Comment by rjdagost | Hacker News Reader

Comment by rjdagost | Hacker News Reader

Some people are questioning the reason behind this offer. Read between the lines here, folks. Musk has borrowed heavily to invest in SolarCity and Tesla, and with the ongoing rout in SolarCity shares he is facing a margin call:

http://www.nytimes.com/2016/06/22/business/dealbook/tesla-so... "But the transaction highlights the unusual moves that Mr. Musk continues to make to support the various arms of his empire, where he is the largest shareholder of each company.

He has taken out loans to buy up shares in Tesla and SolarCity, some backed by his personal stock holdings in both companies — a risky move that leaves him exposed to margin calls if their stock prices slide too far."

And if there's a margin call, Musk has to sell a lot of his shares to cover, which imposes considerable risk on the stock price of his companies. From Tesla regulatory filings:

"Tesla has warned investors in U.S. regulatory filings what could happen if Musk had to sell the shares. "The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business.""

This is just CYA for Musk, dressed up with happy talk about vertical integration and increasing synergy and such.

Edit: I completely forgot about the massive debt that SolarCity owes to SpaceX- all the more reason to prevent SolarCity from collapsing: http://electrek.co/2016/03/22/elon-musk-spacex-solar-bonds-s...

"Last year, SpaceX already purchased solar bonds from SolarCity on two separate occasions: another $90 million followed by $75 million. SpaceX’s involvement in SolarCity’s Solar Bond Program is set to total around $255 million"

Trying to read between lines, but it's not all that obvious to me what is going on. Considering Musk's history with big, risky, personal debts I would not discount the possibility that he is doing something like that here.

Tesla has been making seriously interesting progress in terms of products. It's far outside the norms of " disruptive tech" that we've gotten used to with the giant successes of the last decade or two (Google, Facebook, Uber...). To be Facebook or Uber, you need to put out your version of the software, be popular, lucky on your timing and (ideally) dig a network effect moat. There's a lot of risk, but not a lot of capital is involved.

Musk seems to love capital intensive ideas. There are definitely some advantages to it. Tesla doesn't worry about competition from proverbial college dorms. The competition they need to worry about is from the likes of Google (or maybe Uber in the future) or the major manufacturers. Neither seem like very strong competition. Tesla have ideas that require billions to try mostly to themselves.

Anyway, I wouldn't discount everything as corporate smoke screens and CYA. There is at least a decent chance this is what it sounds like. Tesla want a Solar arm. This purchase makes sense ...and it also lines up well in terms of converting debt-equity-risk-position-whatnot-intertwined-financial-magic.

It also makes sense from a business prospective, where one tests and develops the new ideas in a separate environment and upon success - integrates the said proven healthy ideas into the trusted larger body.

It is important for a business to be thinking long-term. As we all know, that is Elon's real strength. But the financials of this deal make little sense to me and many investors view this decision as reckless. Tesla is a cash burning company- they had to do another large capital raise just last month. SolarCity is a cash burning company with considerable debt. When Tesla buys SolarCity they must fund the day to day cash burn and also assume SolarCity's multi-billion dollar long-term debt burden. With the Model 3 ramp-up Tesla already has massive cash requirements. SolarCity will add fuel to the cash bonfire.

I never know what to think when people bring up "investor concerns" in cases like this. I mean, I get that investors are owners. But, Tesla is public and the stocks (are there bonds?) are liquid. This company has both stated and demonstrated a big appetite for very high risk-reward. If investors don't like it, they can take their win and get out of Tesla.

This is (in some sense ;-) the opposite to the criticism in your earlier comment. Tesla is doing what Musk said they'd do, take lots of risk and try to lead a shift away from fossil fuel. So far we've seen a surprisingly good car and a very promising looking battery, some charging stations… Now he says he's adding solar, with it more risk and more potential. Damned as a liar if he's doing some financial engineering while talking visionary risk taking. Damned as a loose cannon if he does what he said before (presumably) you bought the stock and pursuing some massively risky vision.

I mean… hmmm… there are lots of companies you can invest in. One way they differ is in risk-reward potential. I think it works better if/when CEOs can decide on strategy and investors can decide to buy/sell shares. Catering to investors that want to hold but also to moderate the company's strategy encourages herding, averaging out of strategies.

I'm not an investor in Telsa so I guess I don't have a dog in the fight. But… I have to say I'm excited to see a CEO (seemingly) not driven by bad incentives take big risk. I think investors in Tesla should be the most risk tolerant ones.

Judging by the stock price today, I think that may be exactly what happened, but only just a bit. Stock is down 8%, some investors have decided to get out of tesla.

I'm sure that's part of it, but I think Apple working on a car and filing to become a power company has something to do with it. I think Apple will be a much more more direct competitor to Tesla than I would have thought a year ago if this actually happens.

Some weeks ago Elon Musk said that he thinks that Apple is a bigger competitor than Google but that Apple is coming (too) late to the show.

Elon also said the car market is huge, very huge. So Tesla and Apple are just small compared to others.

If you talk about car competition you should take a look at the big players. Volvo for example is already running tests with complete autonomous cars (100 people driving them). And almost all other brands have self driving cars and electric cars.

So I don't think Apple as a competitor has anything to do with it. Apple is just too small in this industry (for now).

And as for Apple becoming a power company: it's still unclear what Apple is going to do with it in the future. For now they are just selling the excess power they create with the solar panels on the campus and other places.

> Elon also said the car market is huge, very huge. So Tesla and Apple are just small compared to others.

Yes, but they'll probably tend to be competing for the same, much smaller, portion of it.

That was at the Recode conference I believe. The interview can be found on YouTube. Well worth the watch.

I would like to add that Apple has a history of changing markets it enters, and in such a way that Apple takes most, if not all of the profits. Smartphones is a gigantic market, and all the profits belong to Apple.

you might want to check your numbers on that. based on real numbers, android is kicking iOS by a good margin, and samsung is selling way more units then apple. i think you've drinking too much of apples kool-aid.

http://bgr.com/2016/05/23/smartphone-market-share-q1-2016/

"With 17.2% of the smartphone market in 2015, Apple captured 91% of the profit."

Source: http://fortune.com/2016/02/14/apple-mobile-profit-2015/

I would love to see a Tesla laptop, or Tesla phone, being powered directly from my Tesla Sunbeam Convertor. Totally ready to ditch Apple if that happens.

Using Windows 10?

Ofcourse with Sailfish OS, because the Scandinavians love Tesla.

Tesla Linux, of course. Duh.

^ This made my day

Wow. Sounds like a huge shell game that Musk has set up among his companies. It's betting big, which should be expected from Musk, but it seems a bit odd to be so personally intertwined with public companies and making decisions accordingly. It also seems unduly burdensome to the companies in the "portfolio" which might otherwise perform well.

In fact, it's really the two more innovative companies that seem to be heavily subsidizing the more commodity-oriented business (SolarCity) and taking on its risk. Not sure I understand that play.

How do the chaebols like Samsung, Hundai, or LG in Republic of Korea handle financial matters like this?

Also Apple regularly fronts loans to its suppliers to purchase the equipment needed to produce the devices that Apple then purchases from them, right?

Fronting loans to suppliers isn't even remotely in the same legal or regulatory ballpark, unless Apple owns a meaningful stake in those companies. Fronting loans is extremely common; what Musk is doing in commingling, and at the scale he's doing it, is extremely rare today (it used to be a lot more common pre ~1970s or so, the vast expansion of financial regulations and increase in the SEC's powers, have limited it in recent times).

Even if Musk ends up in prison for some ludicrous financial crimes, he still built a frickin' rocket company and got us properly on our way to frickin' Mars.

So, I think he has a seriously larger scope of riskiness to him. I mean, frickin' rockets ..

Well shareholder protections in Korea are much weaker. Cronyism is how it happens.

Say what you will about shareholder activism, my impression is that Japan/Korean corporate governance has a lot of issues from a lack of it.

If I'm not mistaken, Solar City bought a solar panel manufacturing outfit in Buffalo about 9 months ago when it seemed that solar panels would be hit with a supply shortage. I think now the supply of panels has rebounded much faster than expected and perhaps this has put Solar City in a difficult spot financially.

Buffalo local here, going off memory; They received about $700 million from the state to build a huge plant and create ~3,000 jobs. - http://www.nytimes.com/2015/10/26/nyregion/cuomo-bets-on-sol...

There's an air of corruption around it because the AG issued subpoenas, but it seems like there's no real fire behind the smoke.

Publicly it's been discussed much in the same way the Gigafactory is, an opportunity to own production and drive costs down in one fell swoop.

Relevant quote on your conjecture about it being a poor decision in the face of underestimating supply: "Although manufacturers are starting to boost idle production to match increasing global solar demand, SolarCity isn’t interested in conventional crystalline-silicon panels. “We’re seeing high-volume production of basic panels, but not high-volume production of advanced panels,” said Musk." - http://www.greentechmedia.com/articles/read/solarcity-just-a...

Thanks for this. From what you've said it seems trouble with that plant is not a reason for a buyout. Perhaps their advanced panel plant is looking particularly good but the Solar City share price is down and so it's a good time for a buyout by Tesla. Certainly batteries plus panels is the killer app so it makes sense for them to be together at some point.

An alternative way of looking at it (that comes to the same thing): Solar City is now cheap.

Can someone explain why would he take out loans to buy up shares in the first place? Just to increase his personal holdings for a hopefully larger return? To ensure he is the largest single stockholder? I'm not that knowledgeable about investing, but when I was reading up on margin trading just now I learned you cannot do it on an IPO. That means the money from his purchase wouldn't have gone to Solar City/Tesla but just whoever happened to own the stock he bought. So am I correct in concluding that his purchase would not directly benefit the companies?

I believe his original, public statement on this was to show how confident he was in Tesla as a company. Because outsiders were knocking him left and right and commenting on his unimpressive share holdings at the time.

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