How far down will the SolarCity news drive TSLA stock? And how will the company resolve a spate of shareholder suits?
Tuesday morning, near the bell, one of the hottest equities representing Elon musk’s Tesla company was down about half a percent. The stumble comes as the company becomes further embroiled in controversy around a recent acquisition.
CNBC pounced on the pre-market activity, noting legal issues.
The controversy? Tesla purchased a company called SolarCity in November 2016 for $2.6 billion.
Those following along likely saw the value in the electric car maker’s acquisition of a solar panel company. That would mean the ability to harness the sun’s rays to power Tesla vehicles down the road. But it’s not all sunshine and rainbows…
SolarCity Was in Trouble, Auditors Say
Now, details emerge about SolarCity’s financial problems, including a lack of cash on hand as reported by auditor Ernst & Young.
Shareholders further claim that Tesla paid too much for SolarCity, and many of them are pursuing a class action suit. The challenge includes allegations that SolarCity failed to disclose some information about payments to lenders.
In a response statement, Tesla argues that plaintiffs are simply “looking for a payday” and accuses these shareholders of being TSLA fair-weather friends.
“These allegations … are not representative of our shareholders who support our mission and ultimately voted in favor of the acquisition,” Tesla responded to the L.A. Times, September 23. “The accusations made in the plaintiff’s brief are false and misleading, as Tesla and SolarCity published all material information in its proxy and other public filings for all shareholders to consider before deciding on the transaction.”
The Involvement of SpaceX
Another wrinkle in this case is the use of SpaceX funds to help SolarCity maintain cash positions. Reports allege that Musk’s space exploration firm helped fund the embattled solar company.
So the idea is that Tesla raced in to save a solar company mired in red ink. And it’s an example of what can go wrong in mergers and acquisitions that don’t have solid footing.
Disclosure is a key part of M&A standards … And Tesla has a lot to answer for in this particular context.
There’s a lot of scrutiny of Musk’s own behavior. The Tesla chief admits to some participation in deliberations despite recusals. Some level of involvement, Musk argues, was necessary — but that doesn’t mollify plaintiffs looking for conflict of interest or improper engagement.
Those interested in this sort of discovery can find lists of legal cases involving Musk at Plainsite.org.
Meanwhile, the slight downturn in Tesla stock means the equity has dipped from monthly highs around $250 and six-month highs of up to $291 on April 3.
Weighing 52-week highs of $379 with 52-week lows of $176, it seems Tesla is currently trading in the middle. But further downturns are troubling indicators that the SolarCity deal is knocking the wind out of Tesla’s sails.
As of Tuesday morning, TSLA gouged out a lower track down to $230, and there may be more red ink to come. Look for additional price action over the week as TSLA wrestles with the SolarCity fallout.
Justin Stoltzfus writes for Lancaster Newspapers in Lancaster, PA, as well as numerous digital publications like Answerstock, Techopedia, Warrior Trading, and Breaking Modern. His finance reporting has been featured on Motley Fool, Mint.com, and other sites. Stoltzfus is a graduate of James Madison University in Harrisonburg, VA.