Coyote Blog

This is honestly one of the weirdest acquisition proposals I have seen in a long time:  Elon Musk's Tesla offers to buy Elon Musk's Solar City.

This makes zero business sense to me.    This is from the press release:

We would be the world’s only vertically integrated energy company offering end-to-end clean energy products to our customers. This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered. With your Model S, Model X, or Model 3, your solar panel system, and your Powerwall all in place, you would be able to deploy and consume energy in the most efficient and sustainable way possible, lowering your costs and minimizing your dependence on fossil fuels and the grid.

I am sure there are probably some hippy-dippy green types that nod their head and say that this is an amazing idea, but any business person is going to say this is madness.  It makes no more sense than to say GM should buy an oil production company.  These companies reach customers through different channels, they have completely different sales models, and people buy their products at completely different times and have no need to integrate these two purchases.  It is possible there may be some overlap in customers (virtue-signalling rich people) but you could get at this by having some joint marketing agreements, you don't need an acquisition.  Besides, probably the last thing that people's solar panels will ever be used for is charging cars, since cars tend to charge in the garage at night when solar isn't producing.

One might argue that some of the technologies are the same, and I suppose some of the battery and electricity management tech overlaps.  But again, a simple sourcing agreement or a battery JV would likely be sufficient.

So what do these companies share?  I can think of three things.

The first is Elon Musk.   When one sees a deal like this, one is immediately suspicious that there is some kind of game going on where the owner combines holding A with holding B and somehow in the combination ends up with more wealth.  This is a game conglomerates played in the 1960's -- you could create a lot of (paper) value if you had a high PE (stock price to earnings ratio) company and went around buying low PE companies, instantly creating paper wealth if you could buy their earnings cheap and then have them suddenly valued at your higher PE.   Its hard to guess if this sort of game is going on here, as neither company has earnings (or rather both lose a lot of money).   Further, I have no read on Mr. Musk's personal ethics.  If this were Donald Trump, we would all immediately be suspicious such a game was at play.

The second thing these two companies share is that they have business models based on consuming massive amounts of government subsidies.  They get subsidies directly (each by selling various sorts of tax credits or fuel economy credits to power companies and auto makers), they have both gotten sweetheart deals from governments for production facilities, and their customers get subsidized as well in the purchase.  However, while there certainly are economies of scale for cronyism (large companies have the pull to get the loot), I shudder to think that there might be even more for these two companies to grab if they were larger.

The third thing these two companies share is that they both have huge financing needs, are losing lots of money, and are burning through tons of cash.   And here I think is the real heart of this deal, and if I am right, we may be able to answer the question on Elon Musk's ethics.  While both companies are burning through cash and are constantly going out to the market for more money, Tesla still has a (not totally justified in my mind) fabulous reputation with investors** and people seem to be falling over themselves to throw money at it.  With Apple languishing and Google old news, there is no hipper, trendier company out there.   On the other hand, SolarCity is starting to suck wind.  A few months back JP Morgan downgraded the stock:

SolarCity is having trouble attracting new investors, as the company has launched and canceled programs and altered its accounting methods, JPMorgan wrote in a note, according to MarketWatch.

Additionally, some of SolarCity's lower-income customers could be at risk of "slow-pay or default in the event of an economic downturn," the firm continued.

...SolarCity's weaknesses include its generally high debt management risk, weak operating cash flow, generally disappointing historical performance in the stock itself and poor profit margins.

They are also seeing more competition from local contractors and, perhaps most worrisome for their business model, various government subsidies are being scaled back and many states are changing their power metering rules to pay customers only the wholesale rate, rather than the retail rate, for power they put back in the grid.  They have said in most of their annual reports as a risk that their business model likely would not be viable (if it could be called that even today) without current or higher levels of government subsidies.

I have no inside information here, but this is the best hypothesis I can put together for this deal.  SolarCity has huge cash needs to continue to grow at the same time its operating margins are shrinking (or getting more negative).  They are having trouble finding investors to provide the cash.  But hey!  Our Chairman Elon Musk is also Chairman of this other company called Tesla whom investors line up to invest in.  Maybe Tesla can be our investor!

The reason I call this two drunks propping each other up is that Tesla also is also burning cash like crazy.  It is OK for now as long as it has access to the capital markets, but if it suddenly lost that, Tesla would survive less than 6 months on what it has on hand.  Remember, SolarCity was a golden child just 3 years ago, just like Tesla is today.  Or if you really don't believe that high-flying companies that depend on access to the capital markets can go belly up in the snap of a finger when they lose their luster with investors, I have one word for you:  Enron.

There is a substantial minority of the investment community that thinks that Tesla's headed for chapter 11, even before taking on the SolarCity albatross.  Here is one academic paper.  Here is another such opinion.  Non-GAAP reporting has proliferated like a cancer among public companies, with so many creative non-GAAP numbers that I am not sure the Enron folks would go to jail nowadays.  Tesla is a master of this game.    Even if Tesla is not headed for chapter 11, the absolute last thing Tesla needs to be doing is taking on a new acquisition that burns a lot of cash, while simultaneously diluting their management focus.

When I watch SpaceX launches, I so want to love Elon Musk.  But I am increasingly convinced that this is a terrible deal, an insider game he is playing to try to keep one of his investments alive.  I am seldom a fan of most minority shareholder lawsuits, but if I were a minority shareholder of Tesla I would be suing to block this acquisition.

By the way, many investors must be reading this the same way, because SolarCity stock prices are up and Tesla stock prices are down (at lot) today.

Disclosure:  I have been short Tesla for a while.  I shorted SolarCity this morning when the acquisition was announced, after its price popped up.  I consider this merger announcement as the moral equivalent of announcing that SolarCity is in financial distress.  These investments are tiny, the equivalent of a bar bet rather than any substantial investment on my part.

**Footnote:  I have to say this every time -- The Model S is a great car.  I would love to have one, if Santa put it under the tree for me.  But just because they have one great product does not mean that the company will be a success or is a great investment or that it is worth massive amounts of my tax money in subsidies.

Forget the #DIV/0! PE.  That prices the company at over 57 times annual revenues.

Believe it or not, I think this picture is actually good news:

This is a little flawed, since we would expect a constant trend to be a constant percent increase each year, which would be upward curving on this chart, not a straight line trend  (it would be straight on a log scale).  Never-the-less, it makes a point  (by the way, it is interesting the 1980's are considered the decade of greed on Wall Street rather than the 1990s, from this chart).

Here is a better way to make my point.  We get a similar chart if we look at PE ratios for the S&P500  (the chart below is on trailing 10 year average earnings).

Why is this anything but depressing?  Because I get the sense that many people, without any other general indicator of how bad things are in the financial markets, are using the steep drops in the stock market as a proxy measure.  The stock market looks like a disaster, so everything else must be a disaster.

But in a large sense, at least so far, all the stock market has done in the last 2 weeks is return to historical norms.  This tells me that there is nothing about the current level of the stock market that is screaming disaster signals.  In fact, the current level of the stock market is screaming normalcy. 

Of course, this does not mean the drop will stop here.  PE's in the worst of times have headed on down to 5 (which would be about DOW 3000, yuk).  And corrections seldom stop at the mean - they usually over-correct on below the mean.  But seen on these charts, this recent move looks more like the completion of the correction to the late 1990's bubble rather than necessarily an indicator of current financial disaster.

Apparently, my wife has some kind of event tomorrow she needs to look fabulous for, so we went through our usual ritual of her modeling a variety of outfits and soliciting my opinion of their relative merits.  This is hard for me for a couple of reasons.  First, I have no fashion sense (I was an engineer for god sakes).  Second, I have terrible visual memory.   I absolutely dread going to the eye doctor because I can't do those "which is clearer, A or B" tests.  The moment I see B, my mind totally purges what A looked like.  I have the same problem with helping my wife.  If I say I like an outfit, she'll ask if its better than the green outfit I saw a while back.  She might as well ask me the name of my 2nd grade PE teacher. 

Anyway, at the end I eventually say -- yeah, that's definitely the one.  Which is something I learned from golf.

Golf is the most mental of all games.  I can prove that in a simple way - in what other professional sport is every athlete accompanied by a paid psychologist (called a "caddy")?  Caddies will often discuss A or B choices with their golfers.  The golfer might say he wants to hit a soft 7-iron and the caddy will reply that he favors a hard-8.  Anyway, once a good caddy realizes his player has decided on the soft-7, he is supposed to go into support mode:  "That's it.  That's exactly the right club.  Put a good swing on it."

My error tonight was relating this golf caddy analogy to my wife during our discussion of whether she should wear the bustier and the fishnet stockings or the leather outfit with the bare midriff (just kidding, these were unfortunately not the choices I was presented with).  When I finally told her that she definitely had the right outfit, that she had made the right choice, etc., she seems to have lost some confidence in my opinion.  The bright side is that this may be yet another victory for the learned-male-helplessness task-avoidance strategy.

Two different inputs recently have gotten me thinking about public relations and the web, and just how far behind the technology curve many PR departments may be.

The first input was a comment I got on one of my posts that I wrote while on vacation last month.  In this post I mentioned that I would be heading for Disney World for our traditional family reunion, but that growing crowds on Thanksgiving week would probably force us to try a different week next time.  I got a comment from someone who sounded like a Disney employee, recommending a better week.  Now, it turns out that it was not a Disney employee, just a helpful reader (one of my loyal 34 or so).  But it got me to thinking.  Are corporate PR departments keeping up with the web?  If Disney was not doing stuff like this, why aren't they?

The second input was this post in Reason's Hit and Run blog.  They point out TIVO efforts to manage the use of the TIVO copyright to ensure that they do not lose the rights to the name.  (Though the article mentions Xerox and Kleenex, my understanding is that Formica actually came the closest to losing its copyright on that name due to overuse as a generic term for, uh, whatever Formica is).  How can companies possibly keep up with their trademark usage on the web?

Back when I worked for a large corporation, we had PR people, either in or out of house, who would provide us with weekly news summaries of where the corporation was in the press.  This was particularly helpful to those of us in marketing, who wanted to make sure we saw all the reviews of our product (so we could use the good ones and refute the bad ones).

In the world of the Internet, this approach seems hopelessly dated.  In the "old days" I used to walk to school 20 miles each day in the snow, up hill both ways  (sorry, always feel like I am channeling my dad when I say "in the old days") the media might have 10  or 15 mentions of our product every two weeks.  Now, on the web, there might be 10 or 15 an hour. Every day employees may be talking about the company in a chat room, customers may be commenting on the company in some place like epinions.com or in Amazon reviews, blogs may be posting on the company, and authorized or unauthorized vendors may have set up shop to sell the company's products online.

How does  a company keep up with all this?  If I was a large company, I would be actively searching the web for key words associated with my company and competitors, looking for new posts or entries or reviews or even whole websites.   Employees spilling secrets in a chat room?  Need to tell legal.  New web site selling our product? Send it to marketing to make sure they are authorized and are using our trademarks and product descriptions correctly.  Blogs posting on us?  We might want to add our own comment to the post.

What we need is the modern technology version of the clipping service.  The technology would probably be pretty straight forward - a company wouldn't even have to build it's own search engine - it could just take a full snapshot of the Google results one day and compare those results to a search the next week, and look for changes.

Or, better yet, why doesn't Google provide this service to corporate accounts itself?  After all, they do need something to justify their sky-high PE ratio, maybe this would help.  Wouldn't Exxon pay $50,000 a year for this service?  Heck I pay D&B several hundred dollars a year for a credit watch service on my company's credit rating, I would certainly pay some hundreds a year for a PR watch of my small business and my competitors.

UPDATE:

One company that seems to be doing something ike this is BuzzMetrics.  Link courtesy of RatherBiased.com

A comment I got on one of my posts on Friday got me to thinking about corporate PR departments and whether they are really keeping up with the web.  In this post I mentioned that I would be heading for Disney World for our traditional family reunion, but that growing crowds on Thanksgiving week would probably force us to try a different week next time.  I got a comment from someone who sounded like a Disney employee, recommending a better week.

Now, I don't know if they were an employee, or whether they found the post by accident or through an active search program.  But it got me to thinking.  Are corporate PR departments keeping up with the web?

Back when I worked for a large corporation, we had PR people, either in or out of house, who would provide us with weekly news summaries of where the corporation was in the press.  This was particularly helpful to those of us in marketing, who wanted to make sure we saw all the reviews of our product (so we could use the good ones and refute the bad ones).

In the world of the Internet, this approach seems hopelessly dated.  Every day employees may be talking about the company in a chat room, customers may be commenting on the company in some place like epinions.com, blogs may be posting on the company, and authorized or unauthorized vendors may have set up shop to sell the company's products online.

How does  a company keep up with all this?  If I was a large company, I would be actively searching the web for key words associated with my company, looking for new posts or entries or even whole websites.   Employees spilling secrets in a chat room?  Need to tell legal.  New web site selling our product? Send it to marketing to make sure they are authorized.  Blogs posting on us?  We might want to add our own comment to the post.

So I got to thinking - was that Disney that found my site?  If so, is this what they are doing to manage their online PR?  And if not, why aren't they doing it?  You wouldn't even have to build your own search engine - just take a full snapshot of the Google results one day and compare those results to a search the next week, and look for changes.

Or, why doesn't Google provide this service to corporate accounts itself?  They need something to justify their sky-high PE ratio, maybe this would help.  Wouldn't Exxon pay $50,000 a year for this service?  Heck I pay D&B several hundred dollars a year for a credit watch service on my credit rating, I would certainly pay some hundreds a year for a PR watch.

UPDATE #1

See comments below - the original commenter apparently not a Disney employee.  Never-the-less, the idea still excites me.  A company like Disney rests almost completely on its reputation - why isn't someone out on the web every day monitoring what is happening vis a vis their company?