Business

Musings On Markets

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It is get easy to get outraged by occasions around you, but I’ve learned, through hard experience, that writing when outraged is dangerous. In the end, once you have climbed on your high equine, it is easy to find fault with others and wallow in self-righteousness. It is because of this that I’ve avoided taking issue with investment banking valuations of specific companies deliberately, much as I may disagree with the practices used in many of them.

I understand that bankers make money on transactions that their valuations are more sales tools than assessments of fair value and that asking them to pay attention to valuation first concepts may be asking too much. Once in a while, though, I do come across a valuation so egregiously bad that I cannot restrain myself and studying the prospectus submitted by Tesla because of their Solar City acquisition/merger was this occasion.

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My first response as I go through the explanations of the way the bankers in this deal (Evercore for Tesla and Lazard for Solar City) valued the two companies was “You must be kidding me!”. In June 2016, Tesla announced that it intended to acquire Solar City in a stock swap, a surprise to almost everyone involved, except for Elon Musk. In the right time of the deal, Mr. Musk contended that the deal made sense for stockholders in both companies, arguing that it was a “no-brainer” that could allow Tesla to increase its reach and become a clean energy company.

While Mr. Musk has a history of big claims and the smarts and charisma to deliver with them perhaps, this deal attracted attention due to its optics. Mr. Musk was the business lead stockholder in both ongoing companies and CEO of Tesla and his cousin, Lyndon Rive, was the CEO of Solar City.

Even Mr. Musk’s strongest supporters cannot contest the notion that he is at effective control at both companies, creating, at the minimum. In virtually any friendly merger, the bankers on both sides of the offer face, what at first sight, appears like an impossible problem. In the Tesla/Solar City offer, the bankers experienced an especially difficult challenge.

5.25 million and Lazard getting 0.4% of the collateral value of Solar City. There are numerous elements of these valuations that I can take concern with, however in the passions of fairness, I shall start with what I term run-of-the-mill banking malpractice, i.e., bad practices that many bankers are guilty of.