Investment Bank Makes $400 Million Mistake In Tesla / SolarCity Deal – Update

9 months ago by Steven Loveday 28

Tesla Roadster Hooked to SolarCity Install in Rabobank

Tesla Roadster Hooked to SolarCity Install

Over two weeks after the Tesla / SolarCity deal was signed, SolarCity’s investment service, Lazard, realized a substantial monetary error in the $2.6 billion sale. The company was offered to Tesla for a shortage of $400 million.

SolarCity and Tesla Model S

SolarCity and Tesla Model S

Lazard’s initial analysis reported SolarCity’s equity value between $14.75 and $34 per share. However, an oversight that accounted for the company’s projected debt, was missed. The true valuation should have been $18.75 to $37.75 per share.

Though Lazard, Tesla, and SolarCity all declined to comment, it was found that the two companies agreed not to abort the deal. Tesla would pay $25.37 using its stock for payment.

Update: NY Times reports on some confusion on the numbers and where the error actually occurred.

“An earlier version of this column referred incorrectly to Lazard’s role in a miscalculated valuation of SolarCity. The adviser used figures of indebtedness that had been double-counted in SolarCity’s spreadsheets. It was not responsible for the double-counting.”

Should Lazard still have caught the error as advisor?  Probably, but full fault is clearly shared with SolarCity in this case.

This is all a product of a deal the Elon Musk worked out to bring the two companies together. Being the top stockholder in both companies meant that he would stay out of negotiations and leave decisions to a special board and voting to those that don’t have a large vested interest in both companies.

Lazard, currently ranked number ten in the Thomson Reuters Americas M&A league table, is not the first high-level investment bank to fail at such calculations. Earlier this year a lawsuit was filed to decide Tibco Software’s buyout by Goldman Sachs Group, after a similar accounting mistake caused concern.

Source: Autonews

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28 responses to "Investment Bank Makes $400 Million Mistake In Tesla / SolarCity Deal – Update"

  1. Loboc says:

    What’s 15% between friends? Heck, cousins.

    1. ffbj says:

      Yeah, when cousins are two of a kind.
      https://www.youtube.com/watch?v=dIzGzFmCVqM

  2. tftf says:

    “it was found that the two companies agreed not to abort the deal….”

    Both know why. SCTY could likely go bankrupt within 12-18 months (if not sooner) if TSLA didn’t save them.

    This merger in reality is a bailout of SCTY and TSLA.

    PS: Yes, I’m short TSLA. This merger is Musk’s next big mistake imho. It will drag Tesla’s finances down for years (and give Musk a convenient excuse for more capital rounds…)

    1. DangerHV says:

      tftf, thanks for your honesty, your disclosure adds value to your comments.
      I’m confused (and ignorant). Does this mean SCTY is worth $400 mil more than estimated, which would = better for Tesla?

      1. tftf says:

        “Does this mean SCTY is worth $400 mil more than estimated,”

        On their spreadsheet yes. A financial institution can always make a deal work, their assumptions and models just need to become more rosy.

        In practice, SCTY stock could be worth zero if TSLA doesn’t save them (also note the absence of other bidders…nobody else wants to touch SCTY).

        1. DangerHV says:

          Thanks tftf. I obviously don’t understand “financial speak”

          1. ffbj says:

            Lots of people understand it or speak it, but still do not know what they are talking about. Anyway man, top analysts think it a fools game to short Tesla. While I would not go that far, I would say it is quite a dangerous one.

            https://www.youtube.com/watch?v=nPOy7TPjfkE

      2. RexxSee says:

        Honesty? HA! He is not a shorter, he is paid by Big Oil or Big Car to put anything negative about electrics.

        1. Pushmi-Pullyu says:

          I haven’t seen any evidence of that, and I’ve read far too many of tftf’s posts at Seeking Alpha. In fact, I don’t recall seeing any general anti-EV FUD from tftf. Just anti-Tesla FUD, and his motive for that should have been pretty transparent even for those who don’t know he’s a perpetual Tesla shorter frequently posting to Seeking Alpha.

          I’m not an investor, and I confess the utility of long-term shorting of a stock escapes me. You can certainly point to periods in the history of Tesla’s stock price where shorting the stock would have earned the shorter money with a short-term investment, selling out at an advantageous time. But long term? I don’t see how shorting Tesla stock could *ever* be a winning bet, unless tftf honestly thinks Tesla is going to completely fail and go bankrupt soon. Sure, he keeps predicting that (or at least insinuating it), but I think he’s smart enough not to believe his own FUD.

          1. Jim Whitehead says:

            Pushmi is correct; its risky and costly to short Tesla for long. The stock is on a wild roller-coaster ride and can burn you fast on a margin call.

            Most people don’t know that shorts have to pay a special broker fee to “borrow” shares from longs. Sine Brokers like Fidelity and Schwab share this fee with Tesla stockholders.

            My brother, who became a millionaire in 3 years on Tesla stock, says he now receives 4% to 10% income a year, just for lending his shares to bears. He regards it as justice for being annoyed by every day reading the many Wall Street bears, who say Tesla’s demise is on the horizon. (Note: The horizon always recedes as you approach it).

    2. sven says:

      Don’t forget that Musk owned SpaceX holds a very substantial amount of Solar City bonds, which would default and be worth pennies on the dollar if Solar City went bankrupt. Oh, what a tangled web Elon weaves.

      http://fortune.com/2015/08/07/this-is-why-elon-musks-spacex-has-been-buying-up-solarcitys-bonds/

    3. Get Real says:

      Wow, big step for you tftf.

      Now that you are an admitted gambler I hope you get some help for that.

      1. tftf says:

        “Now that you are an admitted gambler I hope you get some help for that”

        ?

        I have been investing for well over 2 decades.

        Investing based on fundamentals and numbers (not short-term tradingmost of the time, I might add) is NOT gambling imho.

        1. RM says:

          Curious. What’s your cover target for Tesla?

          And will you hold through planned major announcements, like the Model 3 reveal part 2?

          1. ffbj says:

            Too late.

    4. no comment says:

      this is a good time to be short on tesla.

      1. sven says:

        But only for a short time, any longer would be a bad time.

  3. Mister G says:

    GO TESLA GO

  4. Spider-Dan says:

    Of course they didn’t abort the deal. It’s an open secret that this is a Elon Musk bailout special, so what does it matter what the terms are?

    1. Yogurt says:

      So Elon Musk is bailing out Elon Musk???

      1. Pushmi-Pullyu says:

        Looks that way, yeah. Or rather, Elon and his family and friends are bailing out Elon.

  5. RexxSee says:

    Ah… come on bulls*******… Solar-City was Musk’s idea all along. But he could not manage more than 2 major disruptive companies at once. So he ask his cousins to do it for him. This is crystal clear. Now is the time to merge because Tesla Energy is ready, Tesla is strong and SpaceX is lifting off pretty well also.
    Now is the time to get beautiful cheap panels and batteries at one place, now is the time to put solar canopies+batteries at every super-charger locations. And maybe it is also time to install optional solar glass roofs on Model 3

    1. Heisenberghtbacktotherootsandnuts says:

      +1000 for the optional solar glass roof!

      (for the naysayers : yes I know the pro and con arguments of carrying around a solar panel… )

    2. no comment says:

      it sounds like you have already placed your orders. when do you expect delivery?

  6. Pushmi-Pullyu says:

    “Lazard, currently ranked number ten in the Thomson Reuters Americas M&A league table, is not the first high-level investment bank to fail at such calculations.”

    Actually, it turns out that Lazard was not the source of the error.

    Quoting from a NYT article on the subject:

    “Correction: September 2, 2016

    “An earlier version of this column referred incorrectly to Lazard’s role in a miscalculated valuation of SolarCity. The adviser used figures of indebtedness that had been double-counted in SolarCity’s spreadsheets. It was not responsible for the double-counting.”

    http://www.nytimes.com/2016/09/03/business/dealbook/lawyers-burnish-teslas-deal-for-solar-city.html

    1. Staff says:

      Thanks Twin-P:

      The source autonews article has yet to be updated, so we will add the NYT note into the story

  7. Jesse Gurr says:

    Reminds me of a monopoly card. “Bank error in your favor, collect 400 million dollars.”