Mba521 Financial Performance | Prospects Assessment Answers

Questions:

1.As a potential investor, what is your assessment of the internal and external prospects for SolarCity’s business to make it a good acquisition target for Tesla? Are there any potential conflicts of interest, considering Musk’s powerful role in both companies? (15%)

2.Identify any real options that would be created because of this acquisition. Should Tesla acquire SolarCity? And how much would you consider to be the fair share swap ratio? Provide your overall assessment of the opportunity and a well-supported recommendation. 

Answers:

1.The internal and external prospects for striking a deal with Solarcity were as following-

• Tesla did not have the capability to produce the battery cells used for their cars.
• SolarCity was already carrying a good name in the US and hence would provide a platform for Tesla to market its products(Reuters., 2016).
• SolarCity’s vision was to provide green energies with intelligent devices which were in compliance with the goal of Tesla.
• The share price of SolarCity was very less and hence it was a great deal for Tesla to acquire it and it was not even sure that such a deal would be available again for Tesla or no.

Elon Musk is having a major share in both Tesla and SolarCity and hence there is a major conflict for him in the deal. The newspapers called the deal as ‘no-brainer’ but it was acceptable as the deal was nowhere made for the personal benefits and not of the organization. The deal says that there was a total of 2.6 million dollars of acquisition thing that was associated with conflict of interest. The issue of solarcity being in liquidity crisis and Tesla pumping in the money to support it was also associated with the interest of conflict thing (Bolland, 2017).

2.Tesla has been from even wanting to expand and foray into the US market. The battery cells making organization has already has the name in the US market. Tesla is associated with fuel saving cars and it wanted to develop the cars run on the solar batteries and hence wanted to make green cars which was one of its goal. But the research and development if Tesla was not great and hence it wanted to acquire SolarCity because it was a professional in making the batteries and it would also help them reach the goal which it had planned or themselves. Acquisition of Solar City was beneficial as it had very low share prices and it would open the market of US for Tesla and Tesla would not have to then spend a lot on promoting its cars in the US market because of Solar City already having a name on the market(Thomas, 2017).

The acquisition deal price was 2.6 million dollars and the directors had proposed to acquire all the shares which were outstanding of common stock of SolarCity in exchange of all the common stock of Tesla. So the acceptable swap ratio was 0.122x to 0.131x shares of Tesla of the common stock for each common stock of Tesla. SolarCity’s every shareholder would get approx. of 0.11 share of Tesla after the acquisition. Weighing and seeing the prices of Tesla and SolarCity this deal was a fair one as it helps in receiving some part of shares of Tesla to the shareholders of SolarCity (Droege, 2007). The common stock is also exchanged at a premium price and it helps in giving opportunity to the existing shareholders of SolarCity to have a part of share in Tesla after the acquisition.

Bibliography

Bolland, E., 2017. Comprehensive Strategic Management: A Guide for Students, Insight. New York: Cengage publications.

Droege, P., 2007. The renewable city: a comprehensive guide to an urban revolution. New DElhi.

Reuters., 2016. Tesla and SolarCity Are Said to be Close to a Merger Deal. Tesla and SolarCity Are Said to be Close to a Merger Deal, 25 July.

Thomas, R., 2017. Construction Site Management and Labor Productivity Improvement. New York.