musk the question was always: what’s next? For Musk’s board and shareholders, the question was different: was Musk, as his biographer put it, “a being sent from the future to save mankind from itself or a slick businessman dragging foolish investors along on grand cash-burning bets?”11This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets2Elon Musk’s VenturesElon Musk was born and raised in South Africa, and made his way to Canada in 1989 at the age of 17. Staying with relatives and working odd jobs, Musk enrolled in Queen’s University in Ontario and then transferred to the University of Pennsylvania, where he earned degrees in economics and physics. He began a PhD program in applied physics at Stanford, but dropped out in 1995 to start an online map and directory firm called Zip2 with his brother. They sold the company to Compaq for $300 million in 1999. Musk used the money from the sale to launch another startup called X.com, an online bank. In 2000, X.com merged with Confinity, another startup,which ran a money transfer service called PayPal. The combined firm took the name PayPal in 2001 with Musk as the CEO and largest shareholder until the firm was sold to eBay for $1.5 billion in 2002. SpaceXNot content with founding and selling two successful startups, Musk founded Space Exploration Technologies, better known as SpaceX, in 2002. He told a reporter in 2003 that “I like to be involved in things that change the world. The Internet did, and space will probably be more responsible for changing the world than anything else.”12Reaching Mars was the long-term goal, and Musk claimed in 2012 to be on track to get a manned spacecraft to Mars in 10–15 years. In the shortterm, however, SpaceX concentrated on the commercialization of near-Earth exploration.13Musk invested some $100 million of his own money in SpaceX and nearly lost it all when SpaceX struggled to achieve a successful test launch of its first rocket. By 2006, SpaceX had won contracts to take commercial and NASA satellites into space despite not yet launching a rocket. Its first three launch attempts ended in failure. By September 2008, SpaceX was on the brink of collapse. As a colleague recalled, “Everything hinged on that launch. Elon had lost all his money, but this was more thanhis fortune at stake—it was his credibility.”14The launch succeeded, however. Then, in July 2009,SpaceX had its first successful paying mission.15In May 2012, SpaceXbecame the first commercial firm to successfully dock a vehicle with the International Space Station (ISS), and later that year it delivered its first load of cargo to the ISS.16In late 2013, SpaceX carried out its first successful launch of a commercial satellite. SpaceX achieved another milestone in December2015, when it successfully landed a rocket after launch.Musk saw reusable rockets as an essential step toward making spaceflight truly affordable. SpaceX executives estimated that reusing rockets could cut its launch prices by 30%, from around $61 million to $43 million per launch.17SpaceX advanced further toward this goal in March 2017, when it successfully launched and landed a previously flown Falcon 9 rocket. Elon Musk was not the only high-profile technology entrepreneur to pursue ventures in space. Amazon founder and CEO Jeff Bezos, the second-richest person on Earth, founded spaceflight company Blue Origin, which directly competed with SpaceX. In November 2015, Blue Origin was the first company in history to successfully launch and land a rocket during a mission to space, proving to the world that reusable rocket technology could work.18As of March 2017, Blue Origin was focused on launching its first crewed flight into space and building heavy lift rockets to further compete with SpaceX. In order to ensure the company had enough money to accomplish its goals, Bezos pledged to sell $1 billion of his Amazon stock each year to finance Blue Origin.19Despite these successes, launching rockets into space remained a risky activity, and SpaceX had lost a few rockets and payloads over the years. On September 1, 2016, a SpaceX rocket exploded on the launch pad at Cape Canaveral. While no one was hurt, the loss was a particularly high-profile one This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-4313because the satellite on board was to be used as a part of Facebook’s effort to bring Internet access to regions of Africa, the Middle East, and Europe.Such setbacks had a significant financial impact on SpaceX: in 2015, SpaceX’s revenue declined 6% after multipleyears of strong growth, and the company recorded a wide operating loss of $260 million following multiple years of small but positive operating income (see Exhibit 1). An early 2015 funding round valued SpaceXat approximately $12 billion, making it oneof the most valuable venture-backed private companies in the world.20Meanwhile, the revenue generated by SpaceX’s success in near-Earth missions provided the capital to continue working toward the ultimate goal of regular space travel to Mars.While SpaceX sought to address Musk’s dreams in the stars, he also had great ambitions for revolutionizing travel on and under the Earth’s surface. The Hyperloop, The Boring Company, and Neuralink In August 2013, Musk announced his idea for yet another revolutionary mode of transportation, dubbed the Hyperloop, which Musk claimed would be a faster and cheaper replacement for high-speed rail. Inspired by pneumatic tubes once used to shuttle documents around offices, it would transport passengers at speeds of more than 700 miles per hour in pods enclosed in underground steel tubes under near-vacuum conditions. Given his other obligations, Musk did not attempt to commercialize the idea, but published an open-source white paper describing the technology. A few startups picked up the idea and began developing the technology. One of them, a firm called Hyperloop One, held a demonstration in the Nevada desert in the spring of 2016, propelling a sled one-half mile down a test track at speeds of over 300 miles per hour. The startup had raised $150 million for the venture through January 2017.21At the end of 2016, Musk tweeted the launch of a Hyperloop-like venture called The Boring Company, which would build underground tunnels to combat traffic. Days after the tweet, he boughtthe website BoringCompany.com and staffed a SpaceX engineer to oversee the new venture.22Finally, in the spring of 2017, Musk started yet another company, called Neuralink, which sought to merge the human brain with computers. Musk planned to be CEO of both new startups. TeslaAlthough Elon Musk was the face of Tesla, he was not one of its founders. The company was started in 2003 by Silicon Valley engineers with the goal of producing a high-performance electric sports car. Musk joined the company in 2004 (two years after launching SpaceX) as its chairman and led its fundraising efforts, which netted $7.5 million in its first round. Musk became CEO in 2008, by which time he had invested $55 million of his own money. The company raised $260million in its 2010 IPO, the first American car company to go public since Ford in 1956.23At the end of 2016, Musk remained the largest shareholder in Tesla with a 20.8% ownership stake in the company. By March 2017, Tesla had raised over $9.3 billion in financing (see Exhibit 2a). Musk articulated a grand vision for Tesla and the broader electrical vehicle (EV) industry as the key to sustainable transportation, in the context of the looming disaster of climate change. As he put it in 2011, “[I]n order to change the infrastructure such that we avoid having some sort of catastrophic situation [acentury from now], we must act now, because we’re talking about changing what will probably be 2 billion cars. You don’t just change that overnight. A whole industry has to be born.”24Musk saw Tesla’s role as bringing that industry into being, with the long-term goal of creating an affordable electric vehicle. Because the cost of electric vehicle technology, particularly battery technology, did not permit the construction of an appealing mass-market electric car in the early 2000s, Tesla and Musk decided to enter the market at the high end and move down-market over time. Musk, tongue-in-cheek, revealed This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets4Tesla’s “secret plan”in 2006: “1. Build sports car; 2. Use that money to build an affordable car; 3. Use thatmoney to build an even more affordable car.”25True to the plan, Tesla’s first production vehicle, released in 2008, was a high-performance and high-priced sports car called the Roadster. Tesla only manufactured 2,500Roadsters,but it demonstrated that an electric car could deliver superior performance. The 300 horsepower Roadster went from 0to 60 in 3.7 seconds, had a top speed of 125 mph, and sold for about $110,000 in 2009. Tesla’s next vehicle was a luxury performance sedan called the Model S that was released in 2012 and designed to compete withMercedes, BMW, and Audi. It was priced starting at $70,000, although optional features (such as a larger battery to provide longer range) could push the price well past $100,000. While not by any means a truly “affordable”car, total Model S sales rose from under 5,000 in 2012 to150,000 by September 2016.26Initial reviews for the Model S were very positive. In 2013, Consumer Reportsgave the first model its highest rating ever, a 99 out of 100, and Motor Trendnamed the Model S its Car of the Year. Two years later,Consumer Reports gave an all-wheel-drive version of the Model S a score of 103 out of 100 for its combination of power and efficiency, prompting itto rescale itsscoring systemto bring the Model S down to a perfect 100. Surprisingly, reliability problems with the Model S led Consumer Reportsto revoke its recommendation in late 2015, citing “a worse-than-average overall problem rate”based on a survey of 1,400 Model S owners.27Tesla’s reputation suffered a further blow when threeTesla vehicles were damaged by battery fires in 2013, caused when the battery pack, which was installed in the car’s undercarriage, was damaged by striking roadway debris. Although no one was hurt in the accidents and Tesla pointed out that fires happenedat a far higher rate in gasoline-powered cars, the fires raised potentially damaging concerns about battery safety. Tesla’s stock fell nearly 4% on the news,and the National Highway Traffic Safety Administration (NHTSA) opened an investigation. In response, Tesla announced in early 2014 that it would modify the Model S to raise its ground clearance at highway speeds and that it would reinforce the vehicle’s underbody armor in order, in Musk’s words, “to bring this risk down to virtually zero.”28The NHTSA subsequently closed its investigation, saying that “a defect trend has not been identified.”29Safety concerns were renewed, however, when a Model S caught fire while charging at a supercharger in Norway in January 2016, completely destroying the vehicle. Tesla, which ultimately traced the cause to a short circuit, insisted this was an isolated incident and pointed out that vehicles had been charged at supercharging stations 2.5 million times without incident. Norwegian officials concluded that it represented an isolated event.30Tesla released its next vehicle, an SUV called the Model X, in late 2015, and it had sold and delivered about 37,000of the vehicles by March 2017.31Like the Model S, it received rave reviews for its performance, but also faced quality issues in the early months after its release, including problems with the vehicle’s unique falcon-wing rear doors and, more seriously, a faulty seat latch that in some cases allowed the rear seats to fold forward during a collision, which led to arecall of 2,700 vehicles in 2016.32Shortly after the launch of the Model X, Tesla announced the availability of a package of self-driving features, which it called “Autopilot.”The system used cameras, radar, GPS, and other sensors to provide semi-autonomous highway driving, keeping the car in its lane, changing lanes when necessary, and maintaining a safe following distance.Musk and Tesla described the system as a “public beta,”recommending that drivers keep their hands on the wheel and remain alert and readyto take control at all times. It soon became clear that drivers were not heeding such warnings, posting videos of themselves reading or watching videos while letting the car drive itself.33In May 2016, a Tesla driver was killed while driving in Autopilot mode when neither the car’s sensors nor the driver detected a tractor-trailer crossing the highway and the vehicle collided at full speed with the trailer. The Tesla driver was reportedly watching a movie at the time of the crash.34Tesla responded by releasing This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets102016, it had a range certified by the EPA at 238 miles and an estimated sale price of about $37,500.87In 2015, Audi, Mercedes, and Porsche announced plans for electric luxury vehicles that would compete with the Model S and Model X.88EV manufacturers faced unavoidable trade-offs between cost and rangeof batteries. Tesla had, with the Model S and Model X, chosen to maximize range by equipping them with a large battery:a 70 kWh or 85 kWh battery delivered an EPA-estimated range of 240 to 265 miles,respectively, on a single charge. In 2016, Tesla announced the availability of 100 kWh battery packs for both vehicles, pushing the estimated range of the Model S over 300 miles.89But that range came at a cost: the size of the battery contributed heavily to the vehicles’price, which could be as high as $135,000. Other manufacturers had opted to sacrifice range to cut costs. Nissan’s Leaf, for example, originally came with a24-kWh battery that gave the car a range of 84 miles per charge, while BMW’s i3 had a 22-kWh battery that delivered a range of 81 miles.90Offerings from Volkswagen and Mercedes similarly had smaller batteries with ranges between 70 and 90 miles. Tesla and other automakers partnered with major technology companies, including NEC, LG Chem, Samsung SDI, and Panasonic, to supply battery technology for their vehicles. Early in its history, Tesla had made the choice to construct its battery from existing industrial-grade li-ioncells manufactured by Panasonic, rather than build or outsource a battery specially designed for its vehicle, as other EV manufacturers had done. The form factor cells used by Tesla were slightly larger than an AA battery and were commonly used in consumer electronics. Tesla worked with Panasonic to optimize the cells for its vehicles.Energy StorageIn addition to electric vehicles, energy storage for residential, business, and utility use was a major potential market for battery technology. The widespread adoption of renewable energy sources such as wind and solar would require significant increases in storage capacity. Falling renewable energy costs(the cost of solar panels had fallen over 85% between 2007 and 2014)had led to increaseduptake around the world.By 2015, the world was adding more renewable generating capacity than that of gas, coal, and oil combined. In many European countries, wind and solar accounted for over 20% of electricity generation, and Germany had set a target of getting 80% of its energy from renewables by 2050.91To reach such goals, renewable energy generation would have to be paired with large-scale storage capacity, most likely in the form of batteries, allowing energy generated by solar panels or wind turbines to be stored for use when the sun was not shining or the wind was not blowing. As well as facilitating renewable energy use, load-balancing for electric utilities was another potential application; massive batteries could permit utility companies to avoid the necessity of firing up so-called “peaker” power plants to meet peak demand. Instead, utilities could draw power from batteries at times of peak demand and recharge them when demand was low. As Musk put it in 2015, “you can basically, in principle, shut down half of the world’s power plants if you had stationary storage.”92Tesla saw this as an important secondary market for its batteries; in fact, Musk estimated in 2015 that the long-term capacity demand for stationary energy storage would be roughlydouble the demand for batteries for electric vehicles.93Indeed, in September 2016, Southern California Edison announced it would purchase 20 megawatts of Tesla batteries to plug into one of its substations, charging them up during times of low usage and discharging them at times of high demand.94To take advantage of the energy storage market, Tesla announced in early 2015 its Tesla Energy suite of battery packs, designed to provide stationary storage for residential, commercial, and utility-scale applications. The residential product, called Powerwall, was designed for load-shifting (charging This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-43111when rates werelower and discharging when rates werehigher), to provide backup power during outages, and to be used in conjunction with rooftop solar applications, storing surplus solar energy for use when the sun was not shining. The Powerwall battery pack provided 6.4 kWh of energy storage, at a price of approximately $3,000. Multiple battery packs could be installed together for greater capacity if needed.In October 2016, Tesla unveiled the Powerwall 2, along with solar roof-top panels that integrated directly with the energy storage system, at an event in Los Angeles. The new Powerwall for residences had more than double the capacity of the first edition (14 kWh) and contained a built-in power inverter (a previously needed separate piece of hardware). The second edition was also priced higher at $5,500. Although the residential system garnered the most attention, Tesla executives anticipated that commercial and utility-scale applications would be much larger; Musk estimated that 5–10 times more capacity would be deployed at industrial and utility scale than at the consumer scale. A few months after the launch of Tesla Energy, Tesla CTO Straubel said that about 70% of reservations had been for the industrial-scale Powerpack and 30% for the residential-scale Powerwall.95Musk claimed the demand for Tesla’s energy storage solutions had been “staggering”in the first few months after announcing the product. By the end of the second quarter of 2015, Tesla reported that it had received more than 100,000 battery reservations, worth $1 billion if they turned into sales (whichMusk admitted they might not).96Musk insisted that, in order to realize the goal of transitioningthe world’s electricity generation to renewable sources, Tesla hoped other battery companies would join Tesla in building “Gigafactory class operations of their own.”He also said that Tesla would continue its policy of “open-sourcing”its information technology related to the Gigafactory and battery manufacturing.97The opportunity to manufacture batteries for various energy storage solutions, whether targeted for electric vehicles or renewable energy, demonstrated such great potential to Elon Musk that he made the bold move to further vertically integrate Tesla by merging the electric vehicle and battery manufacturing company with SolarCity, an alternative energy sourcing and storing company.Tesla’s Renewable Energy Division: Solar CityTesla and SolarCity haddeeply linked histories and close ties. SolarCity’s founders, brothers Lyndon and Peter Rive, were Musk’s cousins;and it was Musk,by all accounts,who encouraged them to look into the solar energy business in 2004. Musk became chairman and a major financial backer when SolarCity was founded in 2006,and was its largest shareholder when it went public in 2012. He remained chairman and the largest shareholder in 2016. In addition, Tesla CTO Straubel sat on SolarCity’s board, and the firms shared one additional board member.98For most of its history, SolarCity positioned itself as a solar energy provider; it purchased solar systems and installed them for residential, business, governments, and ultimately utility companies. It covered the cost of the installation and maintenance of the system and charged customers for the energy produced by the system. Residential customers could pay as little as zero for the installation and pay a monthly fee for the electricity produced by the system, typically ata cost lower than that charged by the local utility.99The option to transition to solar power with no up-front costs had spurred adoption, and the number of SolarCity installations grew rapidly, with the installed customer base reaching 300,000 by the time Tesla acquired the company in November 2016.100Revenues had also increased significantly, from $60 million in 2011 to $538 million for the year ending June 30, 2016. Despite rapidly increasing revenues, SolarCity’s debt levels grew at a much quicker pace (see Exhibit 6 for SolarCity financial data).This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 717-431Elon Musk’s Big Bets12Since SolarCity had not historically manufactured solar systems, it had benefited from the falling price of solar panels, which had enabled the cost of its rooftop installations to decline from $4.73 in 2012 to$2.84 per watt of generating power in 2016. In 2014, however, SolarCity acquired panel maker Silevo. The acquisition made SolarCity, in the words of Peter Rive, “the most vertically integrated solar company in the world.”101To that end, SolarCitybegan construction on a $750 million factory in Buffalo, New York,where it would manufacture solar panels in 2017. SolarCity officials claimed that the new panels would be as much as 30% more efficient than the commodity solar panels it was currently purchasing. These efficiency gains, combined with a simplified manufacturing process and the scale of production, had the potential of even further reducing the cost of residential solar installations to $2.50/watt.102Declining costs for producing solar translated into greater competition for SolarCity. The residential and commercial markets for solar installation were both highly competitive. According to one analyst, the top 10 residential solar installers in 2015 represented 58% of the market, with SolarCity leading at 35% (Vivint Solar was second at 11%). On the other hand, the top 10 producers in the commercial market represented only 42%, with SolarCity leading at 14% (SunPower was second at 7%). “The fragmented commercial developer landscape is largely the result of bottlenecks in the customer origination process that make it difficult for any individual player to consistently grow,” said noted one research analyst. SolarCity would need to defend its lead position among two different sets of competitors,while at the same time, barriers to entry were falling.103To do so required high spending; SolarCity’s sales, administrative, and research costs were $438 million in the first half of 2016, 42% greater than revenue of $308 million.104Such a high level of spending meant that SolarCity needed to find a solution to its continuing need for financing. Further indicating its commitment to the renewable energy business, Tesla first announced in June 2016 a proposal to acquire SolarCity. The acquisition offer was all-stock, in which each share of SolarCity would be exchanged for a fraction of a share in Tesla. This exchange ratio of stock represented a value of $26.50–$28.50 per share of SolarCity and a total equity value of $2.6–$2.8 billion. Tesla’s shareholders did not react positively to the announcement; the next day Tesla’s stock price fell by 10.5%, while SolarCity’s stock price rose 3.3%.105In the context of the SolarCity acquisition, Musk pointed out that renewable energy generation had long been a part of Tesla’s vision. “The point of all this,”he wrote in July 2016, “was, and remains, accelerating the advent of sustainable energy.”Indeed, the original “master plan”written by Musk in 2006, though focused on Tesla’s EV business, included the goal of becoming “energy positive”by providing “zero emission electric power generation options,”partly through partnership with the then newlyfounded SolarCity.106SolarCity had begun offering home energy bundles including solar panels and battery backup using Tesla’sPowerwall battery packs earlier in the year, and for Musk the merger was a natural progression. Musk argued that there was considerable overlap between the two companies’ potential customer bases, that Tesla’s design and manufacturing experience would benefit SolarCity’s solar panels, while SolarCity’s sales, distribution, and installation capabilities could serve Tesla customers.107Tesla claimed $150 million in cost synergies that would be unlocked in the merger (see Exhibit 7). JP Morgan’s research reporton the initial offer cast doubt on the customer overlap: “Absent a detailed explanation (at this time) we are struggling to see brand, customer, channel, product or technology synergies.”108(See Exhibits 8 and9.) Several analysts criticized the proposed deal as adding to Tesla’s already daunting challenges of scaling battery and vehicle production, but Musk insisted that Tesla would benefit from creating a “smoothly integrated and beautiful solar-roof-with-battery product. 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.”109In anticipation of the completion of the merger, Musk announced a new solar roof product which replaced a traditional roof with glass tiles that contained This document is authorized for use only by Alex Waterman ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Elon Musk’s Big Bets717-43113power-generating solar cells. Musk later claimed that Tesla’s solar roofing material would cost less than traditional premium roofing materials, even before factoring in savings from electricity generation.110SolarCity’s financial struggles also contributed to skepticism aboutthe proposed acquisition. The company struggled to become profitable and its operating losses were mounting—totaling nearly $980 million for 2014–2015, leading to considerable doubts about merging two companies that were steadily burning through cash, to the tune of an estimated $2.5 billion combined in 2016.111(See Exhibits 3b and6b for Tesla and SolarCity cash flow data.) The Wall Street Journal wrote that “Tesla latching on to SolarCity is the equivalent of a shipwrecked man clinging to a piece of driftwood grabbing on to another man without one,” while Forbes wondered how the already-indebted Tesla could carry SolarCity’s $5 billion long-term debt load.112Some critics argued the acquisition was aneffort to save SolarCity from its debt obligations, which grew 13x from 2013to 2016. “This deal has everything to do with debt. Call it a bailout, call it what you will....SolarCity is one bad economic downturn away from going belly up,” said one analyst.113Musk and Tesla responded by pointing out that SolarCity’s debt position and cash flows appeared to be worse than they really were because SolarCity used debt to finance rooftop installations that generated revenue over time through long-term leases and power purchase agreements.114Tesla revised its offer for SolarCity on August 1, 2016, in part due to SolarCity announcing that its 2016 forecast for megawatts installed would be 10% lower than previously expected. The new acquisition offer was about $300 million lower than the initial offer at $25.83 per share, representing a $2.6 billion equity valuation.115This price for SolarCity was 10x higher than the average revenue multiple of SolarCity’s publicly traded peers (see Exhibit 10). On the other hand, $25.83 per share was well below SolarCity’s all-time-high closing price of $86.14 set in February 2014 (see Exhibit 11).Corporate governance issues were also debated. The required number of shareholders from both companies to approve the merger was considerably lower than normal. JP Morgan’s research remarked: “The proposal requires the majority approval...from shareholders accounting for 39.44% of economic interest in Tesla(50% of shareholders excluding Elon Musk’s interest of 21.12%) and 38.73% of economic interest in SolarCity(50% of shareholders excluding Elon Musk’s interest of 22.54%).”116Due to conflicts of interest, several board members of both companies had to abstain from voting on the merger. On the Tesla side, Elon Musk and Antonio Graciasrecused themselves because they served on both boards. On the SolarCity side, five of eight board members recused themselves given their various connections to Elon Musk and Tesla. This left two independent board members, Donald Kendall and Nancy Pfund, who were solely responsible for approving the merger on behalf of the SolarCity board.117In the end, investors sided with Musk against the skeptics. After the boards of both companies approved the proposed merger in August, shareholders overwhelmingly approved the acquisition in November, with over 85%of Tesla shareholders voting in favor of the deal.
What are the key environmental challenges Elon Musk saw as opportunities? How did he address those challenges in different businesses?
Why do you think that Tesla, with a shorter history, significantly smaller sales and virtually no history of profits was valued higher than the other American car makers? Should there be different performance metrics for startups, such as Tesla?
How are the different businesses of Elon Musk related or unrelated to each other? Would it make sense for Elon Musk to put different businesses into one corporate umbrella or would he be better off running them separately?
If Elon Musk had to divest one of the various businesses, which would you recommend him? Why? How would this divestiture help him increase performance and investors’ confidence?