Two Heavily Government Subsidized Money Losing Entities to Merge.
New Entity to Reap Synergies of the New Math?: -2 + -2 = +5.
Tesla Announces Plans to Buy Solar City – Tesla Stock Tanks
Tesla announced today that it is making an offer to buy Solar City. Tesla makes battery powered cars at a loss even with a large government subsidy. Solar City offers solar powered solutions at a loss even with a large government subsidy. Besides having losses in the millions despite government subsidies, Tesla and Solar City have another thing in common, a major shareholder, Elon Musk.
Mr. Musk owns approximately 22% of both companies and is the Chief Executive Officer of Tesla.
Synergies of a Solar City and Tesla Merger?
Double Fantasy – The merger of Solar City and Tesla will create a family of unicorns.
Canstockphoto
Two Unicorns are Better than One
Often when two companies merge, proponents of the transaction cite “synergies” that will be reaped to make the combined entity stronger and more profitable. When a stronger company merges with a weaker company there are concerns that the stronger company might be taking on a heavy anchor that might sink them both.
But what happens when two weak unprofitable concept companies toss their anchors onto each other? Do their individual company losses when joined together create profits?
Will the combined entity have a better chance of getting greater government subsidies and chance for a bailout if the combined entity fails? Will the combined entity ensure more press for Mr. Musk that can be used to promote the new entity’s stock price.
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Unicorn Trifecta?
BTW Mr. Musk is also the Chief Executive Officer in another government subsidized entity- Space X, a company formed to mine meteors for minerals.
Will an offer by Solar City/Telsla to buy Space X be forthcoming?
The End of the Bull Market
When valuations are stretched, share buybacks are no longer an option, patience wears thin on unprofitable companies and interest rates have bottomed, a bull market dies. The Solar City/Tesla merger looks like a desperate attempt to boost stock prices and perhaps attract more capital at high valuations. It might have worked during the bull market, but at the end of one, it appears desperate and likely to inspire derision rather than optimism about the combined entity.
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