What Happens to SolarCity Corp. If Tesla Motors' Acquisition Falls Through?

Image source: Getty Images.

The general assumption right now is that SolarCity Corp. (SCTY.DL) and Tesla Motors (TSLA 12.06%) will eventually merge. Elon Musk is the largest shareholder in both, and even though he may have recused himself from voting on the deal, he wants it to go through. And investors in both companies are betting on Musk, so why go against his will?

But if shareholders do revolt and the deal falls apart, there could be major repercussions, particularly for SolarCity. That possibility is worth considering if you're an investor in either company.

SolarCity will lose business from this offer

Over the last few weeks, SolarCity's management has been working overtime on this acquisition offer. That, of course, means they're not focusing on core business operations. Given the uncertainty, it's likely customers are less inclined to sign up for a new solar system, not knowing if they're signing a 20-year contract with SolarCity or Tesla Motors.

We have evidence that this is the case because Vivint Solar, the No. 2 residential solar installer behind SolarCity, went through a similar acquisition offer last year. On July 20, 2015, in the early part of Q3 2015, the company agreed to a buyout from SunEdison. And it's no coincidence that's exactly when Vivint Solar's growth slowed rapidly and went from outpacing SolarCity by a wide margin to falling behind its rival.

YOY = year over year. Data source: Company earnings releases.

Vivint Solar took its eye off the ball when it got a buyout offer and its executives, staff, and customers didn't know how to grow amid the uncertainty. It's likely SolarCity will do the same.

Image source: SolarCity.

Can SolarCity reboot on its own?

SolarCity is facing a lot of challenges right now. Smaller, regional solar installers are gaining market share, customers are demanding loans instead of long-term leases, and investors are questioning how valuable previously signed leases really are. Former NRG Energy CEO David Crane recently argued that SolarCity is in need of a "reboot" to adapt to these market changes. And he thinks it can do so more efficiently hidden within Tesla Motors rather than as a public company.

If that's true and SolarCity is indeed in for a rough transition, even before the acquisition announcement, the outlook is even worse for an independent SolarCity after the acquisition offer if it falls through. 

Tesla Motors won't miss out

Musk is trying to vertically integrate Tesla Motors' energy offerings by adding SolarCity. But if he's not successful, he'll still have a lot going on in selling electric vehicles. Tesla could even sell energy storage to a wider set of customers if it doesn't have direct ties to SolarCity.

In many ways, buying SolarCity is a distraction and the deal falling through would be a good thing for Tesla Motors. The company would have more capital to build out EV capacity and management wouldn't be distracted by adding more products and manufacturing plants to an already complex business. So, I don't see how Tesla Motors' stock could be negatively impacted if the deal is voted down. 

Why this is a big deal to SolarCity investors

There are two potential outcomes for SolarCity given the current Tesla Motors buyout offer. The first is that the buyout goes through and there's upside from the premium paid for SolarCity shareholders. At most, the offer today would be worth $29.45 per share, which is a 20% increase from today's price but probably wouldn't make most long-term shareholders happy.  

But if the deal doesn't go through, SolarCity may be in a weaker position than it was when the offer came in and may still need to reboot its business to adapt to market trends. And that could be very bad news.

If Vivint Solar's venture into a failed acquisition is any indication, there's a lot of downside if the deal with Tesla Motors falls flat. Investors should consider that downside if they're holding shares of SolarCity today.