Breakingviews: Elon Musk's $400 million valuation error

Published Thu, Sep 1 201612:00 AM EDTUpdated Thu, Sep 1 20165:04 PM EDT

Breakingviews

Anthony Currie

Some simple deal math has stumped Elon Musk . Lazard spotted a $400 million error in valuation calculations SolarCity used in its $2.6 billion sale to Tesla. Musk, who is chairman of both companies, orchestrated the merger, one fraught with controversy over governance, finances and industrial logic. These sorts of numbers aren't exactly rocket science. Chalk up the mistake to a modeling error. Amid the data dump SolarCity sent to its investment bankers was a double-counting of how much debt the company reckoned it might have in the future, according to merger documents submitted to securities regulators on Wednesday. Lazard discovered the problem in mid-August, shortly after the transaction was announced and SolarCity released second-quarter results. Spreadsheet blunders are more common than deal makers prefer to admit. Sometimes they can be costly. A couple of years ago, Goldman Sachs kicked in $30 million after its bankers miscounted shares for client and software maker Tibco during its sale to Vista Equity, a flub that inflated the purchase price by some $100 million. M ore from Breakingviews : Pushy policy can help green finance to grow In SolarCity's case, at least, the miscalculation was discovered relatively early and fixed. The two companies even discussed whether to change the terms and ultimately decided against it. There's no guarantee, however, that investors will feel the same. In effect, the extra $400 million only moves the price Tesla offered — $25.37 a share — down from the middle of the very wide range of between $14.75 and $34 that Lazard and SolarCity originally tallied. It now represents a 35 percent premium to the revised base case of $18.75. For a company burning so much cash, that's still a pretty decent outcome. It's also not as if the new information would have prompted Tesla to pay more. Its own analysis hasn't turned up any errors. And the electric-car maker drove a hard bargain, even offering less than it had originally indicated before negotiations began. There's a more fundamental issue to consider, however. A physicist like Musk, whose SpaceX suffered a launch-pad rocket explosion in Florida on Thursday, knows better than anyone just how important it is to get the basics right in complex feats of engineering. This schoolboy SolarCity mistake undermines an already questionable merger. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

SpaceX CEO Elon Musk

Mario Anzuoni | Reuters

Chalk up the mistake to a modeling error. Amid the data dump SolarCity sent to its investment bankers was a double-counting of how much debt the company reckoned it might have in the future, according to merger documents submitted to securities regulators on Wednesday. Lazard discovered the problem in mid-August, shortly after the transaction was announced and SolarCity released second-quarter results.