Tesla-SolarCity Deal Has 'Bad Idea' Written All Over It

 | Jun 22, 2016 | 4:20 PM EDT
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Elon Musk's maneuver to have Tesla Motors (TSLA) launch a takeover attempt on SolarCity (SCTY) is truly a marriage made in corporate governance hell. Tesla is my Real Money "Worst Stock of 2016" pick and Wednesday's trading action is confirming that bias. Stocks can underperform for any number of reasons -- especially in a cyclical sector such as autos -- so I am writing this to emphasize how poorly run both Tesla and SolarCity are from a corporate governance perspective.

If you worship at the altar of Musk and don't care about how these companies are governed, then feel free to click on a different Real Money article. If you care about the decision-making behind a deal involving two publicly traded companies, then read on and realize that this is a little bit of a data dump as a product of the research I've been doing on TSLA and SCTY today.

First, the boards. SolarCity's board consists of:

Elon Musk -- chairman, largest shareholder

Lyndon Rive -- CEO, cousin of Musk

Peter Rive -- CTO, cousin of Musk

Antonio Gracias -- PE firm (Valor), also a TSLA director

John H.N. Fisher -- VC firm (Draper Fisher Jurvetson)

Nancy Pfund -- PE firm (DBL)

Donald Kendall -- Alternative energy PE firm (Five Stone)

J.B. Straubel -- CTO of Tesla

So, half of SCTY's board is composed of the founder, two of his cousins and his right-hand man at another public company. Can any of these people be considered impartial? Of course not.

Musk, Gracias and Lyndon Rive have announced they are recusing themselves from SCTY's review of Tesla's offer. No word on whether Straubel and Peter Rive will recuse, but they really should.

Tesla's board:

Elon Musk -- CEO and largest shareholder

Brad Buss -- Until February 2016 was CFO of SCTY

Robyn Denholm -- Former public company CFO

Ira Ehrenpreis -- PE firm (DBL)

Stephen Jurvetson -- VC firm (Draper Fisher Jurvetson)

Kimbal Musk -- brother of Elon, cousin of Peter and Lyndon Rive

Antonio Gracias -- PE firm (Valor), also a TSLA director

So Tesla's board includes the founder, his brother and a man who was, until very recently, his right-hand man at another public company.

Sound familiar? Yikes! One of these companies has launched a bid for the other? The interboard relationships are astounding.

In addition to the familial relationships and TSLA-SCTY overlaps, realize that two of the independent board members at Tesla work for the same venture capital firms as two of the independent board members at SolarCity.

So who is really independent here? At best, one board member per company (Denholm at TSLA and Kendall at SCTY), but further digging would probably reveal some inherent conflicts there as well.

Public companies will hide behind advice from investment banks and accounting firms -- I haven't heard who is working this deal yet, but where there are fees there are bankers and lawyers -- but ultimately it is the boards who decide what to recommend to shareholders.

This deal is just so incestuous, so full of home cookin', it is very difficult for me to envision that impartial analyses will drive the decision-making.

SolarCity has been a terrible performer and the failure of SunEdison (SUNE) puts the entire business model in question. Tesla's execution has been equally terrible, but the hopes ignited by the March 31 Model 3 unveiling ceremony were real and tangible. Tangible enough that Musk could raise $1.4 billion for TSLA, a figure that would represent about 70% of SCTY's pre-announcement valuation.

So you have the strong one (and the one with access to equity capital) take over the weak one. Happens all the time in family-run private entities. The difference here, of course, is that these are public companies, which should be held to a higher standard.

Spending the past 25 years of my life interacting with company managements and their boards may make me sound sanctimonious when it comes to the inequities inherent in a transaction like TSLA-SCTY.

Losing the trust of the investment community -- buy and sell sides -- is a very real and measurable thing, though, and I believe Musk has steered his corporate flotilla down that path. In my experience, it takes a long time -- years -- to reverse a perception of mistrust.

So I'm staying miles away from both Tesla and SolarCity.

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