SolarCity Accused of Taking Shingling Technology Secrets

With all the merger arbitrage funds out there, you have some very powerful and well moneyed people with a vested interest in seeing your merger go through.

Without commenting or knowing anything about the merits of the lawsuit, it's a very opportune time to bring up a lawsuit. I mean if you are a Solar city shareholder your shares had a very good chance of going to zero without this gift from Tesla, you're going to do pretty much about anything possible to ensure the merger goes through.

So if that means throwing a bit of cash to SunPower, then you're going to very strongly consider it, infact you're going to pressure Telsa to help out with settling the lawsuit because if the merger goes through it becomes their lawsuit.

This has already been a rocky merger for a merger that looked like a sure thing at the beginning.

If you've never thought about the mechanics of how merger arb works. Typically a fund will want to be flat of both companies by the time the merger is completed.

To do this, you find out the ratio of shares being exchanged. In this case its about 1 Telsa share for every 10 Solar city shares so lets use a ratio of 0.1.

The idea is that when the merger closes every 10 shares of Solar city will become 1 share of Tesla so you then flatten your short position of Tesla with the new shares from the merger and the difference between the price you bought/shorted for and the closing transaction price is your spread/profit.

Right now the spread(Price of SolarCity - Price of Telsa*ratio) between the two companies has grown from 0.44 in August to 2.57 as of now( it was as high as 5.5 a week ago), which indicates there is a fair bit of uncertainty over whether or not this merger will go.

Typically you'd expect the spread to asymptotically approach the deal price as we approach the closing date as your certainty should increase over time up to the closing date. An expanding spread is a troubling sign....

Possibly helping push the spread wider is the cost of borrow on Tesla.

So assuming you expect the merger to go through for every 10 shares of Solar City you buy you short 1 share of Tesla. Now when you short a share, there is the question of ownership, you first need to borrow it. And to borrow it you need to pay a fee to borrow.

Unfortunately right now Telsa shares are being loaned out for around 100%, which is extraordinarily high. For reference, if you wanted to say short Google you would expect to pay around 0.35%, a third of a percent.