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Tesla's Grohmann Acquisition Has Been a Mess

By Evan Niu, CFA - Updated Apr 28, 2017 at 2:20PM

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And it's been less than four months since the $150 million deal closed.

Electric-car maker Tesla (TSLA 1.24%) announced in November that it was acquiring Grohmann Engineering, a German company that specializes in developing automated manufacturing with a heavy emphasis on the automotive sector (Tesla was previously a Grohmann customer). That was only Tesla's third acquisition ever, preceded by Riviera Tool in 2015 and SolarCity, which was announced in June 2016 and closed just days after the Grohmann announcement.

At the time, Tesla said Grohmann Engineering would become Tesla Grohmann Automation, and that founder and CEO Klaus Grohmann would remain at the helm. The deal would "bring Mr. Grohmann's leadership, a world-class team and unique expertise in-house." The goal was to "yield exponential improvements in the speed and quality of production, while substantially reducing the capital expenditures required per vehicle."

No financial terms were disclosed at the time, but Tesla's 10-K filed in March revealed that Tesla paid $150 million in cash for Grohmann.

Robots assembling Tesla vehicles

Tesla factory in Fremont. Image source: Tesla.

Why Grohmann really left

Earlier this month, local media outlets reported (via Electrek) that Tesla was moving to end Grohmann's existing relationships with other companies, including Tesla's German automotive rivals, in order to focus on the Model 3 production ramp. That created tension within the local workforce, who worried that the move would threaten job security; having a diverse set of clients made sure there was plenty of work to go around. Local workers are now interested in organizing with IG Metall, mirroring rising unrest among workers stateside at the Fremont factory that want to organize with the UAW.

CEO Elon Musk has attempted to appease workers in Germany with modest pay raises and equity compensation, arguing that Tesla could one day potentially become a $500 billion company, in which case that equity compensation could one day become extremely valuable. Even if there are other ways beyond unionization to address workers' concerns, Tesla's response in Fremont has been less than diplomatic -- at best, dismissive, and at worst, antagonistic.

It had been previously reported that contrary to Tesla's initial announcement, CEO Klaus Grohmann had decided to retire. We might now know why. Reuters is reporting that Grohmann was "ousted last month" after clashing with Musk over the decision to ditch existing clients. Grohmann told Reuters, "I definitely did not depart because I had lost interest in working," but couldn't say much else due to confidentiality agreements. That doesn't quite fit the retirement narrative that Tesla previously offered regarding Grohmann's departure.

It's been less than six months since the deal was announced, and less than four since it closed, but Tesla's Grohmann acquisition is already turning out to be quite a mess.

A potential risk factor?

Integrating acquisitions is a difficult task in any M&A deal, but that process is more challenging when acquiring a company halfway across the world, since the acquirer must factor in cultural differences along with other aspects of integration. Musk's reputation of being a difficult leader also precedes him, and Bloomberg recently tallied up a handful of high-level departures. From an employee morale perspective, feeling insecure about your job while seeing your former leader leave immediately after selling the company can't be good.

The most important aspect of the Grohmann situation is whether or not it represents a risk factor for the Model 3 ramp. Launching its mainstream electric car is by far the most important thing for Tesla right now, particularly with the stock hitting all-time highs in part due to investor optimism around the Model 3. Reuters' sources say the timeline is still on track, and Tesla has previously said that it doesn't "anticipate any impact on the Model 3 timeline."

The Grohmann situation continues to evolve, and Tesla is still hoping to commence Model 3 production in July. It's crunch time, and Tesla needs to make peace with its workers.

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