Deals and IPOs

Tesla's SolarCity merger gets blessing from shareholder research group

Elon Musk, Tesla CEO
Justin Chin | Bloomberg | Getty Images

An influential advisory firm recommended shareholders of both SolarCity and Tesla approve the proposed merger between the two companies, lending support to a deal that has garnered criticism from analysts and investors.

In a report issued Friday, Institutional Shareholder Services called the deal "a necessary step towards TSLA's goal of being an integrated sustainable energy company." The report also said "it appears reasonable to assume that TSLA is paying a low to no premium to take over SCTY."

With a nearly $30 billion market cap, the report said it seems likely Tesla "could bridge a financing gap, albeit at a high financing cost, if conditions are very adverse until capital markets open up."

"Tesla has — within the confines of its suboptimal governance structure — taken the requisite steps to reassure its shareholders: the board gave minorities significant leverage by requiring a majority of the minority vote as condition for approval," the report also said. "Based on the combination of these factors, we recommend shareholders vote FOR the transaction."

In a statement sent to CNBC, a Tesla representative said, "We very much appreciate that Institutional Shareholder Services (ISS), following an in-depth examination of both companies, recommends in favor of Tesla's acquisition of SolarCity. The combined company will become the world's only integrated sustainable energy company, ranging from clean energy generation to storage to transportation, resulting in a better outcome for shareholders, customers and the environment."

Critics have said, among other things, that the deal is not a good use of Tesla's cash, that it may distract Tesla from its already challenging ambitions in electric car production, and that the deal raises concerns about corporate governance at both companies, given the tight relationships (in some cases, family relationships) between Elon Musk and SolarCity executives. Some critics have gone so far as to call the deal a "bailout" for SolarCity.

Musk,however, called the merger a "no brainer," and said, perhaps most notably in his "Master Plan, Part Deux," that offering solar has long been part of Musk's overall vision for Tesla.

Shareholders of both companies will vote on Nov. 17 on the $2.6 billion acquisition.

Tesla shares were recently trading up 2.2 percent at $191.65, while SolarCity shares gained 9.3 percent, to $20.28.