Tesla shares fell by more than 5% in Thursday trading, while SolarCity cratered by more than 9%.
Today's losses symbolize how little trust both investors and analysts have in Musk and his master plan to combine both companies into an alternative-energy powerhouse. It is with good reason. Musk has a history at Tesla of not delivering on promises, and there have been other recent, troubling developments related to the SolarCity acquisition and otherwise.
Tesla's shares haven't seen a decline this large since the SolarCity merger was first announced in June. From the beginning, this controversial deal has clearly rankled investors.
Tesla's proposed purchase of SolarCity is valued at $2.6 billion. At first glance, this makes good sense. Tesla's electric car business would be significantly aided by having the ability to provide its own system for generating and storing energy.
However, Musk is also the chairman and largest shareholder of SolarCity. Plus, a majority of the directors on the boards of both companies are either his blood relatives or financially connected to both businesses.
The whole arrangement has not seemed in the best interest of shareholders.
Nor is the acquisition helped by the fact that neither company has been profitable. Moreover, SolarCity has massive debt.
Consider also that yesterday, Tesla said that it was going to raise more money this year through either an equity or a debt offering to help fund the acquisition. The company already owes $422 million to bondholders. That needs to be paid during the third quarter. At the same time, Musk is building an extremely expensive battery factory.
To make matters worse, Bloomberg reported that Musk discussed the possibility of a merger with his cousin at SolarCity before the board first considered the idea in February. That was months before Tesla sold $1.4 billion in stock in a secondary offering and announced the deal for the struggling company. The head of a major pension fund told Bloomberg that he was concerned about a "lack of transparency." Dieter Waizenegger, executive director of the CtW Investment Group, which represents union-sponsored pension funds that holds Tesla shares, said that by not disclosing the potential merger, Tesla was "raising troubling questions that demonstrate why greater accountability and independence is needed at the board level."
While the type of swagger that Musk shows can sometimes work in a company's favor (just look at Steve Jobs and his legacy at Apple), this can also backfire when the company has little to back up its CEO's claims.
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Musk has yet to deliver on most of his promises.
With debt racking up at both companies as this contested merger continues to drag on, investors should still stay away from both Tesla and SolarCity. Although the stocks are temptingly cheap right now, Musk is too much of a wildcard to be trusted.
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