There were the glaringly obvious conflicts of interest, as Musk is not only chairman of SolarCity, but also the first cousin of the alternative energy company’s CEO Lyndon Rive. The two companies’ boards had so much overlap that SolarCity had to leave the merger decision up to its only two board members with neutral backgrounds, independent directors Donald Kendall and Nancy Pfund. Given the corporate governance red flags, analysts doubted the deal would even go through, with Credit Suisse’s Patrick Jobin giving the merger just 20% to 40% odds of succeeding. Tesla stock dropped 15% in the days after the deal was announced.
On Wednesday, the companies revealed new details about the merger negotiations showing that Tesla and SolarCity were at odds on several occasions throughout the discussions, in contrast to widespread suspicions of self-dealing and sweetheart dealmaking. In fact, even Musk’s board at Tesla did not always obey his will, seemingly refuting accusations of cronyism. The new revelations, disclosed in a regulatory filing that reads like a behind-the-scenes play-by-play of the boardroom sessions, come about a month after Tesla and SolarCity officially struck their $2.6 billion deal.
Here are five things we now know about how the Tesla-SolarCity merger came to pass:
1. Tesla’s Board At First Didn’t Even Want to Consider Buying SolarCity
The plan to merge Tesla and SolarCity came out of a seemingly casual conversation in February between Musk and his cousin Rive in which Musk “suggested” that they undertake “a more serious consideration” of a deal. That “discussion never progressed beyond a high-level, conceptual stage,” according to the filing. Yet on February 29—also known as Leap Day—Tesla convened a special meeting of its board at which the company’s CFO made a presentation outlining potential “synergies” the companies could achieve by combining.
But Tesla’s board did not take the idea all that seriously, and “determined not to proceed with the evaluation of a potential strategic acquisition.” The board was concerned that the legwork for the merger was likely to put additional strain “on Tesla management’s time and resources,” especially while Tesla was struggling to keep up with its production goals for its Model X vehicle and falling behind schedule. Some three months later, however, on May 31, Musk raised the issue again with the board, at which time the board agreed to vet the possibility of acquiring a solar energy company—whether SolarCity or a different target.
2. SolarCity Entertained 7 Other Suitors Besides Tesla
Just as Tesla began mulling making an offer for SolarCity, Rive and his executive team were meeting with another potential suitor. On June 2 in Silicon Valley, SolarCity’s management team sat down with guests from an unnamed company (“Party A”) that was a “potential strategic counterparty for a business combination transaction with SolarCity.” The unnamed company, however, did not specifically discuss a deal or make an acquisition offer.
Tesla made its first official offer for SolarCity on June 21, announcing it publicly on its blog. Still, just five days later, SolarCity was fielding inquiries from other interested parties: On June 26, another unnamed potential strategic partner (“Party B”) emailed one of SolarCity’s board members “to discuss a possible business combination transaction with SolarCity.” Two days after that, SolarCity’s investment bankers were in deal talks with Party B, which asked to set up a meeting “to conduct business and financial due diligence” on the company.
SolarCity also proactively solicited potential competing bids. At the end of June, SolarCity’s bankers at Lazard reached out to and met with an unknown private equity firm (“Party C”) “to gauge its potential interest in a transaction with SolarCity.” Even on the July 4th holiday, SolarCity’s two neutral board members, along with its bankers and lawyers, were working to formulate a strategy for shopping the company around to other potential buyers. Shortly thereafter, SolarCity circled back to the original Party A to ask whether it might want to make its own acquisition offer.
Indeed, between when Tesla made its initial proposal and when SolarCity ultimately accepted it, SolarCity’s bankers contacted six potential “strategic counterparties” to see whether they might want to buy the company—including Party A and Party B. They also contacted the private equity firm “Party C”—the seventh suitor—about a possible buyout of or investment in SolarCity.
Yet no other offers materialized. By July 21, only Party B remained interested in potentially pursuing a deal with SolarCity; by the next day, it too had dropped out, citing various reasons including its own regulatory issues. It may also not have had enough financing to compete with Tesla: “Party B did not believe that it was in a position to make an acquisition proposal within the range of Tesla’s original proposal,” according to the filing.
3. SolarCity Was Getting Desperate for Money During the Deal Talks
Shortly after Tesla originally unveiled its proposal for SolarCity, the solar energy company started freaking out a bit about money. By early July, SolarCity had noticed that some of its lenders “appeared to be delaying funding” of the company’s projects and other financing, attributing the problem directly to “the announcement of the Tesla proposal.” The publicity of the offer had “negatively impacted” SolarCity’s ability to tap the market to raise cash, and SolarCity’s liquidity dried up, Rive and his executive team lamented to the board members evaluating the deal.
At the same time, SolarCity’s management was beginning to worry about something else on the horizon that threatened to make their fundraising situation even more difficult: SolarCity was scheduled to report quarterly earnings in early August, and it expected to reveal that its cash balances had dwindled below where they were supposed be. Worse, SolarCity was preparing to lower its guidance for the amount of solar panels it expected to install this year. (When it revised the guidance lower on the same day it announced its merger agreement with Tesla, SolarCity’s stock sunk more than 7%.)
SolarCity’s troubles also led Tesla to lower its acquisition offer—even after SolarCity asked Tesla to raise its initial bid. Disappointed with Tesla’s counteroffer in the other direction, Kendall and Pfund—SolarCity’s two-member committee—discussed going back to Party B, which might have been better equipped to compete with Tesla’s lowered bid, as Party B’s “perspective on the valuation of SolarCity” was now closer to Tesla’s view. Ultimately, though, the directors abandoned the idea, thinking they were unlikely to elicit a better offer.
In the wake of Tesla’s acquisition proposal, investors panned Musk for attempting what they saw as a “bailout” of SolarCity. Certainly, SolarCity was getting increasingly desperate for cash. In the days leading up to SolarCity’s acceptance of Tesla’s offer, its bankers approached six other financial institutions besides the private equity firm about investing in the troubled company. The board committee was under pressure “to secure flexibility for SolarCity to obtain financing in the interim period between signing and closing a transaction with Tesla”—in other words, to make sure SolarCity could keep the lights on before it became part of Tesla. Yet SolarCity never received any other investment offers—and when it finally agreed to merge with Tesla, it was running out of time.
4. SolarCity Was Worried Tesla’s Stock Might Fall Too Much
Besides asking for a higher price from Tesla, SolarCity also wanted an out clause in the agreement if Tesla’s stock fell below $175 per share before the deal closed. Such a provision would offer SolarCity a valuable protection: After all, Tesla would be paying completely in stock to acquire it. Every dip in Tesla’s share price meant SolarCity investors were getting less in the deal—and Tesla stock fell 2% the day of the merger announcement alone. While Tesla’s stock price has recovered to about $212 share today, it sank as low as $188 in the week after announcing its offer in June (thanks in part to the post-Brexit stock market selloff).
But SolarCity’s request, made as part of its counteroffer with the higher price, did not sway Tesla—which came back with an even lower offer that did not include any termination rights in such a scenario. Instead, SolarCity will owe Tesla $78.2 million if it decides to walk away from the deal—or $26.1 million if it dumps Tesla to accept a higher offer from another bidder.
5. SolarCity’s Bankers Made a $400 Million Error
An an effort to keep the negotiation process above board, Musk recused himself from the board discussions as well as the shareholder votes at both companies. But that didn’t stop SolarCity’s investment bankers from screwing up their own math.
The companies noted in the filing Wednesday that SolarCity’s advisors at Lazard had made a “computational error” in the financial documents they provided to SolarCity’s board committee, in which they “double-counted” $400 million worth of SolarCity’s debt, overstating the company’s actual $3.4 billion in debt by nearly 12%. Plugged into their valuation algorithms, they had mistakenly estimated that SolarCity was worth about $15 to $34 per share; the same analysis with the correct debt figures valued SolarCity at $19 to $38 per share.
Tesla, whose offer values SolarCity at about $25 per share, apparently didn’t care—Lazard’s bankers didn’t even realize their mistake until August 18. Tesla was only informed last Thursday—more than three weeks after signing the deal with SolarCity—but the company said it wouldn’t have changed their proposal, as they had not included the error in their own calculations.
Still, it’s not too late for SolarCity to hold out for a higher offer: It has until September 14 to actively seek other acquisition proposals, at which time the so-called go-shop period stipulated in the merger agreement ends.
Editor’s note: This article previously stated that Tesla did not notice Lazard’s error. It has been updated to reflect a response from Tesla, which says it could not have noticed Lazard’s mistake, as the erroneous calculation was only included in documents provided to SolarCity’s board committee. Tesla therefore never saw the documents containing the error, and did not include the error in its own calculation of SolarCity’s value.