Streetwise Professor

June 21, 2016

Mating Hemophiliacs Seldom Turns Out Well

Filed under: Climate Change,Economics,Energy — The Professor @ 9:00 pm

I’ve long been an Elon Musk/Tesla skeptic, to put it mildly. I’ve called him out as a crony capitalist who milks subsidies, and as a con man.

Most recently, I said that one Musk company’s (SpaceX) purchase of the debt of another Musk company–Solar City–should raise alarms. Well, today four alarms rang: Tesla bid to take over Solar City, and to pay for the acquisition in Tesla stock. Solar City (SCTY) stock soared on the news: Tesla plunged. The effect of the announcement was market cap negative: Tesla’s value declined more than SCTY’s rose.

Both Solar City and Tesla rely on government subsidies, and crucially, on very dodgy financing models and questionable accounting. Like many other solar firms, Solar City was teetering on the verge of bankruptcy. Such an event would have a direct financial consequence for Musk, and given Elon’s large (and leveraged) ownership stake in Tesla, this would impact Tesla adversely.

Moreover, there’s a serious possibility that a SCTY bankruptcy would reveal a byzantine web of financial connections among Musk’s various ventures. Given the boundary-pushing accounting and tenuous financial condition of all of his companies, there is no doubt a lot hidden that Elon desperately wants to keep hidden.

But perhaps most importantly, a SCTY bankruptcy would undermine Musk’s image as a visionary genius and business colossus. This image is vital to keeping Musk, Inc. going. It is vital because this image is a key element of every con, and if Musk isn’t a con man, he sure does a great impression of one.

One key tell of that is that whenever people start expressing doubts about Tesla, Musk has some grandiose announcement about the next new big thing, even though he hasn’t delivered on the last new big thing, or even the new big thing before that. That’s a classic con man trick.

This is also a vital part of the Tesla funding model. In addition to subsidies, Tesla relies heavily on customer deposits for funding. In order to get those deposits, Tesla has to make promises on production that it has not been able to keep. But enough people are dazzled by Elon’s pitch that they fork over the cash that he needs to keep the endeavor aloft.

I read an investment report that referred to such types as “loss tolerant investors.” That’s a polite way of saying “suckers.”

A major Elon fail would put the con model at risk. So despite the fact that the initial reaction to the deal has been incredulity and outrage, and despite the fact that that reaction was utterly predictable, Musk has plunged ahead. That should give you some idea of his desperation.

In the announcement of the bid, Tesla served up a load of argle-bargle that should make any PR person blanch:

Tesla’s mission has always been tied to sustainability. We seek to accelerate the world’s transition to sustainable transportation by offering increasingly affordable electric vehicles. And in March 2015, we launched Tesla Energy, which through the Powerwall and Powerpack allow homeowners, business owners and utilities to benefit from renewable energy storage.

It’s now time to complete the picture. Tesla customers can drive clean cars and they can use our battery packs to help consume energy more efficiently, but they still need access to the most sustainable energy source that’s available: the sun.

The SolarCity team has built its company into the clear solar industry leader in the residential, commercial and industrial markets, with significant scale and growing customer penetration. They have made it easy for customers to switch to clean energy while still providing the best customer experience. We’ve seen this all firsthand through our partnership with SolarCity on a variety of use cases, including those where SolarCity uses Tesla battery packs as part of its solar projects.

So, we’re excited to announce that Tesla today has made an offer to acquire SolarCity. A copy of Tesla’s offer is provided below.

If completed, we believe that a combination of Tesla and SolarCity would provide significant benefits to our shareholders, customers and employees:

  • We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.
  • We would be able to expand our addressable market further than either company could do separately. Because of the shared ideals of the companies and our customers, those who are interested in buying Tesla vehicles or Powerwalls are naturally interested in going solar, and the reverse is true as well. When brought together by the high foot traffic that is drawn to Tesla’s stores, everyone should benefit.
  • We would be able to maximize and build on the core competencies of each company. Tesla’s experience in design, engineering, and manufacturing should help continue to advance solar panel technology, including by making solar panels add to the look of your home. Similarly, SolarCity’s wide network of sales and distribution channels and expertise in offering customer-friendly financing products would significantly benefit Tesla and its customers.
  • We would be able to provide the best possible installation service for all of our clean energy products. SolarCity is the best at installing solar panel systems, and that expertise translates seamlessly to the installation of Powerwalls and charging systems for Tesla vehicles.
  • Culturally, this is a great fit. Both companies are driven by a mission of sustainability, innovation, and overcoming any challenges that stand in the way of progress.

Note the appeal to enviro-vanity. “Shared ideals.” “Culture.” Vague synergies: “including by making solar panels add to the look of your home.” Are they serious? Is that the best he can come up with? “Customer-friendly financing products.” Another joke: the unviability of the Solar City financing model is exactly what put the company into its current straits. So extending this unviable financing model to autos is somehow going to do wonders for Tesla? The release mentions charging systems. A few years ago Elon promised thousands. There are currently 616 worldwide, and Elon has faded his original promise to provide free charging: Model S customers will have to pay.

Further, there’s no explanation of how marrying one cash bleeder to another cash bleeder is going to address either company’s fundamental problem . . . which is that they are cash bleeders. Buying Solar City exacerbates the Tesla cash bleeding problem, rather than ameliorating it: the mating of hemophiliacs is unlikely to turn out well.

Indeed, Tesla bleeds cash like a Game of Thrones battle scene. Hence the need to rush out the Model S (and collect deposits) while huge questions about production remain. Hence the repeated returns to the equity markets to issue new stock.

Which will now be harder, because paying for Solar City in stock–and hence diluting existing shareholders substantially–mere weeks after a big equity offering will make investors to whom Musk will have to sell stock in the future to meet his voracious needs for money think twice: will he take their money then dilute them again a few weeks or months later?

This move looks very short sighted, and it almost certainly is. But Musk is doing it because he needs to address very pressing immediate concerns, and he’ll worry about the future ramifications when the future comes.

Musk has made a living off of suckers. Suckers in government (including most notably the federal government, and the states of Nevada and California) who have lavished huge subsidies based the dubious environmental benefits of electric vehicles. Suckers enamored with the technology and performance of Tesla vehicles–despite the questions surrounding Tesla’s ability to produce those vehicles.

To keep the suckers coming, Musk has to perpetuate his image as the Great and Powerful Oz. A major fail–like the bankruptcy of Solar City–threatens to pull back the curtain and demolish that image. Musk needs to prevent that from happening. He needs to buy time, and to buy time, he is having Tesla buy Solar City.

Desperate times call for desperate measures. The proposed purchase of Solar City reeks of desperation, because it facially makes no business sense, and is explicable only as a way to keep a con alive.

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18 Comments »

  1. SWP:

    Ye of little faith.

    1) Musk is a genius.
    2) The Fed gov’t will bail out CA (& IL & NY, just like it did PR).
    3) True, his products don’t work, but neither does the #GlobalWarming theory; doesn’t stop the faithful.
    4) Elizabeth Warren has never been right about anything, & yet her popularity grows.
    5) You cite Oz, when you should reference the Pied Piper instead.
    6) Facts are not relevant to the true believers.

    anno 1284 am dage johannis et pauli war der 26. juni
    dorch einen piper mit allerley farve bekledet gewesen cxxx kinder verledet binnen hameln geboren
    to calvarie bi den koppen verloren

    VP VVP

    Comment by Vlad — June 21, 2016 @ 11:01 pm

  2. One key tell of that is that whenever people start expressing doubts about Tesla, Musk has some grandiose announcement about the next new big thing, even though he hasn’t delivered on the last new big thing, or even the new big thing before that. That’s a classic con man trick.

    Russian pipeline/terminal/Arctic development projects are like that. And the Western Majors keep falling for it.

    Comment by Tim Newman — June 22, 2016 @ 1:08 am

  3. A mate of mine has a Tesla and really, really likes it. It was his company’s prize for being top software salesman. Instead of some generic software salesman’s Porsche he gets a paid-for Tesla.

    When I ask him what he likes about it, he says it’s an electric car and it’s the future. But what is interesting is that when pressed, it’s futurey things like the self-parking, the auto-overtaking, and so on that he likes. All of these are features that exist on conventional cars. An E-Class Mercedes costs the same as or less than a Tesla and it too can be loaded with all those goodies. Likewise, these self-driving cars we keep being promised aren’t going to be self-driving only if they’re electric.

    Electric propulsion strikes me as a vehicle feature akin to the gullwing door. The most famous gullwing door car is probably the DeLorean – with whose maker Mr. Musk may have more in common than he’d like.

    Comment by Green As Grass — June 22, 2016 @ 5:04 am

  4. Five minutes of listening to the guy is enough to conclude that he is an absolute fountain of BS. I think he emulates the speaking style of Tony Stark in Ironman but not a hint of a suit. Anyone that is 90% sure the universe is a simulation and warns that computers will soon gain conscousness and dispose of mankind should be seen as a crank and not a prophet that should be tithed with support. He cons people by using Marvel Comics based shtik that appeals to their childhood fantasies. He is certainly more of John DeLoraen than Dr Emmit Brown.

    Comment by pahoben — June 22, 2016 @ 7:08 am

  5. The whole premise of this article is based on a fact, that Solar City was in danger of bankruptcy. Considering SCTY’s $400mm in cash, significant ability to borrow, credit ratings, and $2.0bn market cap, this is just not the case.

    Comment by Sydney Cohen — June 22, 2016 @ 10:09 am

  6. I don’t know about SolarCity’s financials, but I know as an industry the rooftop solar financing companies are in deep trouble. They are completely dependent on government tax credits being given to their customers (actually to them). Without that, there is no business model. Furthermore, as rooftop solar became more prominent, the utilities figured out that their pricing and rebates need to change. What was once a boutique charity feature became a real drain on their finances. As they figure out how to deal with that (i.e. reduce the money they give to customers who use rooftop solar), it makes rooftop solar less attractive.

    The technology is still pre-commercial. The only way a real market developed was because of financial engineering dependent on the generosity of government and utilities. That generosity looks increasingly like it is going away. Sunrun was forced to leave Nevada and layoff hundreds of employees based on rate changes. The future looks bleak.

    Cash reserves can disappear quickly. And market cap means nothing to a company’s longterm viability – revenue and earnings do. Market cap can quickly change – just look at SunEdison whose company went bankrupt when its financial engineering imploded.

    Solar is a viable industry, but not how it is currently construed. A viable rooftop solar industry won’t be viable until the price of a rooftop solar set can be purchased by an ordinary household and get an ROI in 5 years or so PLUS having their own battery storage available for blackouts.

    Comment by Chris — June 22, 2016 @ 11:19 am

  7. […] How does combining two ‘cash bleeder’s help? (streetwiseprofessor) […]

    Pingback by 06/22/16 – Wednesday’s Interest-ing Reads | Compound Interest-ing! — June 22, 2016 @ 12:58 pm

  8. This feels like one side of the story. Granted, Musk lives on the edge when it comes to financing, but he’s driving real results and pushing entire industries forward. The Iron Man comment from the peanut gallery is funny, because it’s reasonably well-known that RD jr based his portrayal of Tony Stark at least partially on Musk himself. Like the Marvel quip, many of the other criticisms appear to have the situation backwards. I am not likely to buy a Tesla, I don’t have solar panels on my house, and I’m not going to buy one of his batteries, but I think he’s a pretty interesting guy doing some real and useful work. All that said, this merger seems overly opportunistic; I doubt that anything good will come of it.

    Comment by AmericanFool — June 22, 2016 @ 3:36 pm

  9. A several months ago I interviewed for a job with Solar City based on my experience as an electrician. During the group interview segment (which dropped Mr. Musks’ name) I was perplexed by their business model which included rapidly installing in peoples homes and moving on to the next in large teams where speed paid more than quality (how anyone could install such equipment without damaging homes seemed impossible). The real questions, which I had to ask, were the about the subsidies which allowed them at the time (fall of 2015) to sell electricity at something like 11 cents a kilowatt. It seemed too good to be true and upon finding out that the subsidies would be steeply cut in 2016 I became worried that this couldn’t possibly be a job with a future. I rejected the position and moved on.

    I don’t wish to see solar energy fail, but I’m worried it isn’t ready. I was even more worried that Mr. Musk was behind it. He does have a con-man vibe to him. One of these days we will know for sure if he is or isn’t.

    Comment by Dan — June 22, 2016 @ 6:50 pm

  10. The DeLorean “probably most gulling door car”, really? The Mercedes 300SL certainly exceeds the DeLorean in both fame and beauty, not to mention a gold plated investment.

    Comment by The Pilot — June 22, 2016 @ 7:41 pm

  11. It’s a move driven by the SunEdison bankruptcy. SolarCity will not be able access significant capital independent of Tesla anymore and requires the bailout.

    Musk was much too late in recognizing the problem; had he acted last summer it would have been much easier to spin. The market’s reaction is clear evidence that there’s widespread recognition of the game.

    Comment by FTR — June 22, 2016 @ 8:58 pm

  12. […] Pirrong, professore di finanza all’università di Houston, ed uno dei più salaci critici di Musk che possiate trovare sulla faccia della Terra, ha scritto un post di fuoco […]

    Pingback by Elon Musk non piace, quando gioca il gioco di Wall Street – auto21.net — June 23, 2016 @ 2:58 am

  13. @AmericanFool
    I honestly didn’t know that he used the mannerisms of Musk. If he had based Tony Stark on Musk function rather than Musk form it would have been a very boring crime movie rather than a Sci Fi action adventure. Musk has found a way to tap into the heretofore unknown Marvel Comics Collective Unconscious. He moves entire industries forward the way Charles Keating moved Savings and Loan but the US government is providing the junk bonds.

    Comment by pahoben — June 23, 2016 @ 4:20 am

  14. @Sydney – Barclays’ current forecast for Solar City’s 2016 free cash flow is negative $1.8 billion. (See http://www.wsj.com/articles/why-tesla-is-no-trillion-dollar-baby-1466616257?mod=djemheard_t). In that light, $400 million in cash on hand doesn’t look so great. That cash and other borrowing capacity may be used up just to survive until the end of the year.

    Comment by Dave — June 23, 2016 @ 2:32 pm

  15. […] Mating Hemophiliacs Seldom Turns Out Well Streetwise Professor (Richard Smith). On Elon Musk. I know I should write up his latest machinations, but it is basically old economy chicanery being sold as new economy bottles. […]

    Pingback by Links 6/24/16 | naked capitalism — June 24, 2016 @ 5:00 am

  16. Admiral Nelson is smiling over Trafalger Square-poor guy has had some rough years.

    Comment by pahoben — June 24, 2016 @ 7:05 am

  17. […] weight loss in the economy.  Every industry in America is infested with them.  Get rid of them.  Elon Musk’s recent merger is a textbook example of why we need to get rid of them.  Tesla is really cool and Elon is a forward thinker but his […]

    Pingback by Post Brexit | Points and Figures — June 26, 2016 @ 9:04 am

  18. […] the entire industry up.  I have never, ever seen a solar deal that worked without subsidies.  My friend Craig Pirrong has written about Musk as a businessman.  I’d like to see the feds end all subsidies of lots of different things and let the free […]

    Pingback by Here’s Something Hopeful | Points and Figures — October 29, 2016 @ 7:28 am

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