Investors want Tesla to separate Musk’s chairman, CEO roles

Billionaire Elon Musk’s grip over Tesla Motors has grown too tight as he pursues a controversial merger of the company with solar-panel maker SolarCity, an investor group complained.

CtW Investment Group, a manager of union-based pension funds that hold 200,000 Tesla shares, demanded in a letter that Tesla separate Musk’s chairman and CEO roles.

CtW likewise called on Tesla to add two “genuinely independent directors” to Tesla’s board to evaluate its $2.8 billion SolarCity offer.

The surprise deal, announced last week, sent Tesla shares tumbling on worries about SolarCity’s losses and debt.

“We are concerned that Mr. Musk continues to dominate the board and sits at the heart of a complex web of relationships,” CtW said in its late Tuesday letter.

Musk, who is the chairman of, and biggest shareholder in, both Tesla and SolarCity, is also the cousin of SolarCity founder Lyndon Rive. Musk’s brother, Kimbal, is a Tesla director, and six of Tesla’s seven directors have SolarCity ties, CtW said.

The investment group asked that Tesla amend its bylaws to forbid immediate family members from serving concurrently on the board. It also called for annual elections for all directors.

“It will be Tesla’s disinterested shareholders that have the final say on whether this combination is right for Tesla,” a Tesla spokeswoman said. “Nobody has more at stake in the success of Tesla than Elon.”

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Why I’m Not Dazzled by Elon Musk

As a resident of Silicon Valley, I am deeply embarrassed to admit this, but here I go: I am not dazzled by Elon Musk.

(Pause, while Silicon Valley gasps in appalled surprise.)

I know how much he’s accomplished. Starting a new car company from scratch was an enormous undertaking, and the Tesla—the official pace car of Palo Alto—is a signal achievement that making electric cars, for the first time, is cool.

He puts rockets into space through his company SpaceX, theorizes about revolutionary means of high-speed transportation and in his spare time thinks deep thoughts about the nature of “base reality.” (We’re probably all just characters in some elaborate simulation.)

In short order, he’s become the Valley’s anointed successor to the late Steve Jobs. Unless, of course, you’re one of those who think he’s actually Jobs, Wernher von Braun, Howard Hughes, Henry Ford and Bill Gates—all rolled up into one.

But watching Musk in action, it’s hard to shake the impression that he believes in his own exceptionalism a little too much: that when you’re as smart and as rich and as powerful as he is, well, the normal rules just don’t apply.

Maybe that’s why there was such a widespread allergic reaction, at least outside the Valley, to last week’s announcement of the proposed deal for Tesla (CEO: Elon Musk) to acquire SolarCity (Chairman: Elon Musk; CEO: Elon Musk’s cousin), many of whose bonds, by the way, are held by SpaceX (CEO: Elon Musk).

The proposed deal is accompanied by lots of Valley-speak stuff about synergies—your solar panels charging the batteries that power your home that powers the charger that powers the Tesla in your garage. But all the visionary rhetoric in the world can’t disguise that the deal creates financial conflicts of interest on a grand scale.

Musk and his family are proposing to exchange their shares in financially pressed SolarCity for a bigger stake in also financially pressed—but considerably higher-flying—Tesla. Meanwhile, the boards of the companies, which are supposed to safeguard the interests of all investors, are a horror of interconnecting family and business relationships. (This Bloomberg chart vividly illustrates the tangle of ties.)

Certainly Wall Street seems a good deal less impressed than the Valley. While the shares of acquiring companies often decline, Tesla’s fell off a cliff, plunging more than 10 percent when the deal was announced.

Short-seller supreme Jim Chanos, the guy who called bullshit on Enron, calls the deal “brazen” and “corporate governance at its worst.” Chanos has been shorting shares of both Tesla and SolarCity, meaning he makes money from seeing Tesla’s shares fall. But just because he has a financial interest in being right doesn’t make him wrong. And he’s far from alone in attacking the deal.

Marketwatch columnist Philip Van Doorn warned that other existing Tesla investors are facing “epic dilution” of their holdings. Fortune rounded up comment and advicefrom a number of Wall Street houses, including Oppenheimer (“move to the sidelines”), Deutsche Bank (Tesla buyers “are generally not looking for an end-to-end energy solution”) and Barclays (the deal would be “a lean mean cash burning machine.”)

It’ll be interesting to see how Musk handles the criticism.

In the past, he’s displayed a remarkably thin skin, down to canceling venture capitalist Stewart Alsop’s order for the long-delayed Tesla Model X after Alsop complained about the company in a blog post.

When New York Times reporter John Broder took a disastrous Tesla test drivethrough a Northeast winter in 2013, Musk—selectively citing data that Tesla had secretly logged from the car without Broder’s knowledge—labeled his story “fake” and claimed that the reporter “worked very hard to force our car to stop running.”

Just last week, Musk responded to a post raising a safety concern from auto blogger and longtime Tesla critic Edward Niedermeyer by suggesting that he might “have something financial to gain by negatively affecting Tesla’s stock price.”

That isn’t the kind of allegation you’d expect a CEO to hurl without providing some evidence to back it up. If Tesla has any such evidence, it didn’t make it public; Niedermeyer for his part tweeted back that “I don’t play the market long or short or professionally advise anyone who does.”

Steve Jobs, we all know, wasn’t known for suffering critics either. On the other hand, he revolutionized computing—three times—and built the world’s most valuable company. Elon Musk made a lot of money from PayPal and parlayed it into an empire of companies that have made big bets with, so far, very modest returns. Not quite the same thing.

One thing he and Jobs do have in common, though: the fabled “reality distortion field.” How else to explain the Tesla Model 3? That’s the as-yet-unbuilt $35,000 wondercar Musk is promising for late next year that’s already drawn more than 400,000 preorders, sight unseen, each accompanied by a $1,000 deposit.

Having the charisma, and chutzpah, to obtain a $400 million interest-free loan via what is essentially the world’s largest Kickstarter project? Now that’s dazzling.

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The Tesla-SolarCity Love Affair Is Crumbling

It’s a proposal that would unite two companies on shaky financial ground as they plow into relatively new markets. One makes electric cars, the other installs solar panels. There are few obvious synergies.

Perhaps even more puzzling are the motives of Elon Musk [pictured above], a polarizing billionaire who is the chairman and largest shareholder of both companies.

The overlap created a glaring conflict of interest that’s fueling concerns about whether Musk is milking Tesla’s higher market value and better brand recognition to bail out SolarCity — a company run by his cousin, Lyndon Rive.

The second-guessing probably wouldn’t be as widespread if not for the murky logic underlying the deal and Musk’s history of drawing upon Tesla and another of his companies, rocket ship maker Space X, to bolster SolarCity.

Musk, 44, insists he is just showing good business sense, describing Tesla’s bid of up to $2.5 billion as a “no brainer” shortly after it was announced earlier this week.

Investors, though, aren’t so sure. SolarCity’s shares have edged up by just 5 percent to $22.20 since the all-stock bid was made, well below the $23.56 to $25.30 currently being offered by Tesla. Meanwhile, Tesla’s stock has sank by 12 percent to $193.15.

The offer “raises a number of questions around governance that may test the bond of trust,” Morgan Stanley analyst Adam Jonas wrote in a research note. One of Tesla’s most ardent supporters, Jonas downgraded Tesla and lowered his target price on the shares by 26 percent to $245.

S&P Global Market Intelligence analyst Efraim Levy believes investor resistance eventually may prompt Tesla to withdraw its bid.

The backlash still may not be enough to deter the outspoken Musk, who has cultivated the image of a maverick since he made his initial fortune as co-founder of online payment service, PayPal, which eBay bought for $1.5 billion in 2002.

Musk is hailed as a visionary by admirers who applaud him for shaking up the auto industry with Tesla’s sleek, electric vehicles and drawing up plans to send people to Mars on Space X’s rockets. His detractors ridicule him as an unpredictable control freak, an image that Tesla’s bid for SolarCity may reinforce.

So far, no one has paid a bigger price for Tesla’s baffling bid than Musk. The value of his combined holdings in the two companies fell by nearly $1 billion in three days to pare his fortune to $11.4 billion, based on Forbes’ latest estimates. Musk owns a 26 percent stake in Tesla and a 22.5 percent stake in SolarCity.

The bid has focused more attention on the shaky financial position of both companies as they rapidly burn through cash. Tesla has lost $1.2 billion in the past two years alone while SolarCity has suffered losses exceeding $1.1 billion during the same span. Analysts surveyed by FactSet are predicted Tesla will post a $416 million loss this year while SolarCity will lose $851 million.

And now both companies may have trouble raising additional money from wary investors, if they need it.

The SolarCity bid isn’t the first time that Musk has interwoven his companies’ interests.

Musk has secured $486 million in personal loans to buy either stock or bonds issued by Tesla and SolarCity, according to recent filings with the Securities and Exchange Commission. Musk secured the loans with 9.4 million shares of Tesla stock currently worth $1.85 billion and 4 million shares of SolarCity stock worth nearly $9 million.

If Tesla’s stock craters, Musk could be forced to put up more shares as collateral or sell some to repay the lenders, according to the company. If that were to happen, Tesla’s stock would fall even further at the expense of Musk having helped support SolarCity.

In addition, Space X has bought $255 million of SolarCity’s bonds since the end of 2014, including $90 million of a $105 million offering in March, according to SEC documents.

Tesla had hoped to quickly resolve the conflict-of-interest questions triggered by the SolarCity offer. The Palo Alto, California, company pledged to leave the fate of the deal up to a majority vote of “disinterested” shareholders at both Tesla and SolarCity, meaning Musk wouldn’t have a say.

Musk’s argument for combining Tesla and SolarCity primarily revolves around a battery system that stores solar energy in homes and businesses trying to minimize their dependence on the power grids run by utilities.

Tesla introduced the battery, called “Powerwall,” 14 months ago, providing the first inkling that it planned to be more than just an auto maker. Musk believes both Tesla and SolarCity will be better off if their products are united under one roof and a common brand. SolarCity already is selling the power-storing batteries as part of an agreement that Tesla expects to generate $44 million in revenue this year, according to SEC documents.

If the deal goes through, SolarCity will adopt Tesla’s name and sell its solar panels alongside power-storing batteries under Musk’s plan. He reasons many of the people who want to drive electric vehicles will have an inherent interest in setting up cleaner energy systems in their homes and offices. Although he said he didn’t know for certain, Musk estimated about only about one-fourth of Tesla owners currently have solar energy panels.

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Days of ‘Malaise’ and Jimmy Carter’s Solar Panels

“A new solar hot water heating system being installed at the White House costs thousands of dollars more that the original estimate and it probably won’t pay for itself in energy savings, officials said.”

So went the lede of a story in the Associated Press and reprinted in the Washington Post on April 6th, 1979 about President Jimmy Carter’s newest public relations stunt in the midst of the energy crisis. This was on the heels of lowering the thermostats in the White House, and later in the year, turning off the White House Christmas lights to show his concern over energy usage while also claiming he did so to show support for the hostages being held in Tehran by the Ayatollah Khomeini. In Carterland, this was seen as a public relations “twofer.”

Voltaire once said, “History is a pack of lies, agreed upon.” Truer words were never spoken, especially over the current handwringing by environmentalists and liberal revisionists as to why Ronald Reagan had the useless solar panels and endless pipes removed when he became president.

Revisionist history is current attempting to portray Carter as a forward looking environmentalist and Reagan as some cold hearted capitalist but as a matter of fact, in another public relations initiative, the 39th president also proposed tax credits for wood burning stoves. One can imagine a denuded American continent, bereft of any trees because Americans had cut down all the forests. Environmentalists tend to be silly people and a favored bumper sticker at the time proudly proclaimed, “Split Wood, Not Atoms.”

The Associated Press story elaborated, as unnamed White House officials called the solar panels an “economic dog.” Carter’s cousin, Hugh Carter, was in charge of the parsimous Georgian’s White House, but with Jimmy Carter, public relations often seemed to trump good policy, even spending policy.

Several of Carter’s energy initiatives included closing off exploration for oil and gas in Alaska and western states, proposing time and again a new federal tax of 50 cents per gallon on gasoline, and the creation of the Department of Energy, one of the great government boondoggles of all time, whose goal was to solve the energy crisis. Americans have only been waiting for a little over thirty years to figure out the real mission of the DOE.

During his time of office, he ordered the oil companies to stop refining gasoline and instead refine home heating oil for a coming winter. The order resulted in gasoline lines that snaked around gas stations across the country. In many places including Northern Virginia, fist fights broke out among furious drivers. Rationing policies were initiated by many states, some based on Social Security numbers, others based on “odd” or “even” license plates, but these were obviously easy to beat. And often were.

Americans became especially furious when they learned the Congress had it very own gas station, which was selling the then precious liquid for much less than the taxpayers were shelling out. At his inaugural, Carter had arranged for “solar reflectors” to keep those in the reviewing stand warm, but according to The Economist, “electric heaters will be ready in case the sun fails to shine.”

At one point, Carter issued an Executive Order directing the private sector not to lower their air conditioning below 78 degrees in the summer nor raise their heat above 66 degrees in the winter. Across the country, the order was ignored. However, he did propose “inducements” to force industrial America to switch from oil and natural gas to coal. Conservationists now routinely denounce coal.

He also proposed at one point that mortgages not be granted to home buyers until the federal government has certified the home was sufficiently insulated. Americans who did voluntarily cut their electricity usage found to their horror that their bills actually had gone up, a cruel reminder of how economics works.

Carter also proclaimed May 3 as “National Sun Day” and pressed for the creation of a Administration official to boost solar poer whose job title only lacked the title “Czar.” In Los Angeles, a race between solar cars took place, but it was never reported if any of them actually finished the contest.

The solar panels were originally “supposed to cost” the taxpayers “$24,000 to install and would cut utility bills by $1,000 a year to start.” Imagine that. Carter’s plan was for the panels to pay for themselves in 24 years! Even that platy went awry however, as Cousin Hugh could not find anyone to install them for less than $28,000 and, to accommodate the ugly White Elephant, another $7,000 would have to be spent tearing up the White House roof!

In spite of all the arguments against the useless panels, Carter had the contraption installed anyway, a monument to the fecklessness of his so-called conservation policies. Washingtonians laughed, “There he goes again.”

Government officials—including Carter—actually discussed regulations to control access to the sun.

Early in his term, Carter sat before a roaring fire dressed in a sweater, calling on the American people to sacrifice and conserve energy. He called his campaign the “Moral Equivalent Of War,” but Americans felled to laugher when they realized the acronym of Carter’s plan. After the sweater incident, he picked up the nickname, “Jimmy Cardigan.” Anyone who knows about fireplaces will tell you that an open fire in a hearth sucks all the heat out of a building leaving it colder that it would have without the fire in the first place. But that night, it did make a
pretty television shot for the president.

There was no energy crisis. There was a crisis of harebrained government regulators, interfering with the free market, who created the problems in the first place. In the 1840’s, Charles Dickens visited Washington. Unimpressed with the city and the government, he sniffed, “Few people would live in Washington, I take it, who were not obliged to live there.”

The current occupant of the White House is fearful of unfavorable comparisons to Carter, but at least the Carters chose to send their daughter Amy to the public schools in the District.

After becoming president in January of 1981, one of Ronald Reagan’s first orders was to decontrol the price of gasoline. Nervous editorialists warned darkly that this would send prices skyrocketing, but the economics major from Eureka College knew something about supply and demand. In fact, the price of gasoline fell, supplies became plentiful and in 29 years, there has never been a gas line in America.

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