To: Elon Musk, Tesla Board of Directors From: Faris Alrabi

Overview of Parties & Key Considerations

Elon Musk, CEO of Tesla Motors, displayed an interest in acquiring SolarCity, a provider of solar panels.
Being an innovative mind the field of electric vehicles, Elon Musk’s motivations coincide with those of
SolarCity; both aim to provide consumers with cleaner and more sustainable methods of going about
their daily activities. Tesla acquiring SolarCity would enhance the combined organization’s supply chain,
allow Tesla to diversify its portfolio of investments and create cost synergies.
Advantages and Disadvantages of the Acquisition
An expansion in the realm of sustainable energy-powered vehicles could be on Tesla’s horizon should it
acquire SolarCity. This could be in the form of vehicles powered through solar energy, which could allow
it to target an untapped market. Furthermore, cost synergies are estimated to occur due to the
acquisition, leading to significant savings and contributing to a larger profit margin. Additionally, both
companies share a passion for sustainable energy, which could translate into an easier transition
facilitated by a similarity in corporate cultures. However, Tesla’s financial position is far from perfect, and
SolarCity is still unprofitable and heavily reliant on debt financing. Acquiring SolarCity would mean taking
on its debt, for Tesla. Moreover, SolarCity is unprofitable and was speculated to declare bankruptcy,
indicating that its performance since inception has been sub-par. By taking on SolarCity’s operations,
Tesla would be exposing itself to risk of incurring further losses.
Synergies (Please See Appendix A)
Synergies are expected to be 10-20% of capital expenditure (CAPEX). Please consult Appendix A for an
accurate representation of the figures showing the forecasted synergies for the years 2017-2021.

SolarCity Valuation (Please see Appendices A&B)

Based on forecasts of change in working capital and CAPEX from historical data, Free Cash Flows (FCFs)
were calculated. These FCFs were then discounted by the calculated RWACC, giving the enterprise value
of SolarCity. Given that the debt-to-equity ratio is assumed to be 1:1, this provides us with an equity
value of $712.65 MM. Please consult Appendices A and B for the breakdown and details.

Recommendation & Findings

Based on the liquidity and financial performance of SolarCity, paired with Tesla’s pattern of incurring
losses over the past fiscal years, I would advise against this acquisition. The risk simply outweighs the
reward. Since its inception, SolarCity has not been profitable, and has yielded performance ratios well
below industry averages. Tesla is also struggling, but not on the same scale. Tesla has the resources to
improve its performance and improve shareholder value. However, by taking on SolarCity it would be
risking its potential to bounce back and improve its financial performance. In addition, based on the DCF
Valuation provided, the price per share is overvalued.

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 Appendix A

Appendix B

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