TESLA Solar City Acquisition Tesla is an electric

TESLA Solar. City Acquisition

Tesla is an electric car manufacturer and its chief executive officer, Elon Musk, is interested in acquiring Solar. City, a solar power manufacturer and distributor. Both Tesla and Solar. City operate in young, highgrowth industries. Despite their high growth rates, both companies are losing large amounts of money every year. Yet, even with the poor financials, both companies have similar products and could be a strong strategic fit.

Musk must convince shareholders that Solar. City is a good acquisition target for Teslaand then provide a fair price. Board member Brad Buss has the ability to give Musk his opinion on whether Solar. City is a strategic fit for Tesla

LEARNING OBJECTIVES • To analyze the reasoning that goes into the inputs and assumptions in a discounted cash flow (DCF) analysis. • o understand the similarities and differences (e. g. , synergies, debt and enterprise value, control premium, and other metrics) between valuing a stock for a minority equity ownership and for the strategic acquisition of an entire company. • To appreciate the strengths and limitations of using precedent transactions and comparable analysis when valuing young companies that may not yet be profitable. • To recognize the signs of good and bad corporate governance by analyzing the management and board structures to ensure that there are no conflicts of interests and that the goals of the board, management, and shareholders are aligned. • To learn that when dealing with early-stage companies that have volatile cash flows, the qualitative analysis must be very strong and the quantitative analysis should be more conservative.

Relevant material • Paul Lienert and Liana B. Baker, “Solar. City Accepts Tesla’s $2. 6 Billion Offer; Both Shares Fall, ” Reuters, August 1, 2016, accessed April 20, 2017, www. reuters. com/article/us-solarcity-m-a-tesla-id. USKCN 10 C 26 O. • • Dana Hull, “Tesla Takeover of Solar. City Not a ‘No-Brainer’ for All Investors, ” Bloomberg Markets, June 21, 2016, accessed April 20, 2017, www. bloomberg. com/news/articles/2016 -06 -21/tesla-announces-offer-to -acquire-rooftop-solar-company-solarcity. • • “Tesla and Solar. City Agree to $2. 6 B Deal, ” You. Tube video, 2: 31, posted by Wall Street Journal, August 1, 2016, accessed April 20, 2017, www. youtube. com/watch? v=ANc. AWIAAgy 0. • • “Tesla Motors’ (TSLA) CEO Elon Musk Hosts Offer to Acquire Solar. City Conference Call (Transcript), ” Seeking Alpha, June 22, 2016, accessed April 20, 2017, https: //seekingalpha. com/article/3983785 -tesla-motors-tsla-ceo -elon-musk-hosts-offer-acquire-solarcity-conference-call-transcript.

Videos • Analyst: Tesla Cannot Afford Solarcity—The Deal Makes No Sense, accessed January 4, 2018, https: //www. youtube. com/watch? v=HHZ 37 Ql 0 Hd. Y. • Bloomberg news: Tesla Shareholders Approve Solar. City Merger, accessed January 4, 2018, https: //www. youtube. com/watch? v=FOLHJLh. O-Nk. • WKBW news: Tesla fires hundreds across the United States (including Gigafactory in Buffalo), accessed January 4, 2018, https: //www. youtube. com/watch? v=LMrhy 5_fzv. A.

ASSIGNMENT QUESTIONS • 1. As a potential investor, what is your assessment of the prospects for Solar. City’s business? • 2. Which of the comparable companies appears to be a good match with Solar. City at the time of the case? What type of companies would be a comparable match to Solar. City in 10 years? Use comparable company analysis to value the deal. • 3. What impact do the precedent transactions have on your perception of the industry and your valuation of the company? Use the precedent transactions to value the deal. • 4. Do you agree with the valuation of Solar. City? If not, what changes would you make to the DCF analysis? What assumptions would you consider applying a sensitivity analysis on? Use the valuation models to test the impact of these assumptions. • 5. Is Solar. City a strong strategic fit for Tesla? • 6. As board member Buss, would you advise Musk to purchase Solar. City? If you were to advise Musk to purchase Solar. City, what would be a fair price and how would you structure the deal?