Elon Musk’s Solar Deal Has Become the Top Threat to Tesla’s Future

But in a stunningly rare moment of contrition, Musk expressed regret over the decision at his deposition, part of a class-action shareholder suit that’s gained momentum in recent months. “At the time I thought it made strategic sense for Tesla and SolarCity to combine. Hindsight is 20-20,” Musk said. “If I could wind back the clock, you know, I would say [I] probably would have let SolarCity execute by itself.”

The 85% of shareholders who approved the acquisition had only their devout faith in Musk to go on when they voted three years ago this month. The CEO said a combined Tesla-SolarCity was always part of his master plan and would create the world’s first vertically integrated clean energy company. The hope was customers would drive a Tesla electric car, harvest energy from Tesla solar panels to charge it, and tie the ecosystem together with Tesla’s Powerwall home battery.

In a trove of court filings unsealed this fall, thousands of pages of internal emails, board minutes and presentations, and executive testimony reveal how truly dire the situation was behind the scenes leading up to the acquisition, with almost every significant promise Musk pitched publicly either misleading or false. The documents in the lawsuit offer an unprecedented look at what happens when Musk’s reality-distortion field comes up against the reality of testifying under oath. Tesla didn’t respond to a request for comment on the suit.

From the outset, Musk’s quest to buy SolarCity was riddled with question marks. He’d already bet Tesla on the Model 3, heralded as a $35,000 electric sedan for the masses; was it really the right time to engage in a distracting M&A gambit? Musk has said SolarCity was on solid financial footing, but internally he wrote that the company needed to solve its “liquidity crisis.” SolarCity, it turned out, was hemorrhaging cash and in danger of defaulting on its debt.

Tesla’s board initially balked at the proposal. So did Evercore Inc., one of the banks it brought in to evaluate the deal. (Not that they felt their guidance would be heeded: “It’s Elon’s world. We just live in it,” an Evercore banker joked in an email.) Even Tesla’s then-Chief Financial Officer Jason Wheeler raised concerns. “We have Model 3 happening. We have a lot of things going on. We ourselves have a large debt load,” Wheeler said in his June 2019 deposition. “Why do we need to do this now, Elon?”

Then there were the jarring conflicts of interest. Besides his cousins Lyndon and Peter Rive running SolarCity, its board and Tesla’s had complicated overlaps. Six of Tesla’s seven directors were Musk associates (including his brother, Kimbal) with SolarCity ties. Antonio Gracias was on the board of both companies. What’s more, Musk had used his other entities to raise capital for SolarCity: SpaceX, for example, had purchased $255 million of SolarCity bonds. Musk bought $65 million worth. Tesla’s directors had to grapple with this apparent self-dealing as Musk pushed them to reconsider the acquisition in May 2016. Musk said he recused himself from these deliberations, but court filings indicate he remained actively involved, even advocating for the move directly with bankers and investors.

To win over shareholders, Musk came up with the concept of a “Solar Roof” that resembled a traditional rooftop shingle but could capture power from the sun. At a joint Tesla-SolarCity event in Los Angeles in October 2016, Musk showed off the product to an impressed audience. The demos he unveiled weren’t functional, but the acquisition received approval a few weeks later.

Tesla’s leadership was aware the acquisition risked damaging the company, particularly if the upside Musk promised never came. In a previously unreported internal memo from 2017, viewed by Bloomberg Businessweek, Tesla executives shared public talking points, including stressing that the merger “wasn’t a bailout” and that family-run businesses can lead to long-term success (“the Kochs, for example”). They also discussed framing the Solar Roof’s technology development as “going extremely well” and its manufacturing on schedule. “The collaboration has been great,” they wrote of the Tesla-SolarCity merger.

In truth, SolarCity was by then falling apart. Tesla gutted its sales arm, and in the fourth quarter of 2017 solar deployments declined 56% from a year earlier. The SolarCity brand is now defunct. The Rive brothers left Tesla shortly after the merger. Although Musk had long argued the merger was all about corporate “synergies,” he admitted in the shareholder lawsuit that he “took everyone from solar and said, ‘Instead of working on solar, you need to work on the Model 3 program.’ And as a result, solar suffered as you would expect. … That would include engineering, management, sales, service. Everything that could possibly be redirected towards the Model 3 program was so redirected.” Tesla didn’t respond to a request for comment on the memo.

Perhaps the biggest woe from the acquisition is the Solar Roof. The product was supposed to be central to the merger, but Tesla has failed to develop a mass-market version and delayed high-volume manufacturing multiple times in recent years. Gracias, the Tesla director who was also on the board of SolarCity, said in his April deposition that there are only “50 to 100 of these things operating today in tests on people’s roofs.” A year ago, in an interview with Bloomberg Businessweek at Tesla’s solar Gigafactory in Buffalo, Sanjay Shah, the company’s head of energy, said he had “high confidence” his team was on track to ramp up production in 2019, promising that if any unforeseen delays again arise, “we will be more transparent than ever before to make sure you guys hear from us why.” Musk said in his June deposition that Shah was mostly focused on Model 3 development during his tenure at Tesla. Shah is now chief operating officer at Beyond Meat, the plant-based food startup, and New York state officials wrote down the of the Buffalo factory, built with more than $750 million in government subsidies. (Shah didn’t respond to a request for comment, and Tesla didn’t respond to requests for comment on the Solar Roof or the Buffalo writedown. Musk announced a new version of the roof the day depositions were unsealed last month.)

The contrast between the acquisition’s internal reality and external perceptions will likely give fodder to the shareholder lawsuit, started by pension funds alleging that the board breached its fiduciary duties by going along with Musk’s SolarCity plan and grossly overpaying for it, to boot. Tesla is also dealing with controversy stemming from legacy SolarCity solar panel installations. In August, Walmart Inc. sued Tesla over solar-related fires at its stores and warehouses, accusing it of “widespread negligence.” (The companies settled out of court and issued a joint statement saying they were pleased the matter had been resolved.) Tesla has also initiated an internal program, called Project Titan, to inspect homes adorned with traditional solar panels that are paired with a potentially faulty connector, creating a risk of blazes. At least two homeowners in Maryland and Massachusetts have experienced rooftop fires from Tesla’s flawed systems.

The shareholder lawsuit is set for trial before Delaware Court of Chancery Vice Chancellor Joseph Slights III in March 2020, according to Tesla’s securities filings. So far, though, Musk has mostly adopted a defiant (if not irritated) tone at his two depositions. In a back-and-forth with the plaintiffs’ lawyer, whom Musk called “dude,” he said now that Tesla has a better grip on its vehicle business, “we’re turning our attention to solar, and we’re going to fix it.” When pressed for details on the challenges with the acquisition, Musk called the lawyer “shameful” and a “very, very bad person” for scrutinizing a company that’s trying to change the world for the better.

Musk sounded eager to make this case at trial. “I can’t wait,” he said. “It will be great. You’re going to lose.”
 
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