The combined company will be perfectly suited to markets that barely exist yet
Tesla showroom in Milton Keynes (Image: T. Larkum)
Elon Musk announced last week that he wants Tesla, his electric-car company, to acquire SolarCity, the rooftop-solar company he helped found and now serves as chairman. The result would be a single “end to end” energy behemoth.
“As a combined automotive and power storage and power generation company,” Musk said, “the potential is there for Tesla to be a $1 trillion company.”
Reaction was, by and large, skeptical. (Tesla stock dropped 10 percent the following day.) Over at Stratechery, Ben Thompson says Tesla already faces “very long odds of achieving its plans.” Adding SolarCity’s negative $2.6 billion cash flow to Tesla’s already negative $1.5 billion is no help to Tesla, though it might save SolarCity. Thompson thinks Musk wants it because he’s “highly exposed to SolarCity’s plummeting stock.” Otherwise it makes no sense, he says, because Tesla and Solar City have “zero business synergies.”
Analysts at research firm UBS, in a pair of briefs, echo that critique, arguing that there’s little these businesses offer one another that they couldn’t get from some kind of cross-marketing agreement.
I’m not qualified to comment on the near-term business merits of the deal. It may well prove to be a disaster. But I think Thompson and other critics are underestimating the synergies. They are limited now, but they will grow over time. (Over at Greentech Media, Julia Pyper also has good piece on this.)
How fast will the synergies grow? That depends on factors largely outside either company’s control.
That’s the big risk of this deal: Even assuming the merged company could get past its short-term challenges, its long-term fate rests on policy and regulatory decisions it can’t predict or determine. It’s a merger based on hope.
Synergy depends on future markets
The kinds of markets in which electric cars, home batteries, and solar panels could fully, uh, synergize do not currently exist in most places. They are precluded by the way the US structures its electric utility sector, as a patchwork of monopolies and quasi-monopolies.
Read more: Vox