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Elon Musk and the Terrible, Horrible, No Good $779 Million Day

Sept. 2, 2016
“He’s got guts, I’ll give him that,” said Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management.

Elon Musk has a lot riding on his plan to merge Tesla Motors Inc. (IW 500/227) with SolarCity Corp. -- including a big chunk of his $8.3 billion fortune.

He may be better off just giving up on the debt-ridden solar-panel installer and focusing on turning Tesla into a profitable enterprise. But Musk has a long history of throwing his money after his grand visions, like weaning the world off fossil fuels and colonizing Mars, sometimes running very low on cash and coming close, by his own admission, to personal bankruptcy.

“He’s got guts, I’ll give him that,” said Ross Gerber, chief executive officer of Gerber Kawasaki Wealth & Investment Management, which has a $5 million position in Tesla and has recently been selling shares. “He really pushes it out on his companies, but Elon could implode.”

A lot of the longer-term investors, while they aren’t extremely enthusiastic about the SolarCity deal, still stand by Elon and what he’s trying to achieve."

— Ben Kallo, analyst, Robert W. Baird & Co.

As it is, only about 4% of his net worth is tied up in SolarCity, of which he’s the chairman and largest shareholder. The company has been burning cash at a prodigious rate and, according to regulatory filings, is getting closer to defaulting on its $3 billion in debt. If the proposed acquisition by Tesla doesn’t come to pass, and SolarCity burns out, Musk will take a relatively minor hit.

Threats to Musk's Bank Accounts

He suffered one Thursday, when his fortune, on paper, shrank by $779 million, according to the Bloomberg Billionaires Index. That was due to two factors: drops in the companies’ stock prices; and Wednesday’s regulatory filing showing he has put up an additional $489 million of his Tesla and SolarCity stock as collateral to secure personal borrowings. The pledged shares are stripped out of his total net worth calculation because they’re not immediately available to him. The borrowing is for personal liquidity; he doesn’t even accept the $37,584 minimum-wage salary Tesla is required to pay him.

The bigger threat to Musk’s bank accounts would come from SolarCity dragging down Tesla in a combined company. He has half of his money in the electric-car maker, of which he is CEO; about 46% of his value is in his closely held rocket-launch company Space Exploration Technologies Corp. (SpaceX, as it's known, suffered a setback Thursday when its Falcon 9 rocket burned up on a launch pad, destroying itself and an Israeli communication satellite.)

Though the prospect of a merger has been controversial -- with some analysts and investors viewing it as a costly bailout of SolarCity -- Musk has said he is as committed as ever to seeing it through. He’s said customers will benefit from one-stop shopping and installation of solar panels, energy storage and electric-car charging. Many shareholders are behind him.

There is no level of risk that is too high for Elon Musk."

— Mike Ramsey, analyst, Gartner Inc.

“A lot of the longer-term investors, while they aren’t extremely enthusiastic about the SolarCity deal, still stand by Elon and what he’s trying to achieve,” said Ben Kallo, an analyst with Robert W. Baird & Co. “Typically investors like to be paired with management teams that have big stakes in their companies.”

Tesla made a bid to acquire SolarCity in June, and a two-person committee of the SolarCity board approved the all-stock offer, now valued at $2.3 billion. The Securities and Exchange Committee must review documents related to the offer that shareholders will receive, to ensure there’s adequate disclosure and general compliance with securities laws. Then the matter will be put to a vote by shareholders of both companies.

More Stock Sales Likely

In a regulatory filing Wednesday, Tesla said that in the first six months of the year, it burned through $611 million in cash, and SolarCity went through $433 million. That probably means more stock sales, which will dilute existing holdings, said Salim Morsy, a Bloomberg New Energy Finance analyst.

The filing also revealed that Musk suggested to his cousin, SolarCity CEO Lyndon Rive, sometime in February that they combine their companies, and that the Tesla board was briefed on the idea on Feb. 29. That means Tesla directors knew about the possibility of a union when the company sold $1.4 billion in stock in a secondary offering in May, but didn’t share that information with buyers.

Because the board decided not to proceed with an evaluation of a deal in February, the company was probably in compliance with securities laws, according to James Cox, a professor at Duke University School of Law. It wasn’t until May 31 that Tesla directors told management to assess the rationale of such an acquisition.

Musk's High Risk Tolerance

The February discussion between Musk and Rive was described as “high-level, conceptual,” with the two talking about possible product offerings. It doesn’t specify whether that conversation was before or after Musk’s Feb. 12 purchase of almost 570,000 shares of SolarCity for an average price of about $17.56, which brought his holdings to about 21.8 million shares.

Musk has a famously high tolerance for risk. He poured the $180 million he made from the 2002 sale of PayPal, which he co-founded, to EBay Inc. into Tesla and SpaceX. By 2008, both were running on fumes, with Tesla hemorrhaging money and SpaceX’s first three rocket launches having failed to reach orbit. But in December of that year, after SpaceX’s fourth flight was flawless, NASA announced it had been awarded a contract worth as much as $1.6 billion to ferry cargo to the International Space Station. Tesla closed a critical funding round late on Christmas Eve, hours before it would have gone bankrupt.

“There is no level of risk that is too high for Elon Musk,” said Mike Ramsey, an analyst at Gartner Inc. “That’s absolutely clear. His skin is completely in the game.”

In June, Musk called marrying Tesla and SolarCity a “no brainer.” Back in 2013, he put a telling post on Twitter about his dedication to sticking it out at Tesla: “Just as my money was the first in, it will be the last out.”

By David Welch, Dana Hull and Tom Metcalf

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